Kiwisaver and aggregate savings: A question for our readers

Over at the NBR comment page Trinh Le from NZIER discusses the research by John Gibson and herself into Kiwisaver and aggregate savings (here and research).

The idea that Kiwisaver can actually reduce national savings is an important one – and something that one of us will post on soon, either before or during our upcoming discussion on productivity.

For now it would be useful for you guys to have a look at this article and tell us what you think. Do you think Kiwisaver will actually increase national savings – if so (or not) why?

  • CPW

    I think the answer to that question hinges on where the government contributions are coming from. If the opportunity cost is government saving, then KiwiSaver probably reduced national savings; if the o.c. was government spending, it probably raised national savings. But either way the magnitude is going to be pretty minor in the grand scheme of things.

    My comment on that research is that IIRC their survey was of KiwiSaver early adopters, who could be substantially different in behavior from KiwiSaver late adopters and automatic enrollees.

    The other question is whether all national savings are created equal? I see KiwiSaver moving savings out of housing (fine), but also moving savings out of NZ, which may or may not be a bad thing.

    The tragedy of KiwiSaver is that we didn’t stick with the original scheme long enough to find out if automatic enrollment (with right to opt-out) would have produced a meaningful increase in savings.

  • Greg

    CPW’s third paragraph is a key one. In the long run savings are of less importance than investment (increase in the stock of productive capital). To date NZers have preferred to speculate in residential property rather than invest in productive assets. And who can blame them? The way the tax laws are, it’d be foolish to do anything else.

    Kiwisaver may wean people off the idea that property ownership is the only way to save for your old age, which is good. It also helps to slow consumption a tiny bit. It may act as another tiny spur to the country’s business community to attempt to lift labour productivity (amount produced per hour). That’d be a real benefit.

    I would tend to ignore the article in general. It appears to be part of the long-running campaign by the world’s wealthy to cut their taxes. The fact that different countries can prosper to the same degree despite markedly different tax rates shows that taxes are not fundamental.

    Any article that bleats about taxes, without talking about the services they provide, is wasting your time.

  • Kimble

    Your last two paragraphs make no sense, Greg, making me suspect they are just a result of your own ideological blindness.

    None of the articles ‘bleat’ about taxes.

  • Stephen

    Never the less, on services he has an off-topic point…

  • Fred

    It seems to me that this is an almost impossible question to analyse simply because the timescales around kiwisaver are so long (it’s accessible when you are 65 – I think) and it is an effectively illiquid instrument, however in a few years time I’m sure you will be able to trade against it (legally or illegally people will find a way). It therefore simply becomes a wager against the prevailing economic situation in 15+ years from now vs what can I do with my 1 to 3K pa in the short term (less than 10 years). The prudent investor will quickly realise that it is a bet that they can’t afford not to take simply because the country will not be able to afford both National super and Kiwisaver. Or let me put that another way, the bet is against the value of National Super vs the value of the Kiwisaver return. In 15 years time there will possibly be an order of magnitude difference between the two. So it’s a bet you can’t afford to pass by.

    Is savings; a) foregone consumption or b) an individual’s capital accumulation? (you need to answer this before you start your analysis) Is everyone in a position to forego consumption (and the answer to that is obviously no), and will they do so voluntarily or do they need encouragement (tax break or compulsion). Well, everyone (who is prudent and rational) who can forego consumption will take up kiwisaver (a bet you can’t afford to pass by), so almost by definition kiwisaver is an automatic subsidy for the better off. Will there be an increase in savings because of kiwisaver? Decisions will happen at annual increment time, no reduction in pay (high performers still get an increment in the hand), employer contribution taken into account, etc. so no visible reduction in income, and still a transfer in wealth from the less fortunate.

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  • http://tvhe.co.nz Matt Nolan

    Hi everyone, thanks for the answers,

    Chris:

    I agree – there are definite issues with the study, and the data isn’t exactly the best data in the world to work with.

    “The other question is whether all national savings are created equal? I see KiwiSaver moving savings out of housing (fine), but also moving savings out of NZ, which may or may not be a bad thing.”

    Very true – the movement out of housing is likely to be beneficial – as there is a true productive return on these other assets. If NZ funds are buying firms overseas that can only be a good thing – as the belief must be that the rate of return on those assets is higher than on domestic assets. In this case any investment issues have more to do with the quality of domestic investments then the rate of national savings.

    Greg:

    “In the long run savings are of less importance than investment (increase in the stock of productive capital)”

    In the long run savings=investment, where investment is both productive and “unproductive” (such as housing). So the issues are equally important.

    “The fact that different countries can prosper to the same degree despite markedly different tax rates shows that taxes are not fundamental”

    There is actually a growing stream of panel data coming out that indicates that tax rates do have a significant impact on productivity growth. However, you are right that the funding of these tax cuts is essential – if it comes out of productive government schemes then we end up where we started. Also if it comes out of “unproductive” schemes, we may be giving up an equity effect that we cared about more than the efficiency effect.

    Fred:

    It is true that there are distributional impacts from Kiwisaver – however the overall question I am interested in at the moment is the impact on aggregate savings.

    Fundamentally, someone might say that Kiwisaver should increase aggregate savings, as the “effective interest rate” on the scheme is miles higher than in other savings instruments. However, that high effective interest rate is the result of government spending – which in itself is a full scale reduction in aggregate savings.

    As a result, my impression is that Kiwisaver will reduce national savings – although it will increase private savings, and maybe lead to further diversification.

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  • http://members.lycos.co.uk/blogsite10/ semifinal

    semifinal says : I absolutely agree with this !

  • http://members.lycos.co.uk/dadbeauty Booth

    Somehow i missed the point. Probably lost in translation :) Anyway … nice blog to visit.

    cheers, Booth
    .

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