KiwiSaver

Michael Cullen’s only legacy crumbles to dust

Cullen was generally regarded as a steady steward of the nation’s funds, although many who said so conveniently ignored the fact he did so during an economic boom time when he had no idea what to do with all the money coming out of the tax payer fountain.

Upon his departure, the purchase of KiwiRail at the blunt end of $2B was as cynical as it was an act of sabotage.

But all through this period, and until recently, people still thought kindly of him when talking about KiwiSaver.

That myth just fell apart too.

KiwiSaver tax credits cost more than $800 million a year but careful analysis by Treasury economists of the best data we have on household finances can find no evidence it has boosted the accumulation of wealth, a key objective of the scheme.

Research by David Law and Grant Scobie published by the Treasury examined data from Statistics New Zealand’s longitudinal Survey of Family, Income and Employment (SoFIE).

Their first look at SoFIE found that between 2008 (the first “wave” of data after KiwiSaver was introduced in 2007) and 2010 (the last before it was discontinued) both members and non-members of KiwiSaver increased their savings, defined as net wealth or assets minus liabilities.

But non-members fared better than members, averaging an increase of $32,000 or twice that recorded by KiwiSaver members.

In English – people who avoided KiwiSaver and made their own arrangements are better off than the state-run semi-compulsory scheme that was supposed to save us (heh) from ourselves. Read more »

Bill Ralston says Labour’s Tax Policy is like genital herpes

Bill Ralston accurately sums up Labour’s financial plans.

There doesn’t seem to be much hope in the pronouncements from Labour on what it would do to restore my fortunes. It seems determined to reduce the amount of disposable cash in my pocket.

David Parker wants to give the Reserve Bank the power to pump up my KiwiSaver contributions, which he’ll make compulsory. Yes, I know that means I’m saving, but I can’t touch it till I’m retired and the amount of money I have to live on weekly in the meantime is reduced further.

Labour seems obsessed with getting the Kiwi dollar reduced dramatically in value, but it occurs to me that would mean I’d be paying more for imported goods and inflation would go up, leading to less money in the wallet.  Read more »

Labour won’t come clean on their ‘big tool’ policy

Yesterday Audrey Young wrote about Labour’s new ‘big tool’ and Labour’s refusal to provide figures.

Labour is refusing National’s challenge to provide estimates of how much an increase in the KiwiSaver saving rate would be needed to prevent a 1 per cent rise in interest rate rises through the official cash rate.

Labour finance spokesman David Parker said the call to provide such a figure was part of a “narrow little game”and he was not going to play it.

Unfortunately David Parker is dead wrong. you can’t launch a policy then refuse to outline details of the policy when voters ask for details.

That isn’t a policy, it is slogan and about as deep as a bumper sticker.

To make matters worse the associate spokesman, Trevor Mallard, is issuing made up details from the ‘back of an envelope’.

Mr Mallard last week tweeted that according to his “back of the envelope”calculations, a 0.5 per cent lift in the KiwiSaver rate would equate to $187.5 million a year. That would compare to $210 million a year for a 0.25 per cent mortgage rate increase by the banks.   Read more »

Has Metiria Turei taken her pecuniary interests declaration seriously?

Has Metiria Turei taken her responsibilities regarding disclosure to the pecuniary interests register seriously?

Turei

She calls her house a castle (ok, ha ha) but she also says she holds shares in Comvita New Zealand Limited.

Comvita New Zealand Limited is wholly owned by Comvita Limited so it is 100% unlikely that Metiria has shares in  it.

In fact she has misled in her declaration to Parliament.   Read more »

Labour needs to tell the truth about their new ‘big tool’

Steven Joyce has called out Labour and David Parker for not even knowing basic details about how their new ‘big tool’ will work and how it will affect the take home pay of Kiwisaver victims affected by their policy.

The Government and its political allies have gone on the attack over Labour’s ground-breaking interest rates and savings policy, after signs the plan was getting traction with commentators and the public.

Widely regarded as perhaps Labour’s strongest policy package in some time, the Government was initially dismissive, but chose not to engage on the specifics of the plan to vary employees’ KiwiSaver contributions within a band of about 8 to 10 per cent, as a substitute for some Reserve Bank interest rate movements when fighting inflation.

Labour argues increasing KiwiSaver contributions to fight inflation would cool the economy by diverting a portion of households’ cash into savings rather than into higher interest payments.

Avoiding some interest rate hikes when fighting inflation would help prevent the dollar rising to levels that damaged export earnings and jobs.

But Economic Development Minister Steven Joyce, one of National’s key political strategists, this morning suggested the policy was no more than half baked and it would take massive increases in contributions to have a meaningful effect on interest rates.

Mr Joyce said Labour’s finance spokesman David Parker had been unable this morning to this morning to “answer a simple question today on how much KiwiSaver contributions would have to go up for wage and salary earners in order to stop a 1 per cent rise in interest rates”.

“Surely you must be able to answer that question. If you can’t, it’s not a policy, it’s not even an idea, it’s just a David Parker thought bubble.

“It’s simply not thought through,” Mr Joyce said.    Read more »

Even the left thinks Labour’s ‘big tool’ is useless

Things have gone very wrong for Labour when you get hard core lefty apologist for welfarism, Susan St John, criticising Labour party policy.

Labour’s argument is that the current account deficit is fuelled by a shortfall in national saving and that by forcing every worker into KiwiSaver and then gradually raising the combined contribution rate to 9%, individual saving will rise and therefore national saving will also rise. This will reduce the need to borrow and sell assets to foreigners to fund the current account deficit.

The presumed advantage will be that interest rates do not need to rise as much to reduce demand in the economy. Thus the exchange rate will be lower and exporters encouraged more than otherwise would be the case.

But inflation is actually very low.  What is the demand that actually fuels the current account?  It is not the spending of the low income families that are barely surviving. Forcing them into KiwiSaver is going to reduce the very demand that keeps their local economies going. Making them save even more to balance the economy in boom times is a bizarrely regressive idea for a Labour government-in-waiting.

As I said yesterday in a separate post, good luck to Labour explaining to South Auckland voters that their new “big tool” policy is going to be used to rape their already thin wallets even further.  Read more »

Forsyth Barr doesn’t think much of Labour and their new ‘big tool’

Here are some flippant comments from broker Forsyth Barr on Labour’s policy announcement re compulsory savings and legislating savings rates.

Kiwisaver: as per yesterday’s commentary, the brains trust at the Labour Party met in a very small phone booth and decided to propose some changes to the way monetary policy works if we were to be placed in the frightening situation of having it lead a coalition government.

The key one is giving the RBNZ the ability to change the rate (they call it a Variable Savings Rate tool) at which workers would have to contribute to a Kiwisaver scheme that would become compulsory, instead of simply having the OCR  rate to play with.

The wording would appear to still give the government a veto over an increase in contribution rate so you do have to wonder how reserve bank independence looks under this, also on our maths the changes need to be fairly solid, e.g. we reckon a +1.5% lift in the Kiwisaver contribution rate would be  equivalent to a 50bp increase in the OCR.

The attached note gives you a good overview of the situation, personally I’d back Richie McCaw switching to league as a higher probability than this coming in to play.

Read more »

A reader emails about Labour’s ‘big tool’

A reader provides his thoughts on Labour’s”big tool”.

Hi Cam,

As a student who is about to graduate after 5 years of study I will start my working life under this scheme, if Labour gains power. So over the past 3 days I have been researching and thinking about what effect this policy would have on New Zealanders, and this the conclusion that I have come too.

“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.” – Henry Hazlitt, 1946, Economics in one Lesson

“Compulsory” is not a pleasant word, it’s not a democratic word, It is authoritarian. Compulsory means ‘do what I say, or else!’, by definition it requires there to be a threat of punishment if orders are not followed. What is Labour going to do to punish those of us who refuse to partake in Kiwisaver? fines? prison time? Personal Liberty and Economic liberty are not separate, they are the same. To limit the amount of money that someone can spend is to limit not just economic but personal and social choices available to them.

The policy is filled with numerous economic fallacies and judging from the policy fact sheet on the Labour Party website it is based on a misunderstanding of the current global economic situation.

Let’s start with interest rates. Interest rates are at historic all time lows in New Zealand, which makes borrowing money easy and saving money an unattractive way to invest. to say interest rates in New Zealand are too high is ridiculous. David Parker is correct when he says that compared to “international norms” and the USA we have high interest rates, but since 2002 and for the last 6 years of the previous Labour government our interest rates have been significantly higher than those of the USA. The reason that US interest rates are so low is because the Federal Reserve is spending $45 billion a month purchasing bonds to keep interest rates below 1% in a failed attempt to stimulate the economy, the UK and Japan have been doing the same.

Parker argues that our high interest rates are causing a high NZ dollar and that this is hurting our exporters. I say rubbish. The high New Zealand dollar is the result of foolish monetary policy on the part of the United States and others like Japan. By pushing their interest rates below 1% whilst inflation sits at 1.50%, the savings of Americans are been destroyed by inflation at a rate of about 1% a year. Individuals and businesses that can afford to have shifted their money around the word to countries that offer higher interest rates, and that is one of the major reasons the New Zealand dollar has risen. It is not the result of New Zealand actions but the actions of other governments.

This highlights another major flaw in the policy. Despite Parker’s claims this will increase the amount that people save It probably won’t. Parker wants to lower interest rates to “international norms” (USA levels) and as stated above that has had disastrous effects on the value of American savings as interest rates have dropped below the rate of inflation. Parker hopes to counter this effect in New Zealand with his compulsory and variable Kiwisaver but it won’t work. The policy artificially reduces the amount of disposable income people have and this combined with low interest rates will lead to people simply borrowing more money. What do people do when they don’t have enough money and money is cheaply available? Borrow. The Labour government will remove money from the economy using kiwisaver and a lot of that money will simply be replaced with borrowed money, meaning that very little if not nothing has been done to address demand push inflation.

People don’t just save for retirement, they save for cars, children’s education, homes, business start-ups and an infinite list of other things. Lower interest rates will discourage ordinary bank account savings because the interest return on saving will be too low (particularly if inflation higher than the interest rate), instead people will seek to put their money in other higher risk investments such as the stock market to try and get a higher return.

Low interest rates that are in line with “international norms” will lower the New Zealand Dollar. Parker is right that this is good for exporters, but he is slow to admit that it will be at the expense of everyone else. Lowering the NZ dollar will cause cost-push inflation by increasing the cost of imports, a type of inflation that cannot be controlled by confiscating our money because the rises in price are unrelated to consumer demand. The only way to address the inflation caused by a low exchange rate is to increase interest rates, but doesn’t that defeat the purpose of this policy which Is meant to deliver a low New Zealand Dollar and low interest rates?

A low NZ dollar will also mean that the price of New Zealand produced goods will increase because the imported goods required for production, especially petrol and petroleum based products will become more expensive. Again these price rises are independent from consumer demand, so cannot be lowered by decreasing demand through variable Kiwisaver.

Parker is wrong when he says that this is going to create  jobs. Yes, new jobs will appear in the export sector, but at the same time jobs will disappear from the import sector as kiwis will be buying fewer imports because import prices are high and people have less disposable income.

Parker made the claim this policy is going to result in “less foreign ownership of our land and companies’” – this is nonsense. A lower New Zealand dollar will make buying New Zealand companies cheaper for overseas investors.

Another nonsense claim is that this will somehow help us save for our retirement and stop us from giving our money away to overseas banks in the form of mortgage interest rates. In reality, people who have money saved in the bank will receive a lower interest rate, thus saving less, and people who lose jobs in the import sector will also save less. Lower interest rates are good for those with mortgages, but at the same time mortgage holders will also have less disposable income because of mandatory variable kiwisaver and higher import prices, so they will likely be paying down their mortgages at a slower rate. It is also important to remember that lower interest rates will encourage people to borrow more money than they normally would, so it is unlikely that the banks will  experience any loss in income as Kiwis pay off larger mortgages at lower interest rates but over a longer period of time.

Finally – It appears that Parker has forgotten who runs our kiwisaver accounts, the banks and insurance companies do. These foreign banks and insurance companies will be making massive profits from Kiwisaver if it becomes compulsory, which raises the question of who helped Parker formulate this policy? Was it those who stand to profit from compulsory Kiwisaver?

Another implication of this policy that I have not seen discussed is the effect that the exclusion of employees and self-employed people will have. Will we see large numbers of wage earners now becoming contractors to avoid having to contribute to kiwisaver, particularly if the compulsory contribution is pushed above 10%?

BNZ warns Labour over their “big tool”

It looks like the BNZ is not at all keen on having Labour’s new “big tool” deployed.

Their Chief Economist Tony Alexander has issued a warning to Labour that their much vaunted policy won’t work as intended.

Labour’s plan to use KiwiSaver as a monetary policy tool would force investors into buying more shares when prices are high and fewer when they are low, Bank of New Zealand chief economist Tony Alexander has warned.

The proposal from Labour, unveiled earlier this week, was for KiwiSaver to be made compulsory, and the minimum contribution rate lifted or dropped as a means of influencing the pace of household spending growth.

It was billed as an alternative tool to using interest rates to dampen or stimulate economic activity in the economy, and therefore inflation.

But in his weekly newsletter, Alexander has warned about its potential pitfalls, including lifting volatility on the sharemarket.

Alexander said: “The policy would boost Kiwisaver contributions when the economy was booming and presumably asset prices like shares rising firmly and at high levels. The tightening of monetary policy would lead to more asset buying out of the contributions and this would amplify the equity price cycle while forcing people to buy more when equity prices are high.”  Read more »

Compulsory KiwiSaver that isn’t compulsory

You pretty much can tell when a policy is flawed when you have to look at all the exceptions and edge cases where it isn’t going to apply, or it does more damage than good.

Labour’s “Big Tool” includes implementing a universal compulsory savings scheme for everyone through KiwiSaver.

Except that it doesn’t.   Apart from those at the bottom end of society, 300,000 others have now been discovered to fall outside the universal compulsory scheme.

Simon Collins explains

More than 300,000 business owners and self-employed people would be exempted from Labour’s new policy to make workers pay more into KiwiSaver to dampen inflation in boom times.

Labour finance spokesman David Parker confirmed yesterday that his variable compulsory saving proposal would apply only to employee contributions to KiwiSaver – not to employer contributions, and not to self-employed people and employers who choose to pay voluntarily into their own KiwiSaver accounts.

The policy isn’t getting any love from academia, traditionally a place that is synonymous with Labour’s social and economic engineering   Read more »