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NZ Institute puts forward radical savings plan

By Rob Hosking

Wednesday 6th April 2005

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A radical proposal of individual savings accounts from birth for all New Zealanders is being put forward by the New Zealand Institute.

With considerable public relations' flourish and much use of the buzzword of the moment, 'the ownership society', the New Zealand Institute has released a report recommending a far more paternalistic approach to savings.

It advocates the creation of 'Kiwi Savings Accounts', funded partly by a 2% tax cut, partly by government endowments, partly by employers and partly by individual savings.

The institute argues for this form of compulsory savings, saying that there is evidence that compulsory savings regimes "crowds in" savings, by creating a savings habit.

The government would kick-start each account with $500 and further $500 top ups at ages five and 10. The government would also match annual contributions of $200 dollar for dollar. The money would remain tax-free until the child turns 18.

People would be able to withdraw money from their account for tertiary study, a deposit on a first home, retirement and for transfer to offspring. The report's aims are not modest - it says the government would need to commit about $4 billion a year to the initiative - double what currently goes into the New Zealand Superannuation Fund.

Other countries are spending even more to encourage asset accumulation, the report says. The Australian government spent more than A$4 billion over the past four years just on helping people into their first home, the report points out.

"Given that New Zealand currently spends close to nothing on initiatives that promote asset ownership, a substantial increase in the size of the fiscal commitment is required to get New Zealand to the commitment levels of these countries."

The government would provide matching contributions to voluntary contributions to the account of up to $1000 a year, and employers and family members would be encouraged to make contributions to the accounts. The report considers whether centralised or decentralised approach to such accounts, and comes down firmly on the side of a centralised administration with a lower range of choices.

This would save costs in a number of ways, the report argues, and it suggests too much choice can kill such schemes as this.

"These cost advantages are particularly important in a situation in which there are many small contributions and small balances, as is likely in the proposed scheme...the evidence does not suggest that more choice necessarily leads to better outcomes for the individual.

For example, many competing choices often leads to procrastination, with lower participation rates being observed in some schemes with more available funds."

The report also advocates greater govt spending on developing financial literacy as part of the project.

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