VSR: Very silly regulation?

When discussing it’s new monetary policy Labour was keen to explain why they felt a change was necessary, and why a variable Kiwisaver contribution rate should be investigated.  However, to investigate such a policy it is important to ask some specific questions – this is what Gareth Kiernan did in this article (Infometrics link).

In announcing its new monetary policy proposals, Labour has shown an admirable ability to think outside the square. …. Unfortunately, there are a lot of problems with Labour’s idea and the assumptions behind it.

His list of 10 questions are:

  1. Should KiwiSaver be compulsory?
  2. Does New Zealand really have a savings problem?
  3. How good is Australia’s compulsory savings scheme for their economy?
  4. Do compulsory savings programmes actually increase savings anyway? 
  5. What effect do compulsory and limited-access savings have on the robustness of financing decisions?
  6. Is New Zealand’s permanent current account deficit really a problem?
  7. Are our ‘high’ interest rates really caused by our rigid monetary policy framework?
  8. How much of our mortgage interest payments go overseas?
  9. Does the export sector really need a lower exchange rate?
  10. What about compliance costs for businesses?

His answers to these questions give a case for why the VSR may not be good policy at all.  What are your thoughts?




7 replies
  1. Blair
    Blair says:

    I thought it was a VSA – very silly article. There are two good arguments against the tool – that it’s the responsibility of the government, not RBNZ, and that it would be better to reduce interest rates and the exchange rate by removing the underlying causes of those factors. This article doesn’t make either of them.

    • Matt Nolan
      Matt Nolan says:

      Hmmm, I’m not sure I agree. There are the two arguments you’ve made and a myriad of other arguments about “why” the tool isn’t a good one – questions such as “is there really a problem”, “does this change savings”, and “should compulsion be mandated” are important, and highly relevant questions.

      Since the Savings Working Group finished our National Accounts figures have been revised significantly – the “savings gap” is actually far less severe than it has looked when the group was put together. Recent research from Australia indicates that compulsory savings increased gross liabilities as well as gross assets – actually worsening risk. And there are moral arguments around compulsion.

      I think we need to be a little careful trying to “solve” the economy like it is a rubix cube, and noting that by asking these types of questions appears reasonable to me 😉

      • Luc Hansen
        Luc Hansen says:

        Lots of interesting questions raised in Gareth’s article (on interest.co.nz) and a couple of pretty informed comments to it as well – of course, some others not so well informed 😉

        What I like about compulsory savings is that people who otherwise wouldn’t save are forced to save and simply adjust to the minor reduction in disposable income. I can speak from experience here as a contributor to Roger Douglas’ scheme way back and when Muldoon called it off after only a couple of years or so I was refunded enough to concrete the driveway of my (Government financed – State Advances Corporation) house and build a nice garage. And we didn’t notice the missing money in the meantime. Funny how that works (of course, half of that money was from my employer!). Anyway, from that aspect compulsory savings is great for reducing inequality over the long term without costing the government a cent (if the subsidies were removed at the same time as it was made compulsory, as they should be).

        For those who reallocate their savings as a result, so what? Savings is savings and it could be argued that Kiwisaver managers should be pretty well the best in the country, anyway, and we won’t lose efficiency through the reallocation. And as for those who borrow to consume now in anticipation of their retirement fund, well, again, so what? That’s good for current GDP in a consumer driven economy, and it’s not the government’s problem if some end up overextended.

        Addressing the mirage of VSR changes every six weeks: seems to me that’s misunderstanding the intent of the policy. The OCR is still the blunt instrument, but since the RB is meant to have a two year time horizon, an annual tickle to the VSR shouldn’t do much harm in these computerised payroll days and, a bonus, a portion of the 30% of our interest payments that currently head overseas will be retained in our hands. That can’t be all bad, except for the overseas bankers!

        Remember that the RB resisted being enabled with macro prudential tools before acquiescing – under pressure? And even if the VSR was never used under the current RB governor, it is still a useful item in a future toolbox.

        Also remembering that today’s conventional thinking is tomorrow’s defunct economist’s ideas, if there is a possibility that the VSR could be useful – and I think that possibility, at least, is acknowledged by many economists and commentators – then it should be added to the RB’s armoury. But not the government’s. That thought makes me shudder…

        It’s worth noting that all governments end up accepting, if not endorsing, many past government’s actions – e.g. National opposed the Cullen Fund, PPL, WFF, interest free student loans…the list goes on – so let’s look through the electioneering and acknowledge the possible merits of an innovative policy.

        Who knows, we may all be pleasantly surprised!

        PS I vote Greens (for their concern for the environment and my daughter’s future), so this is not a paid political broadcast on behalf of the Labour party 😉

        • Matt Nolan
          Matt Nolan says:

          My concerns are different to Gareth’s – I am worried about transparency, about giving a “tax” instrument to an independent authority to do something other than balance the books (as it will hurt independence), and I’m worried about compulsion in the face of a lack of market discipline for Kiwisaver providers. The fact the tool only works hurting the credit-constrained (poor and the risk takers) is also a bit of a concern.

          I don’t know when calling policy “innovative” became a compliment – government is there to redistribute, help coordinate, and do all that law business. That is a lot of rolls. Doing “innovative” things, without reference to trade-offs, sounds a touch dire to me!

          In terms of voting, I haven’t decided between the big 3 yet – they are all still an option. Once we get closer to the time, I’ll have a good read. The three parties actually seem pretty similar this time around – even if none of them would ever say that 😉

      • Blair
        Blair says:

        There are a few misconceptions about the performance of the Australian scheme floating around. One is that it doesn’t result in additional saving. It does – a lot. If you read the original Connolly paper that is sometimes used to discredit Aussie super, it sounds pretty great. There’s a perception that Kiwisaver hasn’t increased national savings, whereas contributions are only running at about 1/30th of the Australian level (so what do you expect). The caution about trying to “solve” the economy sounds like a case against state-led economic development, when in fact this is a perfectly legitimate economic model with many success stories. And looking at notable compulsory savings schemes, whether it be Australia, Singapore, Chile or China, these are examples where increased productivity-led growth more than paid for the initial welfare losses, in my view.

        • Matt Nolan
          Matt Nolan says:

          I am really not sure if the “productivity dividend” shows up for Australia – and in the other cases we are talking about countries starting below their productive frontier, and that are closer to market.

          I don’t want to rule out “state lead economic” growth as a whole – I just want us to think of the trade-offs, and be aware of the temptation for it to simply become a transfer to those with wealth. I would also be careful describing NZ in a way where it sounds as if we need to “develop” – it could easily be that we’ve made a different equity-efficiency choice. The allure of picking the outcomes that offer the “highest GDP” is a misleading one – just as misleading as when people assume re-distributive policies will come at no cost in terms of aggregate income.

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