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Saving in New Zealand - Issues and Options

The effect of transfers and government expenditure on saving

Government provision of transfer payments and publicly provided services impacts on individuals' saving choices by:

  • Reducing the need for lifecycle saving - for example, NZS and student loans reduce the need to save in advance for well-known lifecycle events.
  • Reducing the need for precautionary saving or insurance - for example, social welfare benefit payments, and subsidised health services.[18]

A number of areas of government expenditure could reduce household saving for lifecycle or precautionary reasons. Households generally build up and draw down on savings over long periods of time. This means that the largest impact on household saving is likely to be from policies that affect the need for lifecycle saving.

The two areas considered the most likely to reduce the need for household saving are student loans and New Zealand Superannuation (NZS). The Government is committed to retaining the current settings of NZS and it has been excluded from the SWG's terms of reference. The Government has also said it is committed to retaining interest-free student loans and the SWG is unlikely to consider the student loan scheme in detail. Nonetheless, these two areas are discussed in order to cover the full suite of options that could have a significant impact on national saving as part of the broader debate.

Student loans

Subsidised student loans reduce incentives to save and encourage debt

The Government has a student loan scheme to facilitate students' funding of their tertiary education course and living costs. It currently involves a significant Crown subsidy through interest-free student loans. In 2009/10, the Government lent $1.5 billion in student loans: this borrowing is expected to cost the Crown $728 million, ie, nearly half of the value of the loan is written off when it is drawn down.[19]

As noted above, the Government has stated that it is committed to retaining interest free student loans. Notwithstanding that, Treasury considers that the student loan scheme is likely to be having a negative impact on household saving in several ways:

  • it removes the incentive for individuals or their parents to save for tertiary education
  • interest-free student loans provide students with a subsidy to take on debt. This is likely to encourage some to take on more debt than they would in the absence of interest-free loans, and
  • encouraging students to take on debt could have an ongoing impact on their saving behaviour. For some people, taking on large amounts of debt when young could acclimatise them to continue funding consumption through debt rather than saving.

The following graph illustrates total borrowing via the student loan scheme and highlights two periods of policy change. The 2005-2006 period shows that the introduction of interest-free student loans was associated with an 8.4% increase in the number of borrowers and a 12% increase in borrowing. The 1999-2000 period has several explanations, one of which is the ‘no-interest-while-studying' policy introduced in 2000.[20]

Figure 12 - Total student loan borrowing
Figure 12 - Total student loan borrowing.
Source: Student Loan Scheme Annual Report 2008/09

One option to arrest these trends could be to reduce the subsidy element of the student loan scheme. This could involve charging interest on student loans or further changes to the eligibility criteria to receive a student loan. Changes to student loan settings could both increase household saving and speed up the Government's return to surplus. Changes to the conditions of the student loans scheme could also be combined with the introduction of a saving product to encourage parents and/or individuals to save for tertiary education.

New Zealand Superannuation

NZS settings may be contributing to lower household saving

A second area of government expenditure that reduces the need for lifecycle saving for many households is NZS. This reduces national saving through a number of channels:

  • it significantly reduces how much households need to save to maintain the same standard of living in retirement. This is particularly true for households on lower incomes, who need to save very little for their retirement to maintain their standard of living[21]
  • it reduces the opportunity for government saving as it is a significant fiscal cost and is becoming more costly as the population ages. NZS currently costs around 4.4 percent of national income and is expected to rise to about 8 percent a year by 2050,[22] and
  • it is largely funded on a pay-as-you-go basis rather than save-as-you-go, which means neither the government nor individuals are saving enough to fund future pensions.[23]

Different countries have adopted quite different models of pension payments. New Zealand is unique in having a flat-rate universal pension. NZS has a number of advantages but it may also be reducing national saving compared with alternative regimes characterised by save-as-you-go or less generous schemes.

Over the long term, there are two broad ways that NZS could change:

  • Changes to the age of eligibility – could have benefits both in terms of increasing national saving and encouraging elderly people to stay in the workforce. This could involve providing a payment at a later date for those who remain in the workforce longer and delay receiving NZS; or it could involve increasing the age of eligibility as life expectancy increases.
  • Considering the level of NZS – this would encourage individuals to save more for their retirement. There are a variety of ways that the level of NZS could be adjusted, for example, indexing increases to inflation instead of wage increases to maintain a constant standard of living for the elderly, or some form of means testing.

The following table outlines some policy options for government expenditure changes that would encourage private saving.

  Pros Cons
Change student loan scheme (eg, charging interest or further changes to eligibility criteria)

  • Raise household saving by removing an incentive to take on debt
  • Potential to change some students’ ongoing attitude to debt (ie, culture or habit)
  • Increase Government saving

Tertiary education saving product

  • Could potentially lift household saving if combined with student loan changes
  • May discourage participation in tertiary education
  • Less of an incentive for graduates to remain in New Zealand

Tertiary education saving product

  • Risk of low uptake, which is why it has not been progressed. May have sufficient uptake if combined with student loan changes and a subsidy
  • Needs to be compatible  with tertiary policy settings and purpose of KiwiSaver
Modify NZS settings
  • Could raise national saving
  • More affordable for the Government
  • Incentives for older people to work (could be a pro or con depending on the change)
  • Raises issue of fairness between different groups
  • Adequacy of retirement income
  • Possibly increased administrative complexity

Some Government policies may be acting as a disincentive to private saving


  • Are these approaches to reducing policy-created disincentives to save the right ones? Are there other approaches that should be considered?
  • Could changes to the student loan scheme increase national saving?
  • Should a tertiary education savings product be designed to supplement the student loan scheme?


  • [18]See for example Callen & Thimann (1997) Empirical determinants of household saving: evidence from OECD countries; and Hawke (2005) Retirement income provision in New Zealand: A way forward.
  • [19]Ministry of Education (2009) Student Loan Scheme Annual Report October 2009.
  • [20]The 1999-2000 period has a number of explanations, including: the amount that could be borrowed for course-related costs was reduced in 1999 leading to a fall in total borrowing. This policy was reversed in 2000 and the ‘no-interest while studying' policy was introduced.
  • [21]Gibson, Le and Scobie (2004) Saving for retirement: New evidence for New Zealand.
  • [22]New Zealand Treasury (2009) Challenges and Choices: New Zealand's Long-term Fiscal Statement.
  • [23]The New Zealand Superannuation Fund (NZSF) is an exception but is simply intended to help smooth the transition to the costs associated with an older population, and is not a full solution. Capital withdrawals from the NZSF are projected to begin in 2030/31. If the returns from the fund were solely allocated to funding NZS, the fund would be expected to finance around 6.3% of annual NZS expenditure over the decade beginning in 2036/37, which is a relatively small percentage (estimated by the Treasury).
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