By Bernard Hickey
It's big and it's hairy and it could change the way monetary policy is run.
David Parker's proposal for a Variable Savings Rate (VSR) certainly qualifies as the 'big new tool' he promoted it as over the weekend.
It ties together Labour's savings policy and its monetary policy in a way few expected.
Parker is certainly hoping it is the tool that fixes the big, hairy problem for the economy, the over-valued exchange rate.
Some might argue this over-valuation is a symptom of our low national savings rate, which is why the VSR appeals. It would give the Reserve Bank an economy-tweaking tool which could also help solve this structural problem of a low savings rate in one fell swoop (although there is debate about whether compulsory saving actually increases national saving -- see more below on that).
On the face of it, the VSR appears an innovative complement for the OCR (Official Cash Rate) that the Reserve Bank already has.
In many ways it is similar to the proposal put forward by former Reserve Bank Governor and National Party leader Don Brash. He proposed a variable GST rate, which would have allowed the Reserve Bank to tweak the rate to slow down or speed up the economy without having such an impact on the exchange rate.
But the policy has the most in common with Australian Labor Treasurer (and then Prime Minister) Paul Keating's compulsory savings scheme dreamed up with then Australian Union leader Bill Kelty in the late 1980s and early 1990s. This 'Accord' was essentially a deal done to deliver a wage increase that was not inflationary, and at the same time create a compulsory superannuation system. Here's Keating's own telling of the tale.
The system is now worth A$1.7 trillion and the proportion of everyone's wages put aside into the scheme is set to rise from 9.25% now to 12% by 2021.
David Parker is proposing making KiwiSaver compulsory at 6% of wages, including 3% from the employee and 3% from the employer, before it rises to 9%.
This would be where the VSR becomes a tool that the Reserve Bank could use to cool or heat up the economy by lifting or cutting the contribution rate to cool consumer spending, without having to hike the OCR and put upward pressure on the exchange rate.
The VSR would allow the Reserve Bank to remain independent and give it another way to slow or speed up the economy. There would, of course, be a Policy Targets Agreement between the Minister of Finance and the Reserve Bank Governor to govern how the VSR could be tweaked, but the decisions on when and how to use it would be made by the Governor.
Politically, the idea of increasing the KiwiSaver contribution rate seems more attractive than raising interest rates, at least for exporters and mortgage borrowers. It means the extra savings are kept by the wage or salary earner, rather than being 'lost' to the bank and term depositers.
In theory, raising the VSR would allow the Reserve Bank to avoid putting up interest rates and therefore take pressure off the currency.
The other parts of the policy that didn't get as much attention may be just as important. Labour is saying the Reserve Bank could use macro-prudential tools such as capital requirements to limit lending growth or pressure on the currency. The Reserve Bank has already partly gone down this path with higher capital requirements for high LVR mortgages and the speed limit.
This wider use of macro-prudential tools could also help reduce the reliance on the OCR.
Simply imposing KiwiSaver compulsion and a higher contribution rate may not necessarily improve national savings. The Australian experience has been mixed at best. It turned out Australians felt richer as their superannuation pots got bigger, which encouraged them to borrow even more against the value of their houses.
Compulsion in tandem with Labour's policy of gradually increasing the retirement age to 67 is controversial within Labour and on the left of politics. There are plenty who argue poorer manual workers are discriminated against. There'll be some tricky questions around who gets exemptions because of ill health and who can ask to be exempted on the grounds of hardship.
The other risks with compulsion are around the issue of Government guarantees, funds management fees and means testing. If you are forced to save by the Government you could argue your funds should be guaranteed by the Government.
The Australian scheme has become notorious for high fees and compulsion has become something of a subsidy for the funds management industry, and ironically, the banking sector. There would have to be some tough conversations and negotiations around fees. Here's an excellent Grattan Institute report about Australia's fees mess.
And finally there is the argument against compulsion that used to be made by the 'Father' of KiwiSaver, Michael Cullen, which is that once these funds get very big political pressure will build for means testing, as is the case in Australia. That would rob the current NZ Super scheme of some of the simplicity and fairness behind the universal pension.