Thanks for your detailed reply. I am actually the ‘James’ listed in our ‘About us’ page but I just didn’t use my name as a username when I registered on WordPress. I wouldn’t want you to think I was sniping at you from behind a pseudonym (or sniping at all, for that matter).

Writing for myself, rather than the rest of the group, and from a somewhat academic perspective, it is generally recognized that there are two main saving “problems” that many people encounter at some stage of their lives. The first problem is to overcome the temptation to spend when they want to save – the problem of self-control. The second problem is working out how much to save, and how to invest these savings. For many people, neither problem is particularly challenging. For others, one problem or other is particularly difficult. My own perspective is that the second problem is probably of greater concern to most people: working out how to invest well.

Societies provides a variety of non-government means to solve the savings problems. Yet most Governments intervene in most developed countries, because they don’t believe this is adequate:
(a)they believe many people will solve the problems badly if left to their own devices;
(b)they provide investment products that are poorly provided by the private sector, such as annuities; and
(c)they provide “insurance” protection to ensure people have some resources in retirement even if they suffer catastrophic investment returns.

New Zealand has smaller mandatory, tax-sheltered, or subsidised saving schemes than most other countries. The relatively limited use of compulsion and subsidised saving schemes seems to reflect a belief that most people can adequately solve the saving problems, and a belief that the costs of compulsion and subsidies are very high. I think the SWG had a lot of sympathy with this view. This is one reason it shied away from a greater use of mandatory interventions. Even after the group’s recommendations, NZ would still have some of the fewest and least costly interventions targetted at retirement saving and investment.

Internationally, four arguments are normally forwarded to justify mandatory retirement schemes. These arguments have to weighed against the costs of mandatory schemes (which can be substantial). To elaborate the first two, and add two more:

(1)Governments impose mandatory schemes to make people save a minimum amount for their retirement, because many people find it difficult to correctly calculate the amounts they should save, or find it difficult to discipline themselves to save this amount. These difficulties are accentuated when there are large increases in life expectancy.

(2)Governments impose mandatory schemes to protect individuals and whole cohorts against catastrophic investment outcomes. Many people find their life savings are unexpectedly wiped out by wars or disasters, by theft, by inflation, because loans are not repaid or because of the firms they own fail. Mandatory schemes that provide a government guaranteed pension, and mandatory schemes that require investments in diverse asset portfolios, provide insurance against these catastrophic investment outcomes. They also provide protection against unscrupulous agents who have large incentives to take advantage of savers.

(3)Governments impose mandatory schemes to avoid the “rational prodigality” problem – that some people deliberately under-save while working in order to take advantage of a government provided welfare benefit when retired. Because most governments provide some means-tested welfare benefits to ensure their citizens are not in poverty, there would be incentives for some people to consume most of their income while working, and rely on the benefit while retired if pension schemes were not mandatory. One solution to this problem is to force people to save when they are working.

(4)Governments impose mandatory schemes to ensure that if people rely on government payments in old age because their investments go sour, they will have contributed to the government while they were working. Mandatory tax contributions can be considered an insurance premium that is paid to the government in return for a guaranteed retirement income should their investment strategies not work. A mandatory tax-funded pension scheme also solves the moral hazard problem whereby people adopt unduly risky investment strategies in anticipation that they keep the bulk of the returns should an investment do well, and a pension if it does not.

Andrew
(who will again state that these views are his own, although notes they may have been shared to a greater or lesser extent by the SWG)

Thanks for the clarification: I tried to point out that I wasn’t attempting to represent the reasoning of the SWG but perhaps I could have been clearer. Certainly, the two reports focussed on different issues and I didn’t mean to suggest that they were at loggerheads. Nonetheless, I believe that there were differences in some of the two groups’ recommendations as well as their focus. For example, isn’t the recommendation of the SWG on PIE’s tax rates in conflict with the TWG’s view.

It also appears to me that the SWG’s recommendations go further than simply removing distortions: the automatic enrolment in, and subsidy of, Kiwisaver seem like mechanisms designed to increase saving. At the very least it would be hard to argue that a lack of automatic enrolment and absence of subsidies for saving would be distortionary.

More pertinently, I would be very interested to know what you see as the market failure that needs remedying. Or do you, as I infer from your comment, believe that the failure stems solely from the distortionary incentives that presently exist in the economy?

The Saving Working Group could be better characterised as having made recommendations to reduce the way the current tax system discourages savings and distorts investment choices, rather than promoting tax incentives that encourage saving. In this sense it did take a different perspective that the Tax Working Group, which focused on other issues.

One example is their recommendation that New Zealand switch further towards consumption taxes rather than income taxes, both because income taxes distort the timing of consumption expenditures (encouraging people to spend earlier rather than later) and because consumption taxes are neutral to the types of investments people make, whereas income taxes provide incentives to invest in lightly taxed asset classes such as owner-occupied property. Another example is their recommendation that only real interest earnings rather than nominal interest earnings should be subject to income tax, for when you tax the inflation component of interest income you provide a disincentive to invest in interest earning asset classes. Neither of these recommendations can really be considered saving subsidies, unless you believe (a) income rather than consumption should be taxed as a matter of principle and (b) the inflation component of interest earnings and payments is income.

Andrew Coleman

It’s generally believed that real estate will (always) provide a superior return. People are keen to take advantage of this investment — so keen that they bring forward future saving/investment via debt.

I don’t see a market failure. Everything is rational and in equilibrium.

It’s quite common for people in the US to have debt in the tens of thousands of dollars on unsecured lines of credit. Not so much here, I think. I’d be wary of drawing analogies. Even more of inferences.

To run the externality argument we’d have to show that there is some real, unpriced cost to others because of our marginal borrowing. Given that macroeconomic risk is priced through the country risk premium I’m not convinced that the externality argument is as persuasive as the behavioural argument I went with. I’m open to persuasion, though 😉