Act now on savings before it’s too late, says working group

Published: Thu 16 Dec 2010 05:32 PM
Act now on savings before it’s too late, says working group
By Pattrick Smellie
Dec. 16 (BusinessDesk) – New Zealand’s poor savings record requires urgent action because “the window for changing policy settings is closing” as rising health and pension costs start weighing on government and private finances, says the government-appointed Savings Working Group.
The chair of the SWG, Kerry McDonald, is warning that the country has its “back to the wall”, and that “younger new Zealanders should understand this and also not bank on house price booms to lift their net wealth”.
The comments are in the group’s interim report to the government. A final report, which is likely to influence Budget 2011 decisions, will be published early next year.
McDonald likened New Zealand to “standing on top of a crumbling cliff, uncertain of the exact risk and needing to step back quickly to reduce the risk”, especially that posed by the country’s very high level of foreign debt – a key weakness as the world economy continues to digest the credit crunch.
“The country is vulnerable, some say highly vulnerable,” he said. “Continued increases in debt are unsustainable.
“New Zealanders collectively been spending too much and saving too little, using large amounts borrowed offshore to fund new investment.
“It’s time to get real. We need less consukption by both government and households, more savings, better quality investment, more exports and increased import substitution.”
After more than a decade of free-running credit growth, “we’ve had the fun, the big spend-up, bought over-priced houses and farms and a lot of bling. Now, unfortunately, it’s time to pay and lay a more secure foundation for future sustainable wealth,” the interim report says.
The best approach would be to act swiftly and pre-emptively, concentrating particularly on raising low productivity in the public sector, while a “reduction in total consumption of around 3% of Gross Domestic Product would appear appropriate.”
“It will be faster to raise savings through government, and those savings could bridge the short term until the private sector can make a more significant contribution,” McDonald said.
Among policy areas that the SWG is concentrating on to improve savings policy are:
• The pros and cons of making Kiwisaver retirement savings compulsory, perhaps with thresholds so that only those above a certain age or income would be compelled;
• Using so-called “soft compulsion” where everyone is automatically enrolled in Kiwisaver, and would have to choose to opt out;
• The impact of compulsion on the universal pension;
• Improved products for retired Kiwisavers to ensure they can live off their savings effectively once they stop contributing to the scheme. This could include government-supplied annuities;
• “At least some inflation-indexation” of tax on savings, and an extension of the tax rates applied under the PIE investment regime. “Lower taxes on saving may not have a large effect on the total quantity of savings, but should materially improve the allocation of saving across different classes of investment,” the SWG says;
• Close scrutiny of the long-standing practice of taxing earnings in retirement funds, which is rare in other countries. “This taxation of returns on retirement income over time heavily cuts back the returns to savings.”
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