9.4  Household saving – what are the government's objectives and how can it best achieve them? (4.1)

Savings objectives

Many governments have policies designed to influence household saving but it is not always clear what their objectives are or ought to be. A range of possible objectives for the New Zealand government are to:

1. Help people make good saving decisions for themselves recognising that people often find it difficult to establish a saving habit, know how much to save, have the discipline to save, and decide in what form to save.
2. Remove as far as possible distortions to household saving such as tax disincentives or various forms of misinformation about saving, borrowing and consumption, and undue risks from fraud, incompetence etc.
3. Increase national saving to narrow the gap between domestic investment and saving and so reduce the country's current account deficit and its dependence on foreign funders. This in turn has benefits such as reduced vulnerability to financial crises, a lower exchange rate and cost of capital and a better balance between tradable and non-tradable activity in the economy.
4. Provide an efficient pay-as-you-go (PAYGO) tax-funded universal pension scheme at reasonable cost to the taxpayer.
5. Contribute to save-as-you-go (SAYGO) schemes on behalf of households (e.g., a government fund, paying off government debt or contributing to private funds). Such schemes aim to lift wealth in order to create more opportunities or deal better with future challenges (e.g., an ageing population, rising healthcare costs), or crises.
6. Encourage development of financial markets through higher household investment in financial assets. This could be in order to lean against a tendency to over-invest in housing or to reap wider economic benefits from a more developed financial system.

It is useful to place these objectives in a framework that captures the key elements of household saving behaviour. From an individual's perspective, saving involves reducing consumption today in order to increase it in the future. From a country's perspective, refraining from consumption out of current income releases resources that can be invested in the productive capacity of the economy.

Economic theory suggests that there are three key determinants of a household's consumption in different periods, and therefore of saving. These are income, the relative price of consuming in different periods and underlying preferences for consuming now or later.

Over the past two decades, the income growth, after inflation, of many New Zealanders has been low. In fact, households in the first five disposable income deciles have generally seen a fall in their average market income between 1988 and 2007. When benefit income is added, deciles two and three still experience slight reductions in their disposable income over the two decades, while deciles four and five show slight growth. The household income measure used in these estimates is “equivalised” which means that it is adjusted for the variation in living costs of households with different numbers of adults and children.

Figure 9.12: Market income falls between 1988 and 2007 for the first five disposable income deciles

Source: 

Figure 9.13: With benefit income added, income for first four deciles still largely static between 1988 and 2007

Source:  The Treasury; Statistics NZ, Household Economic Survey

Government policies to achieve saving objectives often work through these three channels, or they can simply use the power of the state to compel people to save. The paragraphs below outline the main policies that the New Zealand Government uses to achieve the saving objectives listed above.

Current government pension policies

Pension policies are an important subset of saving policies and are primarily aimed at achieving adequate income in retirement for the bulk of the older population. The typical OECD-country pension model is sometimes referred to as the three-tier system, where the tiers are:

1. A publicly provided pension
2. Mandatory personal retirement saving
3. Voluntary personal retirement saving.

New Zealand has tiers 1 and 3, with NZ Superannuation being the tier 1 scheme and KiwiSaver being a tier 3 scheme.

Tier 1 schemes are safety-net pensions, paid by the government. New Zealand's scheme – NZ Superannuation – is PAYGO. While age pensions are often income-tested, NZ Superannuation is universal, being available to all people over 65 who have been resident in New Zealand for 10 years or more. The level of NZ Superannuation is tied to wages, with the level of pension for a couple being equal to at least 66% of the net average wage. Because the cost of NZ Superannuation (as a percentage of GDP) will rise with population ageing, the Government has established a fund (the NZ Superannuation Fund) to partially pre-fund these future costs. This initiative inserts a modest SAYGO element in an otherwise PAYGO scheme and is also a small shift toward imposing the higher future costs on the generation that will create them.

KiwiSaver is a voluntary retirement savings scheme which also attracts contributions from employers and the government. Employees who join the scheme put at least 2% of their income into the scheme, and this is matched by a 2% contribution from their employers. Government makes an initial contribution of $1000 when a person joins the scheme, and provides an annual tax credit of $1042, provided that the person makes contributions of $1042 or more over the year. The Government gives a tax concession for the employer KiwiSaver contributions but it does not provide reduced taxes for other saving schemes and in this respect New Zealand is unusual in the OECD.

The principal stated objective of KiwiSaver is to help people improve their incomes in retirement. This recognises that income from NZ Superannuation falls short of that needed to maintain pre-retirement consumption for many people. KiwiSaver also contributes to objective 1 by making enrolment and contribution a default option for new employees and by putting the task of looking after their investments in the hands of IRD and their KiwiSaver fund manager.

KiwiSaver is also likely to be contribute to several other of the objectives above:

• Higher national saving and reduced vulnerability (but the effect will be weaker to the extent that people simply switch their existing savings from other forms into KiwiSaver).
• As a SAYGO scheme it potentially improves the PAYGO-SAYGO balance and adds to household and national wealth and income.
• Financial markets will develop in size and sophistication as KiwiSaver funds grow.

While KiwiSaver may achieve some of the government's objectives it comes at the high fiscal cost of the subsidies to members (although these may be of similar order to tax concessions for long-term saving that are common in other countries). The SWG's overall assessment and recommendations with respect to KiwiSaver taking into account both benefits and costs are described in Section 7.3.4.