So far we have described that there is some belief that we have some problems in our capital market, this has lead to the statement that we have a “savings problem” and to solve it the government introduced Kiwisaver – which may not even increase national savings (infact it might reduce it). These articles have put us at a point now where we can ask – even if Kiwisaver does not increase national savings, could it do any good.
As mentioned in this post, our “savings problem” may not stem from insufficient savings per see, but from distributional issues surrounding our savings. As Dismal Soyanz suggests, other government policies (or insitutionalised rules of thumb) may have created a situation where savers have a bias towards relatively “unproductive” forms of investment, such as housing – furthermore, households underestimate the risk of certain assets and overestimate the risk of others. These are all behavioural biases that may exist in reality – as a result of the bounded rationality of individuals.
As a result, the purpose of Kiwisaver may be to shift the composition of New Zealand’s savings – not increase the level. Now if this is what Kiwisaver is meant to achieve we have to ask about two things – firstly, is there a better alternative. I can’t think of too many alternatives off the top of my head, so I’m going to cover this by asking, how does Kiwisaver compare to a straight income tax, where some % of the money is put aside?
From what I can see, the advantages of Kiwisaver above the government taxing the money and giving it to providers are:
- The scheme is voluntary – allowing people to make their savings decisions rather than forcing them down a sub-optimal path,
- Transparency – people can tell where their money is going, and can keep track of it.
- Lower risk – there is a much smaller chance that the government will just change the policy and claim the money, as it is under your name (forces the government to be time consistent!).
- The behavioural element – opting out has a transaction cost, which although it is small, may help time inconsistent savings commit to a greater level of savings.
So given that we want to change the distribution of individuals savings, Kiwisaver seems like a better mechanism than achieving it by tax.
There are some issues with Kiwisaver in its current form.
Firstly, all these subsidises come with the cost of deadweight loss in taxation. As long as the price effect of receiving a higher interest rate (as that is what the subsidy does) is greater than the income effect (you need to save less to have the same level of savings in the future) we know that this will increase savings – however the cost to society is substantial.
Takings someones money and then offering to give it back to them in a way that won’t let them spend it is really equivalent to the government taxing and saving for us – as a result, it suffers from the costs described above.
Secondly, you can take the money out to buy a house. If we are interested in shifting peoples savings away from housing and towards the broader capital market this clause is insanely counter-productive!
Ultimately, I think that if you remove the subsidies and change the conditions surrounding the removal of funds (to take into account inherent income risks and the fact that we are trying to promote a savings shift) Kiwisaver could be a novel way to change the distribution of savings. As it is, it is likely to become a large scale burden to the tax payer, and lead to the ultimate removal of superannuation payments.