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Economics: A rainy day

By Donal Curtin

Tuesday 1st March 2005

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New Zealand households are fond of debt, and have tanked up on it - when they save, it's disproportionately through home ownership, and they've got few financial assets. Opinions vary about how much of a problem each of these is, but the overall combination is clearly not the optimum place to be, as February's editorial pointed out.

It's one thing to decry where we are, but quite another to figure out how to improve the current state of affairs. If you were of a mind to work some policy levers to shift things towards a more balanced position, what would you need to do?

We're actually closer to coming up with some good answers than you might think. In particular, it's time to give some overdue credit for the design of a future savings regime to the Savings Product Working Group, which produced its report last August: "A future for work-based savings in New Zealand". At the time, it didn't get the traction it deserved - its terms of reference were reasonably directive, and it was chaired by the politically connected Peter Harris, ex the Council of Trade Unions, and Michael Cullen's office, which may have spurred concern in the business world of an "agenda".

The working group created the skeleton of a simple, robust, workplace-linked national savings scheme, which would collect contributions via employers through the IRD machinery. As a design, it had a lot to recommend it. It was starting in the right place: there's good evidence that workplace super schemes, for example, add to overall private saving (rather being a substitute for saving that would have happened some other way). And it had answers for most of the problems that you'd be concerned about.

Compliance costs for employers looked to be low: they didn't have to run any funds themselves, just make at least one available. It gave a lot of control over choice to the savers themselves. It wasn't compulsory, though it would come with a default setting of "opt in" when you were hired (there's good evidence that people tend to go with the flow, plus people tend not to miss money deducted at source, so there's a better chance it stays saved). And it had good efficiency-promoting ideas on having fund providers compete for the savers' business, including a transparency requirement to disclose the actual dollar amount of fees charged (an improvement on the current industry practice of percentages).

In particular, they've avoided the assorted problems Australia has inflicted on itself. There, companies offering pension plans have fallen foul of excessively complex and prescriptive regulation: the companies have been deemed "fund promoters" when they've merely been providing access to third-party products, and trustees of corporate pension schemes have required licensing as "financial advisers" (under a regime that virtually everyone regards as onerous and clunky). Unsurprisingly they have been shunning the high prudential risks involved.

So far, so good - but it's short of a full answer, for two reasons. It was too soft on allowing withdrawals from the funds accumulated (it seemed to give too much weight to what Singapore allowed members of its Central Provident Fund to spend on): if you're serious about a genuine increment in national savings, there would need to be tighter provisions for lock-in. And, self-evidently, it was required to focus on workplace designs, and didn't address how the very large numbers of New Zealand's self-employed would fare. Somewhere in the bowels of the bureaucracy where terms of reference are written, someone still has a "bosses and workers" view of the world. As the report noted, while there's quite a chunk of money in company super schemes (some $10 billion), they cover only 14% of the workforce: the other 86% of us need some thinking about, too. In practice, something similar could be built around the mechanisms for paying provisional and terminal tax.

Progress from here, though, depends on simultaneous progress on the tax regime for savings products. As things stand, New Zealand super schemes are disadvantaged by tax, and for many people wouldn't be worth joining but for the employer's matching contributions (where they exist). Not only are super funds' share price gains taxed (when they typically wouldn't be if you bought the same shares with your own money) but the taxation is perverse in its incidence (lower tax rate members pay 33 cents instead of the 19.5 cents they should, while the better off 39-cent folks can get a six-cent tax break through "salary sacrifice"). Something will need to change if future workplace savings are treated like super is today.

As it happens, there's a good proposal for reducing some of the tax distortions around managed investments (the "Stobo report" of last November). Still, from whispers I've overheard around the financial planning industry, what started out as enthusiasm for the Stobo recommendations (largely around levelling the tax treatment for different ways of investing) seems to be moving in favour of toning down some or all of its provisions.

Perhaps that's an over-pessimistic assessment, and we'll eventually find our way to a more rational tax regime for investments. But if we don't, we can also kiss goodbye to any meaningful progress on voluntary workplace savings and, as of today, that's the only realistic proposal on the table for getting our national savings rate on the mend.

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