7 Household and business saving
The focus of the first half of this report has been on macro-economic issues including the fiscal position of government and the level of government saving. In this section of the report, we look at government policies that can have a direct or indirect influence in increasing saving in the private sector.
This section examines some tax policies, and these will undoubtedly have some impact on the fiscal position and government saving. However, the major thrust of these policies is to influence private sector saving, and they have been examined and are presented here in this light. This section also looks at the role of the NZ Superannuation Fund, which also has consequences for the fiscal position and government. However, the role of the Fund is also very much tied to the issue of retirement saving and hence to the saving position of the household sector. For this reason, it is covered in this section of the report.
The emphasis in this section is on policies that might affect the level of household saving, although there are also some comments on business saving. The over-riding issue, however, is not whether policies will increase, say, household saving, but whether this, in turn, will flow through to produce a rise in national saving, and/or improve the quality of that saving. Unfortunately, it is not easy to identify and quantify the final impacts of policy changes on national saving. There is scope for more work to pin down how large these impacts would be, and on the optimum timing of any policy changes.
Tax issues are dealt with first. The first part of the tax subsection looks at policies that could be expected to have an impact on the level of household saving. It includes a look at incentives related to income tax, and whether these can have a material impact on national saving. It also looks at the effects of a shift from taxing income to taxing expenditure, and whether income tax produces an inherent over-taxation of savings that might be reduced by adjusting tax rates on at least some types of income. The second part of the subsection looks at policies that might affect the type of assets held by investors and the debt/equity mix of investors. This includes a look at indexation (taxing income on a real basis, rather than a nominal basis), New Zealand's thin capitalisation rules, and other issues.
The second subsection focuses on long-term savings mechanisms. Inevitably, the issue of saving for retirement features in this section. However, the emphasis here is not so much on looking at whether saving for retirement of different cohorts is adequate at the individual or household level (since this is not a focus for the SWG), but in assessing whether mechanisms to provide retirement income might also be used to lift household and national saving. In effect, we look at whether a second objective - lifting national saving - can be added to the primary objective of providing adequate retirement incomes. It seems likely that any success with respect to this second objective could also have positive consequences for the first objective. That is, it may result in retirement incomes being provided on a more sustainable basis.
The second subsection begins with a look at the difference between a pay-as-you-go pension scheme (PAYGO) and a save-as-you-go pension scheme (SAYGO). Under PAYGO, pensions are paid out of current taxes. NZ Superannuation is an example of a PAYGO scheme. Under SAYGO, taxes (or private contributions) are collected in advance and accumulated into a fund, and pensions are paid out of this fund. During the transition from a PAYGO to a SAYGO scheme, the fund will rise, resulting in the country having a higher level of accumulated wealth. The impact on national saving (the flow measure) should also be positive over the transition period. Using retirement saving to increase national saving would involve increasing the emphasis on a SAYGO approach in preference to a PAYGO approach. The use of SAYGO is discussed with respect to NZ Superannuation, via the NZ Superannuation Fund, and with respect to household or private saving, via KiwiSaver.
The subsection goes on to take a detailed look at KiwiSaver. It looks at the structure of the scheme, including whether membership should be compulsory and what the level of contributions should be. It then looks at ways to improve the performance of KiwiSaver for investors: the level of fees, its operational structure, and whether it is capable of delivering more to members in terms of returns and risk profile. Both of these issues – structure and performance – are important, since they both affect the level of national saving and the level of national wealth.
The subsection then discusses the potential role of annuities in reducing the risk for retirees associated with the receipt of lump-sum retirement payments.
The subsection concludes with a look at other long-term saving issues, including non-retirement, locked-in long-term savings, and inflation-adjusted investments.
The final two subsections of the private sector saving section cover business saving and financial education.
At this stage, it is worth highlighting that the recommendations and comments that follow have been assembled in light of the SWG's Terms of Reference (see Part 3), which excluded looking at changing the parameters of NZ Superannuation, capital gains tax, other specific forms of benefit/income support, and the merits of individual spending areas. The recommendations have in effect been formed on an assumption of no changes in these areas.
- In keeping with the Terms of Reference for the SWG, this report does not make any recommendations regarding the level of NZ Superannuation; the focus here is on funding.