How big an impact would variable compulsory saving have?

May 1st, 2014 at 12:00 pm by David Farrar

The Herald reports:

More than 300,000 business owners and self-employed people would be exempted from Labour’s new policy to make workers pay more into to dampen inflation in boom times.

Labour finance spokesman David Parker confirmed yesterday that his variable compulsory saving proposal would apply only to employee contributions to KiwiSaver – not to employer contributions, and not to self-employed people and employers who choose to pay voluntarily into their own KiwiSaver accounts.

This is a point I wasn’t aware of. The variable rate will only apply to employee contributions.

This means that the impact of a change of rate will be quite small. I’ve done some basic back of envelope contributions.

The current annual member contributions to KiwiSaver are around $1.8 billion. That’s based on a 3% minimum rate. So a 1% change in KS contribution rates would lead to $600 million more into KiwiSaver. However only around 40% of this will be increased savings (based on evidence to date) rather than transferred savings so the amount of money taken out of circulation (so to speak) will be $240 million.

Now the total amount of lending is currently around $330 billion. So a 1% change in interest rates would have an impact of around $3.3 billion.

So a very rough ballpark estimate is that you would need to increase the KiwiSaver contribution rate by around 14%, to have the same anti-inflationary impact as a 1% increase in interest rates.

Someone with better economic modelling skills than me can calculate a more precise figure, but the salient point is that any impact will be very small. It will not be a choice between interest rates going up or increasing the KiwiSaver contribution rate. Both will occur. Increasing the KiwiSaver contribution rate will have a small impact at the very margins.

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17 Responses to “How big an impact would variable compulsory saving have?”

  1. dime (9,607 comments) says:

    “The current annual member contributions to KiwiSaver are around $1.8 billion. That’s based on a 3% minimum rate. So a 1% change in KS contribution rates would lead to $600 million more into KiwiSaver. ”

    I guess once its compulsory those numbers go up.

    But it would still take one hell of a hike to compare to a 1% rate hike

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  2. Viking2 (11,226 comments) says:

    the biggest lie is that increasing the interest rate dampens inflation. No it doesn’t it increases inflation.
    the price of money has gone up. That is inflation.
    Guuur why don’t pointy heads understand this.???

    Well it ain’t measured with in the inflation rules. Rents are though.

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  3. OneTrack (2,758 comments) says:

    “This is a point I wasn’t aware of. The variable rate will only apply to employee contributions.”

    Is this right, the PAYErs will get hit directly in the pocket by VSR, but Labour’s rich mate big corporates don’t?

    It’s really a little tool then, and Labour will still have to be fiddling with the OCR?

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  4. Ed Snack (1,773 comments) says:

    Viking, the intention is to dampen demand by reducing the tendency to borrow for consumption, and as such it does work, but not instantly. One of the major criticisms if using interest rate controls is the lead time, the Reserve Bank has frequently been criticised for acting too slowly to tighten. It’s by no means perfect but is there a politically acceptable and workable option ?

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  5. peterwn (3,194 comments) says:

    There is another aspect not mentioned. It is but a short step away from a Labour-Green government grabbing control of some of the Kiwisaver investments, for example insisting a certain portion goes into Government stock, or allocated to house mortgages at an artificially low interest rate.

    This was a significant issue with the Norm Kirk scheme of 1974 or so, the demise of which left wingers still lament. A Government entity was set up to manage the funds, but would have been highly amenable to political influence. As it was, there was significant political interference in the savings, insurance and finance industries at the time. For example, with one breath, it was said the funds would get a commercial rate of return, and with the next, the funds could be used for low interest mortgages.

    So it seems Labour wants to re-fashion Kiwisaver into the Norm Kirk type fund with the additional ‘feature’ of adjusting compulsory contribution rates to suit economic circumstances. So if a significant portion of workers’ pay is excised into the fund then invested at low returns for political reasons, it is tantamount to a tax. So it seems that Labour discussion groups and think tanks wave wanted to devise taxation that is not a tax and come up with the idea of perverting Kiwisaver, together with the smoke and mirrors capabilities this offers.

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  6. mjw (303 comments) says:

    There is amazing confusion from opponents on this. They can’t seem to decide whether to say that it won’t work, or that it will work, but in some other way. Or that it will work, but actually high interest rates and a high exchange rate are desirable, and would be missed! Last week Labour was to be avoided because they would push interest rates up. This week Labour is to be avoided because they would push interest rates down. Then we had Bill English saying working folk couldn’t afford to pay 1% more in savings. Begs the question – so what good has 6 years of National government been then?

    At the moment, the opposition to the VST looks like a rabble.

    I’m just enjoying eating the popcorn and watching the entertainment.

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  7. alloytoo (457 comments) says:

    First Labour will make this compulsory, then they water down whatever potential effect by exempting a whole lot of people.

    As what point does the administrative cost of this “Churn” in the economy exceed any mysterious benefit?

    For my money the cost of the discussion has already exceeded any potential benefit this overly complicated mechanism will have.

    Labour’s problem is a simple one, they simply don’t understand the problem they are trying to fix, this is because the problem they’re trying to fix is the polls, nothing else.

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  8. Sir Cullen's Sidekick (828 comments) says:

    This is the point I was making yesterday in TV3 news site. Once this stupid scheme is implemented, there will be double whammy. Both OCR and KiwiSaver contributions will increase and people will be squeezed to death. On top of that Labour’s envy tax and Green’s carbon tax will also eat into disposable income.

    While the wheels are starting to come off the so called “circuit breaker policy”, rainbow Williamson screws up and now the entire focus will be on this. Damn the clumsy clowns of National……

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  9. peterwn (3,194 comments) says:

    mjw – opposition might be confused at the moment, but then it is a complex thing to sort through. There is alot of smoke and mirrors to it, and various policy possibilities that have not been publicised. The opposition to it will be highly focused when John Key deals with it in the leaders debate before the election.

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  10. seanmaitland (468 comments) says:

    DPF, there is a massive hole in your calculations. 65% of mortgages are currently fixed, with that amount increasing. A 1% rise in the OCR doesn’t have any impact on interest rates for several years, once all those fixed loans are renewed. An increase in KiwiSaver contributions would have to be smaller than the corresponding bank mortgage interest rate rise to have an immediate impact. Its not a black and white comparison.

    My thoughts on it are that it is penalising people without mortgages to effectively support those with mortgages. You can argue all you want about dampening inflation, but the immediate results of it are a massive benefit to property owners, and pain for non-property owners. I hate Labour and what they NOW stand for, and find this policy hilarious because I would massively benefit from it at the expense of the ordinary Labour voter.

    [DPF: I thought about the fixed proportion but the reality is that the fixed rates tend to be factoring in anyway the likely future OCR changes as they are fairly easy to predict a way out.

    Also be aware that bank lending includes commercial and rural - not just residential]

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  11. tvb (4,235 comments) says:

    For this to be effective there will have to be a significant increase in contributions and that will cause hardship to low income people. So we have some exemptions for them. Say only for people earning over a certain amount. So the new tool become even less effective. So we are back to interest rate increases which may be less because of the new tool. Or will it, if it is against a large spending programme needed to hold the unstable coalition of parties together.

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  12. Albert_Ross (266 comments) says:

    Yes mjw, it’s difficult to assess which is the worst of the myriad of ways in which this is a bad idea.

    So that makes it a good idea?

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  13. OneTrack (2,758 comments) says:

    Just repeating Albert_Ross a bit here, but..

    mjw – “There is amazing confusion from opponents on this. They can’t seem to decide whether to say that it won’t work, or that it will work, but in some other way.”

    Yes there is amazing confusion. Labour haven’t explained THEIR policy very well have they. Maybe when they work out how it will actually work, they can let us know? Or should we go with their “Trust us, we know what we are doing………bang” approach.

    By the way, I haven’t heard what the coalition Finance Minister Norman thinks about this, and whether he will implement it (or change it). What policies would we be voting for again?

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  14. dishy (225 comments) says:

    OneTrack. Don’t expect to know what policies to vote for. There are at least two areas of uncertainty here: the actual policy itself (what sort of policy contains words like “probably” and “could”?) and what Labour’s coalition partners will do to it (will Norman want to up the ante and include the self-employed?). And then there’s Cunliffe, who keeps telling us that he would wait till AFTER the election to do his deals. You see, he thinks that when people vote under MMP, they know what the options are and vote accordingly. He probably thinks that in 1996 our ballot papers included “National / NZ First coalition”. Mine didn’t.

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  15. Akld Commercial Lawyer (165 comments) says:

    I note that Labour want to claim that the bank economists are all biased and that, as a result – we should ignore their analysis of Tuesday’s piece of handiwork. However, the BNZ’s Tony Alexander provides a useful piece of analysis.

    He does give credit to Labour for thinking outside the square to try and address the issue of the interest rate impact on the Kiwi dollar.

    But his starting point is that Labour’s proposal makes Kiwisaver subservient to Reserve Bank monetary policy desires. This he concludes, on a number of fronts, is not a good idea. One major problem I have not seen discussed elsewhere is that it forces people to save more when the economy and share prices are soaring – which will exacerbate share price gains and cause people to buy more shares when prices are high. Then when the economy is weak and share prices low and or falling, people will be forced to buy fewer shares thus worsening price declines. This would exacerbate share price volatility and reduce long term Kiwisaver returns – by forcing people to buy high (and buy less at low prices).

    It would also increase household and external debt – because lower and less volatile interest rates makes borrowing safer. Of course, this will result in people sinking yet more money into housing, because returns on bank deposits would be lower – driving housing even further out of reach of young families.

    Bank profits would also increase not just by raising debt levels and giving banks more Kiwisaver business, but causing people to stay floating rather than fixed, because of the reduced risk of interest rate shocks (bank margins are higher on floating than fixed rate mortgages).

    From where I sit, the prospect of politicising Kiwisaver is a major policy failure – and reason again not to have any faith in Labour’s finance spokesman.

    We need a better opposition.

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  16. SPC (5,472 comments) says:

    The bottom line here is that Labour was committed to the concept of compulsory Kiwi Saver. But his might cost them an election they were favoured to win, and of course end their hopes for this one because

    1. the policy did not play well with their base, those struggling to pay their rent and power bills.
    2. in the election deciding centre there are those facing rising mortgage bills.

    Now because of electoral necessity they have found a way to sell compulsory super to the more important of the two groups (interest free loans and WFF excluding those on benefits worked in 2005).

    They will have to find a way to explain how a lower OCR means higher profits for business and thus more ability to pay higher wages – the thing is that the employers will be transferring this wage increase directly into the Kiwi Saver Fund, so the worker will still be struggling to pay rent and power bills (see their power bill policy).

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  17. SPC (5,472 comments) says:

    Declaration, I have supported an alternative means in the past to hold the OCR at a lower level – about ten years ago when the OCR first began to rise in response to house market inflation.

    This is of course compensating for the lack of GST on borrowing to buy household property by the use of a surcharge.

    To balance the current proposal from Labour one might place the surcharge targeted to rental property mortgages alone – so as not to advantage speculators with cheaper mortgage finance resulting from the Kiwi Saver adjustment option.

    The surcharge would be a way to raise money off speculators who have and will continue to profit from historic speculative investment – and no CGT tax will ever touch this (unless it retrospective).

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