Scoop Feedback: KiwiSaver

Monday, 14 May 2007, 1:40 pm
Opinion: Scoop Feedback

It is generally agreed that Kiwi's should save more of their earnings. Money saved is, of course, not squirreled away in the bank's equivalent of 'under-the-mattress' but is invested in our economy. Some benefits of a marked increase in savings/investment are:

* Increased business development as this newly available money is used for investment.

* Worthwhile jobs (as opposed to the present low paid, menial jobs) for Kiwi's from the construction and running of these businesses.

* Lower inflation as a result of less money chasing today's consumer goods. If you are saving you have less to spend.

* A better exchange rate due to lower inflation leading to easier exports. (ideally, one wants a lower inflation rate than one's trading partners to take advantage of the hysterisis effect).

* Lower prices at the store for the average Kiwi due to competition. With less money chasing goods, competition between retailers increases. This results in lower prices for the consumer.

* Less, or possibly, no need for the reserve bank to hike interest rates to keep inflation under control since saving lowers inflation automatically. If increased saving lowers inflation, the reserve bank could even reduce the base lending rate.

* Stimulation rather than choking of business. The hiking of the base interest rate by the Reserve Bank chokes business whereas saving/investment powers it.

* Lower interest rates for businesses loans due to a larger supply of money available for loaning. Simple supply and demand kicks in when lending institutions have an excess of liquidity. They must reduce interest rates to get this money working for them. Money held in their vaults does them no good.

* More profitable businesses, especially export businesses, since, with lower interest rates, it costs them less to service their loans.

*Lower interest rates yet again. As interest rates come down, it becomes less profitable for mom and pop in Japan and elsewhere to speculate in our currency. Their speculation is stimulating further speculation. In other words it is an economic bubble; a rise in the value of our dollar powered by perception rather than by economic reality. One downside of a bubble is that it can easily pop with all the bad effects this brings.

* Lower inflation again. The bubble caused by overseas speculation in our currency is one, amongst many, factor causing our inflation. It is also haemorhaging our economy as money flows overseas during profit taking. The initial reduction of inflation due to increased saving makes it less worthwhile for foreigners to speculate in Kiwi dollars, further reducing our inflation.

* A more stable and hence more attractive environment for business, possibly tipping the balance toward New Zealand for some businesses which are contemplating relocating overseas. Also the possibility of encouraging outside businesses to relocate to New Zealand.

** Easier purchase of a house (1) because of lower-interest mortgages. This is caused by lending institutions having more money (supply and demand again) and because of competition between the lending institutions to lend this money. This will allow more people to purchase their own homes.

** Easier purchase of a house (2) due to lower house prices since with a safe, worthwhile alternative investment, less people will be speculating on housing. The high house prices are a bubble, just as the currency speculation is a bubble and is powered by perception rather than intrinsic worth. As with all bubbles, it also contributes to our general inflation. Without the housing bubble, not only would houses be more affordable but so would bread and milk at the corner dairy.

** Easier purchase of a house (3). With more money in peoples hands, from their KiwiSavings, when they go to buy a house they will have a larger down payment, still further still easing the purchase of a home. The government has suggested that it will be possible to access KiwiSaver funds to purchase the first house

** Easier purchase of a house (4) because of higher real wages. Investment in one's country increases per-capita productivity. As long as wage increases do not exceed increases in per-capita productivity, they are not inflationary. With a higher real wage (as opposed to a higher numerical wage that inflation quickly neutralizes), it is easier to buy a house.

* More money in peoples hands at retirement with all the benefits this brings. Although this is the major reason given for KiwiSaver, it is actually a relatively minor benefit compared to all the other benefits which will come from all of us investing in our own economy.

* Less need for investment from overseas since we have our own increased source of investment. Overseas investment results in profit being sent overseas where it is lost to the New Zealand economy. Profit earned and spent in New Zealand supports our home grown businesses at many levels.

* Less debt owed by Kiwi's. Instead of buying something on credit, incurring interest and paying it back over time, people will save, get interest and then buy. High debt is going to land a lot of us in trouble. This depends on easier access to our KiwiSaver funds, something that the government is against at this juncture. It also depends on KiwiSaver being a worthwhile system of investment so people will invest in it.

* Avoidance of the 'crunch' which is coming due to us regularly spending 10% more than we earn. If this continues, it will eventually lead to a precipitous fall in our exchange rate as outside investors loose faith in the worth of our currency. Such economic earthquakes are as bad for everyone as our present over- inflated currency. The longer this excess spending goes on, the greater will be the size of the inevitable correction. Our objective should be to induce overseas investors to gradually get out of our currency rather than to have them suddenly pull the plug.

Up to this point the assumption has been that all the money collected under the umbrella of KiwiSaver will be invested in New Zealand businesses. This is of course unrealistic. However, investing overseas is not all bad. True, we are investing in the businesses of our competitors but on the other hand, we are bringing their profits into New Zealand where they can help with our balance of payments. The combination of less consumerism driving inflation (because we have less money to spend) and a better balance of payments reduces the chance of a confidence crash which would cause our currency to plummet.

Now I'm, conservative investor/saver. I suspect quite a few of my fellow Kiwi's are too. I would much rather be putting my money into a fixed-earning deposit in the bank than be speculating on property or shares. I have neither the ability or the interest to spend my leisure hours following the stock market and trying to outguess the insiders who control the system. Besides, again and again, the supposed insiders loose their shirts as one or other stock or sometimes the whole stock market crashes. I can remember at least 4 fairly major crashes in my life. And,,, When you consider that, $100 invested at 6% from age 20 to age 65 will grow to $1376 how bad can it be to invest in a fixed deposit at the bank. Let's look a little closer.

If I am a middle income Kiwi in the 33% marginal tax bracket, in order to have $100 to invest, I have to earn $150. When the inflation rate is running at about 3%, I can get a fixed deposit investment of about 6% at the bank. The 6%, 3% scenario is used here not only because it reasonably reflects the past New Zealand investment climate but also because it makes the maths relatively easy. In addition, using these same conditions will allow us to compare various different scenarios for KiwiSaver. So, here we go.

With a 6% investment, at the end of one year, I have $106 in my account for every $100 of investment. The government takes a third of the $6 I have earned leaving me with $104. Because of inflation, I need $103 just to break even; just to maintain the buying power of my investment, so I have really only earned $1 on a $100 investment. Of course, because of inflation this $1 will only buy what $0.97 would buy when I invested it. At this real rate of return (buying power indexed to the time of investment), of 0.97% it will take me 42 years to get back to the $150 of buying power that I originally earned (1.0097 raised to the 42nd power equals 1.499957 times 100 equals $150 ) and a further 70 years to double my investment to $300!!! I haven't got that long.

Another way of looking at it is that the first $150 our mid-income Kiwi earns, pays taxes on and invests when he is 20, will be worth $154.40 when he retires at age 65; an increase in buying power of 2.7%!!!! The average citizen is being asked to lock his money away for a life-time with no benefit above what he would have on the open market. At least on the open market he would have access to his money. More important, he is asked to put his money into this abysmal investment rather than into his mortgage, credit card debt or student loan with all the huge expenses that this will result in. If he invests in KiwiSaver rather than first servicing his debts then, at 65, he will be far worse off. So how could KiwiSaver be structured to make it an attractive option for the investor.

Our real earnings could be taxed. In the above example, you have actually only earned $3 on your $100 investment so $1 could be taxed from the mid income Kiwi. This amounts to a real interest rate of 1.94% (increase in buying power indexed back to when you made the investment). At this rate you will double the buying power of the first money you invest in 35 years. Looking at the first $150 that our mid income Kiwi earns, pays taxes on and invests at our standard 6% over a period when inflation is running at 3%, it will be worth $237.42, an increase in buying power of 58%. This is a little better than the present situation but far from what other jurisdictions manage.

The following comments on the superannuation systems of other jurisdictions are based on conversations with citizens of these countries and information on their web sites. It is surprising how vague some people are about their own superannuation systems and it is likely that the web sites only include the good bits as ours does. If I have misunderstood the information from these two sources, consider the following instead, as possible systems we could institute rather than the definitive word on how their systems operate.

We could follow the Australian example. The Ausi investor pays 15% on money he invest and 15% on interest or dividends, both regardless of his tax bracket. The government also puts in considerable money for low earners ($1.50 per 1.00 invested) but let's not go there. As with us, they pay no tax on the money if they leave it in until 60. (65 in New Zealand). Incidentally, they can start to draw their money at 55 but they then pay taxes on it until they are 60. With our standard example of $150 earned, the Ausi can invest $127.50. He starts $27.50 ahead of us. At the age of 65, the first $150 he earned, paid 15% taxes on, earned interest and paid 15 % taxes on them, will be worth $395.93, an increase in buying power of 164%. Now we are getting somewhere.

We could follow the American system. They pay zero on their investment (in other words, investment is before taxes, not after taxes as in our system) and zero on interest and dividends. The Yank can invest the whole $150 in our standard example compared with our $100 for every $150 earned. He starts $50 ahead of us. He also pays 0% on dividends. However after retirement, Americans pay taxes at their marginal tax rate on money that they take out. For the example let's assume that the 65 year old couple has paid off the mortgage, has the teens with their huge appetites out of the house and perhaps has put solar water heating on the roof while they were earning a salary. This allows them a good life style while taking their money out of the scheme at a rate that puts them in the 20% (for simple calculation) tax bracket. Since the Yank can invest the full $150 he earned and he is getting a true interest rate of 3% (6% interest minus 3% inflation), at 65, the first $150 he invested at 20 will be worth $567.23. After paying 20% tax, he still has $453.79. This is an increase of 202%. In other words every $100 he invests at age 20 will have a true value (buying power) of $302.53 at retirement at age 65. Set up the same system in New Zealand and watch the money pour in and all the benefits mentioned in the start of this diatribe come to pass.

Without some drastic changes to the structure of KiwiSaver, no one with even a minimal understanding of the nature of the investment will consider having their money in KiwiSaver. We are asked to lock our money into a scheme that is no better than we can obtain on the open market. In the open market at least we have access to our money. We are not even warned that investing in KiwiSaver before we pay off any debt we have will leave us far worse off when we retire. Of most concern, as we begin to realize what an abysmal investment KiwiSaver is, we will stop investing and all the benefits which a good investment/saving scheme could bring to our economy will not happen. We simply won't buy into such a scheme. With the American economy grossly over-extended and with us spending $1.10 for every $1.00 we earn, some pretty major economic earthquakes are very possible in the not to distant future. A good saving system which results in us starting to own our own economy would go some way to buffer us against such events. A decent KiwiSaver could do this.

Some thoughts on Kiwi Saver and business in general

Philosophically we believe in free enterprise. It shouldn't be too big a step for the government to allow the average Kiwi to participate in the development of New Zealand and to stop contemplating punitive methods such as increasing GST, introducing capital gains taxes and so forth. To achieve this we musn't micromanage Kiwi Saver. We musn't surround it with all sorts of regulations. If we save for one year to have a bigger deposit on a car, all the benefits mentioned in the beginning of this article are achieved to some extent. If we save for 5 years to have a bigger deposit on a house, the benefits are achieved to a greater extent and if we save all our lives for our retirement, the benefits to the economy of Kiwi Saver are achieved to the greatest extent. Don't force people into Kiwi saver. Make it attractive, so that people want to keep their money in it and are reluctant to make withdrawals. It will take a while for people to get used to KiwiSaver; to gain confidence that it really delivers what it purports to but as confidence builds up, there will be a paradigm shift in Kiwis attitude to saving. This will become the engine that makes and keeps New Zealand prosperous. It will also be the mechanism that helps to insulate us from the economic earthquakes of larger countries. Part of the incredible success of China and Australia today is due to a very large savings rate amongst her citizens. We don't want to be left behind in today's world.

Our government subscribes far too much to the mind set of using punitive methods to control our economy. There is talk of upping the base interest rate, of increasing GST, of introducing capital gains tax, especially on second and third houses and so forth. With most human enterprises, the carrot works far better than the stick. A decent KiwiSaver is a carrot, the above and other punitive measures are the stick. We need a paradigm shift at government level. All we are doing is making it impossible for the average Kiwi to own his home and our latest achievement has been to drive Fisher and Pykel out of the country.

Stimulating the development of business by the government is only justified if it leads to the prosperity of her citizens. It is not an aim in itself. Government is elected by all Kiwis, not by the owners of business. It is of very limited use to have a booming economy where Kiwis get minimum wages and profits are sent overseas. Kiwis putting off instant gratification and investing in their own country will develop the economy and keeps profits in the country to benefit everyone. More important, it will benefit everyone, not in the next 4 years election cycle, but far into the future. The correct set up of Kiwi Saver could do this. To misquote Uria Heep....Earnings $1.00, spending $1.01 - disaster. Earnings $1.00, spending $0.99 - prosperity.

The present housing-speculation makes it look like the economy is booming when all it is doing is inflating house prices. It allows Kiwis with money, to buy properties for speculation. This simply shifts money from the pockets of poorer Kiwis into the pockets of richer Kiwis. This does absolutely nothing to grow our economy. This shift of money from the poor to the rich occurs without the rich having done anything for the economy to deserve their greater wealth. There is nothing wrong with a man getting rich while truly developing our economy but getting rich just because he has money and can corner the market on a resource that is so important to the well being of so many of us, is almost legalized theft. It makes the average Kiwi poorer by having to pay more for his house. It also has a double whammy effect because of the inflation it causes. Besides having to pay more for mortgage repayments or rent, we now have to pay more for our bread and milk. Having a viable alternative for investment would cool down this very destructive artificial market.

No institution should be allowed to dominate the new money which will flood in if KiwiSaver really is worthwhile. There should be a government plan; a bond for instance. There should be a bank involvement with a variety of their existing saving plans. Let the insurance companies participate, and have various plans in stocks and shares all the way up to venture capital. Competition between all these institutions to get this money and competition between them to invest it will be very healthy for the whole economy and will stop abuses which would occur if one institution has control of the funds. Let the saving-Kiwi decide for himself where he wants his money to go and allow the business-Kiwi decide from whom he wants to obtain investment finance. And lastly, make it reasonably easy, say once a year, perhaps semiannually, to switch your money from one plan to another. This will keep the institutions on their toes and stop them from becoming complacent.

There will be quite justifiable suspicion that future governments will fiddle with KiwiSaver, will try to get their fingers on the huge amounts of money that will accrue if the scheme is worthwhile. These fears are probably not justified. If there was a really worthwhile KiwiSaver scheme, I would like to see a party who made the conditions worse get reelected. It would be political suicide.

ENDS

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