Why cyclical Kiwisaver would be an awful tool

Via Rates blog I see that, at the conference on government finances over the past couple of days Michael Cullen suggested making compulsory Kiwisaver contributions pro-cyclical (combined with the scheme becoming universal) as a monetary policy tool.  I appreciate he wanted the auidence of academics there to think outside the box, but this is actually a pretty poor idea.  I am sure these matters were discussed at the conference, but I will lay them down here in any case:

There is little evidence Kiwisaver increases national savings – and when it does, it is because of the “credit constrained”

Remember, just because we have to contribute to one savings vehicle doesn’t mean that households won’t borrow or dissave from other vehicles to compensate.  Work by the Savings Working group and Treasury suggested that Kiwisaver had very little impact on savings, and in the long-term it may actually reduce savings due to it being a relatively blunt way to promote savings (inefficient).

Compulsory Kiwisaver would lift savings, in so far as it does, by making some people unable to borrow or dissave in order to meet the level of consumption/investment they desire – as a result, this policy only works to promote savings in so far as it makes people worse off …

It isn’t savings that is the monetary policy issue – it is investment/consumption demand

For kicks, lets pretend that Kiwisaver does push up savings depending on the contribution.

Also targeting domestic savings misses the point on what we are trying to do here.  Remember, we use interest rates for monetary policy because they determine the intertemporal “price” that determines when people consume or invest out of current income.  A low interest rate now makes it relatively more attractive to consume/invest now – and if resources in the economy are underutilised at current interest rates, we would like this “price” to be lower.  The combination of a clear inflation target, and central bank policy that chases down this price, helps us to smooth the ebbs and flows in the economy.

If we were a large closed economy, then we know that pushing up savings would force consumption and investment to fall for a given level of income (as disposable income is lower) – under some conditions this may well do the trick.  This is like some sort of paradox of thrift style view, with Kiwisaver actually determining savings (so it needs to bind on the upside AND the downside).

Although this is a stretch, matters are even worse than that!  We are a small open economy, households and firms can borrow from overseas if their disposable income temporarily falls.

We use interest rates because we are changing the incentive for NZer’s to invest and consume, using Kiwisaver has nothing to do with actually monetary policy in this sense.

It is not politically independent

This is an obvious one.

It is even blunter than interest rates

I’m adding this, but the first two points were really all I was interested in writing 😉


Kiwisaver doesn’t necessarily change savings levels, and it is underlying consumption/investment demand that really matter.  Given this, “compulsory Kiwisaver with cyclically varying contributions” is too clever by half – and shouldn’t be considered as a stabilisation tool … especially not as part of “monetary policy”.