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Welfare blanket suffocates savings habit

By Neville Bennett

Friday 20th August 2004

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New Zealand households have a lot of catching up to do in the international wealth stakes. The amount of wealth commanded by individuals is lower than in most OECD countries: for example, Australians just before retirement are more than twice as well off.

Moreover, the rate of wealth accumulation is lagging behind other countries so there is little prospect of catching up unless there are amazing changes.

Perhaps some change can be prepared for by making the facts available. Wealth studies are few and far between, and there is often apathy toward the subject. Yet half of the population is so poor it can be said to lack a stake in the country.

Envisage a cake that represents the nation's wealth. The top decile (the wealthiest 10%) claims half of the cake. The bottom 50% gets crumbs only as its share is a mere 3%.

In 2001, the top 10% had an average wealth of $1.1 million but the lowest 50% had negligible assets; indeed, 16% had negative assets ­ they are in debt. Some 39%, or 800,000 New Zealanders, had less than $20,000 in net assets.

This wealth distribution is similar to that of the US, UK, Australia and Canada. In most of them the bottom 30% has less than 1% of the cake. But the proportion of people with negative assets in New Zealand (16%) is remarkably high. In Australia it is only 4%.

Some of the breadth of wealth distribution is a function of age. Thus the median wealth of 18-24 year olds is just $100 but $200,000 for 60-64 year olds. But some people do not accumulate any assets before retirement.

A large number are almost totally dependent on national superannuation. The New Zealand Institute, a new think tank, suggests "people make a deliberate, rational decision not to accumulate wealth because of the existence of a publicly provided pension."

There is an obvious link between income and asset acquisition. Unsurprisingly, people with higher income tend to have more assets. But the relationship seems to begin at about $50,000 per annum.

Below that level, households struggle and live hand to mouth. As the median level of income for individuals is about $30,000, and the median for households is $50,000, half of the population is on incomes that make it difficult to save. Some incomes advance with age but many will never exceed the median income.

Household expenditure data indicate between 1984 and 1998 about 50% of all savings were by people in the top 10% of income earners. Income seems a more powerful determinant of asset acquisition than age.

Nevertheless, income, age, education, family structure, inheritance and occupation only explain about 40% of variations in saving. This means institutions and individual preferences are extremely important.

Institutions do matter. The level of wealth of people who participate in employer-based superannuation schemes is substantially higher than those who do not. Moreover, housing plays a huge role in asset acquisition.

Home ownership rates were at 68% in 2001 but for the poorer it is about 50% while it is 80% for the rich. There is a strong preference for housing assets.

Some 77% own a car and 91% have a deposit account. But only 21% have private superannuation. Most financial assets are concentrated in the ownership of the richest part of the population. More have their total wealth in motor vehicles than in shares.

Housing wealth was increasing its share of total assets before the recent price surge. Financial assets have declined as a proportion of wealth holding.

This marks New Zealand off from other Anglo-Saxon countries. It is important to determine why Kiwis have a relatively low and declining share of financial assets.

Clearly, government policy encourages tax-free gains in housing while taxing deposits and dividends. Other countries have policies that encourage both home ownership and financial asset ownership, but New Zealand encourages only home ownership. Australia has a compulsory superannuation scheme and the US encourages savings through tax-advantaged accounts.

The outlook is gloomy, with a declining rate of home ownership, an increasing student loan debt and less frugal habits with a greater willingness to assume debt. The NZ Institute paper concludes that it is increasingly difficult for New Zealanders to advance financially, so "a growing number of Kiwis will be without any meaningful stake in the economy and society."

It is an important conclusion by David Skilling and Arati Waldergrave, whose excellent piece of research should be carefully studied by policy-makers and politicians.

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