Opinion: Bernard Hickey thinks Labour should be congratulated for risking electoral pain for long term economic gain with its compulsory savings plan

Opinion: Bernard Hickey thinks Labour should be congratulated for risking electoral pain for long term economic gain with its compulsory savings plan

By Bernard Hickey

Political leaders rarely risk telling voters they need to reduce or delay pleasure or consumption.

More often than not they reassure voters that they can have it all and that someone else will pay in some other universe or time zone.

That usually means politicians and today's voters do an immediately convenient but economically disastrous deal to consume the future now and punish tomorrow's voters.

This strategy of stealing from tomorrow's voters so today's voters can feel good is successful as long as the major political parties tacitly agree not to call each other's bluff.

It has worked for John Key until now. He could be confident of continuing to stonewall calls from experts aplenty for a rise in the retirement age as long as Labour did the same.

The announcement today from Phil Goff that Labour would make KiwiSaver compulsory from 2014 and would phase in an increase in the eligibility age for New Zealand Superannuation from 65 to 67 by 2033 appears to be the political equivalent of the Charge of the Light Brigade -- a gloriously admirable gallop to certain defeat.

This is not the first one (Labour's Capital Gains Tax plan was a training exercise for Goff's Light Brigade) and it must be making John Key either thank his lucky stars or wonder whether he's missing something.

The opinion polls at the moment showing Key romping to victory suggest a bout of short term electoral thinking will put paid to Labour's long term bravery.

Or will it? Will Labour's decision to call Key's bluff leave him looking like an irrelevant King Canute type figure trying to deny the inevitable.

Aside from the political theatre of it all, let's look at the details of the policy and whether it makes long term economic sense.

Labour is proposing a bunch of things that it says was estimated by the Savings Working Group to improve New Zealand's net debt position by 17% of GDP and reduce government spending on NZ Superannuation by NZ$100 billion over 30 years.

These changes to KiwiSaver would include:

1. KiwiSaver would become compulsory for all employees from 18-65 from 2014. Beneficiaries, students, self-employed people and those under a minimum income threshold would not have to join.

2. The employer contribution would increase by 0.5% annually from 3% to 7% over 9 years to 2022. The employee contribution, which is due to increase from 2% to 3% from April 2013 under National, would be reduced down to 2% under Labour. This would stay at 2% under the Labour plan.

3. The goverment's NZ$1,000 kickstart for new KiwiSaver members would be spread over 5 years and the member tax credits (currently NZ$521/year) would be unchanged.

4. Universal KiwiSaver would cost the government around NZ$370 million a year or a total of NZ$2.02 billion over the seven years to 2019/20.

5. Labour will keep the first home buyer's subsidy of up to NZ$5,000 per person (NZ$1,000 per year of saving). KiwiSavers are allowed to withdraw their contributions after three years in the scheme to buy their first home. So far 1,300 KiwiSavers have withdrawn NZ$12 million at an average of NZ$9,640 per person in the 9 months since this was allowed on July 2010.

6. The age of withdrawal from KiwiSaver stays at 65, even though the NZ Superannuation eligibility age would rise to 67 by 2033.

7. Labour would review the default KiwiSaver fund provider arrangements, including fees and disclosure. It may offer the option of saving in government guaranteed bonds.

The changes to NZ Superannuation would include:

1. The age of eligibility would increase from 65 to 67, rising at a rate of two months each year between 2020 and 2033. This would save NZ$100 billion in government pension payments over 30 years, Mercer has estimated.

2. There would be transitional assistance for those unable to keep working after 65, with payments at the same level of the pension.

3. Labour would keep NZ Superannuation payments for a couple at 66% of the average wage.

The changes to the government payments to the NZ Superannuation fund (Cullen fund) would include:

1. Labour would resume government contributions to the NZ Superannuation fund in 2012/13 with an initial contribution of NZ$750 million a year, rising to NZ$2.4 billion a year by 2015/16.

2. This would contribute NZ$5.5 billion more than under National's plan, which is to resume contribution some time after 2015/16. They were suspended in 2009. Labour said its plan, including investment returns, would mean an estimated NZ$12.8 billion extra would be in the fund to help pay for extra cost of retiring baby boomers. The cost to the government of the ageing workforce increases the NZ Super costs to 8% of GDP by 2050 from 4% now. Labour said its changes would limit that cost to 5% of GDP.

The pros of these policies:

This goes some way to limiting the weight of debt and contingent liabilities (health and pension costs of the baby boomers) piling up on future generations.

John Key's guarantee that he would never change the retirement age or payout rate from 65 and 66% respectively while he was Prime Minister was one of the most short-sighted and irresponsible things he has ever said.

Comments he made recently in parliament about not needing to worry about the government's finances after 2025 reinforced his apparently short term view on this. See Alex Tarrant's October 4 article.

Key was asked by ACT MP John Boscawen whether New Zealand should raise the retirement age.

The government was comforable that the costs imposed by the retirement age, which were modeled out to 2025, were affordable, Key said on October. "That's about as far out as we need to go," he said. Key will be 65 in 2026.

Labour is biting a very tough bullet on this and taking a longer term view. Good on them. It says it would add an extra 730,000 members to KiwiSaver, adding to the 1.8 million already in the scheme and essentially democratising this type of investment in assets other than the family home.

This would increase the size of the savings pool, at least some of which would be invested in New Zealand businesses and infrastructure.

The cons of these policies:

There is a risk a significant ramping up of KiwiSaver funds under management would increase the amount of profits and bonuses for fund managers. One of the complaints with Australia's AS$1.3 trillion scheme is that it has created a generation of 'Macquarie Millionaire' investment bankers and fund managers.

Labour says it would regulate fees and charges hard.

Another risk is that savers are being forced to save in investment vehicles that may lose money. Labour says it could address that by ensuring KiwiSavers could invest in government guaranteed bonds.

Some also believe the fastest and most efficient way to improve national savings is for the government to quickly reduce deficits and start running surpluses, through government spending cuts and higher taxes. Labour says its plan encourages private foreign debt reduction, given the government subsidies are magnified by private borrowing.

Your view?

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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32 Comments

Fortune may not favour a brave Labour, this time; but they have positioned themselves ideally for a... "Look at the mess we are in now! We told you this would happen..." for 2014. Get the contentious discussions going, Labour...you have nothing to lose, and all to gain...next time. ( PS; How come it's a LaboUr Party these days, as opposed to a Labor Party to distinguish between politcs and work effort?)

Labor as in Labour - Australian influence aye??? 

You meant self-unemployed people.....

Aaaaaaand it's gone.

Count on it.

I haven't participated in the KiwiSaver discussion before as I don't completely understand it.

On balance, the general consensus of the many posts by the various contributors on this site, regarding this topic, is one of absolute opposition, for a variety of reasons. Which surprises me. I'm located in Australia and consulted to an Australian Financial Advisor Financial Planner for 15 years so I'm familiar with the Australian system. It is compulsory, it started in 1990 under the Labor Government as a compact with the unions as a trade off against wage increases and wage rulings. In 20 years it has grown to become an AUD $1.4 trillion industry. It is now the largest single industry in Australia. I know a lot of people who have been in the system from the start, who, now, nearing retirement find themselves quite wealthy. Much more wealthy than they would have been otherwise. I have never heard anyone complain about it. 

The problem with kiwisaver is the indusrty is incompetant but charges a premium....

Sure its grown, but anyting you hand a monopoly to a private company they get fat...

Its easy to make some money in good times....just watch for the losses in bad....and they will still take their fees.

regards

Hell will freeze over before I vote labour....I cant afford to do kiwisaver and over-pay my mortgage and I know which one its the better net benefit to do....and with a depression coming.

Kiwisaver hands a state sanctioned monopoly to the incompteant insurance industry to lose money hand over fist, take an easy cut and do didddly competantly...just look at their preformance over the last decade. My main private pension lost 22% in 2008 after 30 years....In the coming depression it will probably be wiped out as will kiwisaver accounts.  Whats left  will  get "directed" by a Labour govn on where to invest....its a stealth tax in all but name.

My one hope is by 2014 we will be in a mega depression and the huge losses will have been booked by others so shares etc will already be bottomed and commercial property worthless.....even if Labour gets in it wont make a difference....idiots

regards

My one hope is by 2014 we will be in a mega depression

Holy cow Steven cheer up mate, we are world cup champions woop woop !!

Nothing changes on this site :)

There is going to be a mega depression...the only Q is when.....By 2014 I would think its almost certainly started and about 1/3rd the way through the drop...with a 5 or 6 year drop.....10% per annum for house prices.....

You are a PI?  so if you have say 10 houses on large mortgages, just how do you sit on 50% loss of value? sitting pretty? of wiped out?

Considering the bull*** from the likes of Olly, Big Daddy and SK etc.....I will find it hard in their cases anyway not to smile.....

The single home owners who wanted a place for family/children are the ones I will really feel sorry for, everyone else is a "Pro".

regards

 

My one hope is by 2014 we will be in a mega depression

Why do you hope for a mega depression by 2014?  What would that achieve?

Bernard wants us to "congratulate" Labour...for what?

He sees "long term economic gain" from their plan....why?

At least he has put the 'cons' down....at the very end!....why not at the start?

Wolly, that's not difficult to guess.........

None of what Labour is proposing to do to KiwiSaver will reduce public cost in the future - since they are proposing to continue to pay NZS as it is at present, as well.  

In fact, it may well increase the burden on future taxpayers if the cost of the "incentives" - which would actually be unnecessary if saving through KiwiSaver is to be compulsory anyway - raises the public debt that future taxpayers will have to pay back.  Same goes for borrowing to put into the NZSF.

In sum, baby boomers are now to benefit twice from their children - once with the NZS that they will continue to collect, and once with the money that's being borrowed from the future to put into their Kiwisaver accounts.

Raising the retirement age will certainly reduce the cost of NZS below what it would be if the retirement age remained the same, but I seriously doubt that such a modest change as they are proposing will reduce the cost by as much as  three percentage points of GDP.  Can we see how they've worked that out?

"Commies! Socialists! Pinkos! Reds under the beds! Bring back Cohn and McCarthy!"

Steven can you please explain:  "incompteant insurance industry to lose money hand over fist".

Mine is with Gareth Morg & so far is doing fine. Out of all my investments it is by far the best.

As it is your money earns 50% PA.

Hi,

I think if you read what Gareth says about most of the industry you can see where I am coming from. Now if I was going into kiwisaver Gareth would be one of very few  I would trust...once my mortgage is clear its probable some of my money will go to him......

For myself I had some money in a Company called Northern Rock.....I got back 10% of what I put in then there was management fees......worked out at <9%.....

Then there is one of my main pensions I have been paying in for over 30 years, it lost 22% in 2008....it will obviously never recover....

In the last 15 years Ive been quietly a) (over) paying down my mortgage and b) buying shares, management costs, zero. I sold them in June 2010 and made some reasonable money.....looking at the present values Im 7% better off than if I sold today.....some luck there but I expected a blow up 12montsh ago....

What you dont see with these funds is teh risk your money is under to get the return....I think it was Gareth who also commented on this.....high returns with high risk is farily easily done by a gambler.....the likes of Gareth's returns then look medicore in comparison, but hopefully the risk is far far lower.  Givn the huge volitilty and mega recessiosn depressions ahead of us protecting your capital is the number one game....IMHO.

regards

 

 

Im in Gareth Morg kiwisaver Pureant, and unlike you I am not happy with how it has gone there.

Are you with him in a kiwisaver capacity, or as a general investor?  If the former, what type of fund and when did you start contributing?

Bernard...

To see if Labour REALLY understands what savings are you could have asked him some easy questions. ...  ( in a fundamental ..  economic sense.. as it applies to the REAL productive, everyday economy )

 

1/ What are "savings"..      ( In my view savings are Delayed consumption )  ( borrowing and spending is the opposite to this )

2/ In a credit based economy where we grow GDP by taking on debt...  if we decide to REALLY save we will have a recession.... Are u ok with this..??

Deleveraging can ONLY happen with a contraction.

3/ Ask him if he is ok with the OCR at 2.5%

4/ Ask him which comes first....  Reducing total debt or savings  ( his version of savings ).

What he is proposing is just more  "financialization" of the Western World....  It is the old paradigm.. 

It is not really savings ... It is just a way of capturing money that can then be used in the same old way by financial institutions..... BUT... what is different now is that the game has changed....

Labour is wanting to do this in the climate of a World that is trying to "deleverage".

The ONLY thing that makes Kiwisaver a winner for people...is the Govt subsidy..

SO....  to make it compulsory  could be , kind of, viewed as just another tax.

( written this on the run,...  so maybe not well thought out. )

What I am trying to say... is that if Polititians were truly interested in Savings they would do things, such as allow a "depreciation" rate on Savings.... 

That single thing would increase our savings rate Overnight.... and would also remove a fiscal distortion that has been part of the reason for our love of property..  ie. as things stand .. savings as an investment is a mugs game.

I remember Farmers selling their Farms in the late 1970s'... They felt rich with their money on term deposit...BUT within 7 yrs most of them needed parttime jobs to make ends meets.

When money supply can grow form $40 billion to $230 billion in 22 or so yrs...    Savings don't stand a chance in the face of that king of money debasement...!!!! 

Cheers  Roelof

 

 

These apply just as much to National.

The real ones to ask is,

When is peak oil and when did it occur.

What is the imapct going to be.

What are your plans to deal with it.

regards

Labour has opened up good discussion points, but they have really missed the mark with this. They need votes, they may suffer a heavy defeat at this election.  To gain votes, you need to tell the public something they want to hear, it may not be true, but humans are all about greed and what is in it for them. For this I think they have failed, Goff should of gone long ago, he will get chewed up and spat out come leaders debate time, go red and fumble his way through the debate, JK will smile, tell everyone about growth in 2015 and how good we will all be, how good the earthquake was for our growth, voters will love it,  and Unfortunately thats what wins votes. This One discussion point from Labour may well headline out any other policy changes they have (good or bad).

I think Labour knows its going to be a heavy defeat...however they need game changers for 2014.....so why not look for some of these at expense of losing a few more votes and maybe the odd list MP?......no biggee.....problem is now that Natioanl could take the opportunity of an easy win to go to the right....interesting to watch...

The interesting thing is the Green vote trend its trending up a little...The Greens are more left wing.....as well as Green....is that wining them real votes? or is it a case of the left of labour voting Green as a protest?

 

regards

It's easy to come across as being big and tough, when you know you haven't got a snow ball’s chance of becoming the govt. Hell, I'll promise you whatever you like and whatever makes me look good to the easily impressed if I know I don't have to step up and deliver on it. Labour can’t go any lower in the polls. I’m surprised they haven’t promised to pave Mt Roskill with gold in 2060 as a sign that they mean business.  

This is just more typical crap from a craven and desperate Labour party playing politics. It’s beneath contempt.

Just as an addition to that. Bernard your first sentence contains a typo. What I think you actually meant was:- Labour leaders rarely risk telling voters they need to reduce or delay pleasure or consumption.

I think you will find that that is a more accurate reflection of the truth of the situation.

FYI from a reader via email:

How about a Payroll Tax?

However not just any old Payroll Tax.

The revenue to go direct to the Cullen Fund

Start on 1% of all wages, salaries and also any dividends (In lieu of wages etc) from private/close companies.

On top of that another 10% (or more, maybe much more) for all salaries over $100k p.a. and include the value of bonuses and incentive share issues.

Benefit is individuals could not complain they were paying the tax. Ater all companies do not have a vote, do they?

I think inthe UK they do that? ie have 1 or 2 small % taxes for health? and OAP?

and yes I think its sensible.....

regards

Wake up NZ and vote for people not for parties.

 What about all that chattering left – right – national – labour – greens –act – blue – red ????? Why are we not debating politicians  performance ? How much longer are you prepared to listen to these “Bloody Party Cock Fighters” – hiding behind the party face - underperforming -  just going around a circle.

Hopefully in a few years time political parties are a thing of the past and we have a team of capable Kiwis, who can lead this country out of misery.

......preferable more women.  

Who will they be and who will appoint them that takes us into the dark ages?

Say make,

Tribeless the head of the board?

John Minto? 

Don Brash?

Democracy isnt a great system, but I dont see anything else as good by a long way.

regards

 

Labour would have suffered greater electoral pain if they had failed to differentiate themselves significantly from National.  As it is, they have at least put daylight between themselves and the government and turned the election into something of a contest of ideas, rather than the contest of personality it would otherwise have been.  The strategy was obvious - rather than clever - given their leader's low ratings, but they have succeeded in diverting voters' attention from a choice between Goff and Key.
 

As for the policy detail, let's face it: the current model is not working and will work even less well in future.  It's a step in the right direction.

This came as a complete surprise to me, as I am sure it did to John Key which is presumably why he did not want to be on telly last night. He probably wants to think out a response which might get him out from under his "not while I am Prime Minister" misfortunate pledge. He must know the elegibility age has to rise. Look for some sort of summit about retirement savings early next term. Labour wont be able to put up much of a fight about that and maybe Key can blame his backflip on a coalition deal with ACT.

 

Hopefully Winston will have had a collision with his full length mirror by then and all the pollys can be realistic for once.

 

Most of the rest of the Labour Package is a bit silly. Makes no sense to borrow to invest and compulsory Kiwisaver only adds up if the govt super is means tested as in Australia. Goff has not got enough courage to fess up to that.

 

The conspiracy theory is that this actually a Labour Plot to get Winston over 5% by giving him oxygen. Might actually work but I cant imagine Labour being that clever.

Gradually increasing the superannuation age from 2020 as usual keeps the baby boomer generation happy. Its the GenX and GenY's who will be affected. No wonder my generation are becoming more and more resentful.

I agree. Thats why we are all leaving for South America. Demographics are in our favour over there. Boomers had all the advantages and squandered it. How about we push the retirement age out 70 effective immediately. Most of my gen X & Y friends dont think there will be a pension for them at all when their turn comes and are reluctant to put in now knowing the boomers will take it strait out.

 

 

In the short term, "the Budget deficit forecast for the June 2011 year has gone from $2.5 billion to an actual $18.4 billion and the June 2012 forecast from a $3.1 billion to a $10.8 billion forecast. (The Christchurch earthquakes contributed $9.1 billion to the 2011 deficit.)"

Longer term, "the cost to the government of the ageing workforce increases the NZ Super costs to 8% of GDP by 2050 from 4% now." Also there are the health care costs of an aging population. The 1946 baby boomers are now retiring, and the baby boomer retirement phase will last 18 years.

Obviously there is a structural problem along with some shonky forecasts by treasury on deficits. wrong. More tax is needed and/or less government spending. Labours proposed capital gains tax and raising of the eligiblility age for NZ superannuation from 65 to 67 will help address this structural problem.

 

The main problem is that The Treasury has got its tax revenue forecasts horribly wrong although the Key Government’s tax cuts have been a contributor to this.

 

 

In as much as legislated savings for retirement funnel the savings capacity of the nation into a narrow and government regulated investment it detracts from the primary economic use of savings; namely that of the wide and free investment in commercial enterprise for the future wealth and prosperity of all.