Bernard Hickey looks at the pros and cons of Labour's big new monetary policy and savings policy tool – the Variable Savings Rate

Bernard Hickey looks at the pros and cons of Labour's big new monetary policy and savings policy tool – the Variable Savings Rate
Treasury measure of tradeable vs non-tradeable sectors of the economy, showing non-tradeable has kept expanding at the expense of the tradeable over the last 15 years, and over the last 10 years in particular.

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.

It's a nifty idea, but it has a few pros and cons, as do the other elements of Labour's monetary policy detailed in this 24 page policy document and in Parker's speech.

The Pros

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.

The Cons

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.

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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55 Comments

VSR is an absolute idiot policy.  I have a mortgage and if this comes through my wife and I instantly take a 5% pay cut (based on base salary) or more realistically, around 6.5% pay cut based on take home pay, and then a whole more when there's a need to control inflation.  All employers contribution are coming out of future pay rises and only idiots will believe that "employers contribution" is strictly out of employers' pocket.
To compensate for that paycut we'll need to borrow and buy as many houses as we can afford so that the benefits of the lower interest rate can flow through to our benefit in order to compensate for the paycut.
 

@VSR you are correct , everybody is forgetting the reason we put interest rates up , to prevent negative real interest rates .
Give savers a negative return after inflation and tax , and the savers withdraw their cash or dont save , the banks face a fubding crisis .......
History repeats itself

issue is greater than one tool can fix.
big picture, think and act more like Singapore than Sydney
 
its the financial system, we have 4 banks that are not headquartered here.
The con BH missed in Oz is that the main wealth managers are now the 4 main banks (though not to srart with).
fees are not usually disclosed
similar to the guys that acted as AMP agents here 40 years ago Oz is littered with financial planners, part of dealer groups/wealth managers, owned by banks.
such agents when offering advice need not put the client interest/situation first (i.e. owner bank commission and bank supported investment products, volume commission, approved product lists.......) is top of mind..
we need not have such concentration in the financial system, unless we work in a bank.
 

by example:
from dtcarter ASB Kiwisaver is all ASB entities /ASB products and Public Trust.
no conflict, no interest.
 
https://www.asb.co.nz/kiwisaver/downloads/ASB_KiwiSaver_Prospectus.pdf
 

Who is involved with the Scheme?

Issuer and Manager:ASB Group Investments

Promoters:ASB Bank and its directors and ASB Group Investments

Trustee:Public Trust

Custodian: Newburg Nominees

Registrar: ASB Bank

Administration managers: Sovereign and ASB Bank

 

(Newburg Nominees is wholly owned by Public Trust)

 

In business, a Chinese wall is an information barrier implemented within a firm organization to prevent exchanges of information that could cause conflicts of interest. For example, a Chinese wall may be erected to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions. Firms are generally required by law to safeguard insider information and to ensure that no improper trading occurs.

 

choice...

 

Henry , forget about Singapore , its the closest thing to a liberal dictatorship on earth .
Kiwis are so different to Singaporeans  , we would never accept Government dictating to us to that extent
The culture of compliance , and respect for politicians in Singapore is totally different , we give politicians a hard time , and if we dont like the government we get rid of them .
We hate being told what to do by elected politicians , whom we mostly regard as idiots
Lee Kuan Yew was basically a dictator who stayed in power for 30 years

but can one assume the folk running Singapore are idiots...
we are more flexible on structure when one considers outcomes....
 
Imagine if Len and coy had the wit and wherewithall to run Auckland as Lion City has been.
 
hint compare
http://www.theguardian.com/news/datablog/2013/dec/03/pisa-results-country-best-reading-maths-science
and
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita
 
 

Yes, because political approaches that work in one country will transpose completely seamlessly and have exactly the same results another country whose culture, demography, geography, economy and wealth are totally different. 
 
Are you also recommending that NZ politicians be paid at similar levels to Singaporean ones?

You are correct that they do not easily transpose. So why do our leaders assume every policy in USA and US economic models are supposed to work here? 
We should do what is best for NZ not what we have been told is best practice for somewhere different.

Please give examples of our leaders assuming that every policy in USA and US economic models are supposed to work here. 

Boatman-la there may be other views:
http://e2nz.org/migrant-stories/chapter-2/a-singaporean-says-living-in-n...
check out some of the comments....
 
We recently moved our two children back to the U.S. from New Zealand. They took some time to catch up. The New Zealand schools are much farther behind academically in their level, i.e., the difficulty of material they teach and the standards they impose on the children........

Most of the things in NZ are good, except high crime rate per capita and most good jobs are unlikely for Asian or women. Most children would love the schools here in NZ. One of the best child birth and early child care sysetm. Investment wise; would be conventional real properties. It is a beautiful country and friendly people; at least on the surface.

well, there is no perfect world except heaven, but honestly kiwi are very laidback, very humerous pple,fresh air good lifesytle, however if you are a competitive person, pls dont come here.
NZ is not the perfect place for sure, but I’m not sure what Ming said is a fair description of the country. Sure the people that described exists but there are also many well travelled and well informed people in NZ. Work is a little hard to come by and taxes are high, but then it is a different governing policy and different perspective. Some people think that government not providing unemployment benefits is attrocious but we from singapore think it’s alright.
 

Just extract the VSR margin above the contribution base rate, for the people who don't wish to be part of a standard KS scheme and place in zero fee cash fund. I'd rather pay a tax that'll eventually get paid back to me, than give money to an Aussie bank. Leave the standard KS contributions to those who can get it to work for themselves.

The deal is this, initially these plan looks great but once the savings pot gets big the money disappears into bad investments. Look at America - if there was ever a bad investment that banks needed to get of their books it was the mortgage securities they rated as AAA+ which were sold to pension fund managers.

that's done deliberately because large funds are great places to dilute down the bad deals and cover the poor financial decisions without individual owners (policy holders) being able to take action...after all , each time they only personally lose under a hundred dollars.   So the legal and time cost of taking action is way out of proportion with any recovery (and the cost of defense would likely be hidden in future years fees!)

It is hoped that the long term ponzi nature of such funds will offset such behaviour, and it's mislabelled "risk" - that's why a few great deals are packaged/sold alongside the scraps, so that the 'B side' of the recording is worth the risk

An imagined conversation between RBGuv, Finance Minister, and the Fundz Cartel oops I mean the esteemed Managers of our IRA's.
 
RBG:  Well, chaps and chapesses, my dials and gauges show a fair old head of steam, what with a Lab/Greens Glorious Coalition at the helm, consumption roaring along, and Nasty Growths breaking out whichever way we look.  How's aboot I raise the KS Contribs Rate to take this punchbowl away?
FM:  Well, you Are independent.   (long pause)   Nominally.
FC: Higher contributions are a Sound Policy, now you mention it.  Our esteemed Members stand ready to clip the ticket oops I meant to say Assist our Smallfolks' Savings Goals on the increased flow which will compulsorily result.
RBG:  Ok, guys and gals.  I'll just move this here Reversing Gear Lever into High KS Percent Mode.
Later:possibly sooner rather than later.  Meeting reconvenes.
RBG:  Well, folks, we certainly found out a few things about moving That setting, eh?  I can't find the academic backing but I believe it's termed Sod's Law.
FM:  Yes, indeedy.  I've had the unions on my case all week, claiming their membership has had a triple whammy:  the higher KS rate takes discretionary earnings off the top, the lower interest rate (only 50 bips, who woulda thunk it would be so minor) has set off Housing inflation yet again and they now claim the property ladder has another rung missing, and the employer KS contribution rise has given a universal signal to the business sector to raise prices across the board.  My Party Co-Leader has authorised me to say, nay, Demand, that you shift the lever back again to regain the former position, hopefully to reverse the effects we see.   Of course, you Are independent.   (long pause)   Nominally.
FC:  Well, I'd have to Respectfully Disagree.  Our esteemed members have gorged themselves silly oops I meant to say Invested the Proceeds Wisely on the increased KS funds flows, and their Financial Plans don't include a downside risk fees-wise.  And perhaps I'd better mention that (sotto voce) your campaign funding is gonna suffer if you let that RBG fiddle with his darned Dials and Levers, in a downwards or counter-clockwise direction.  Geddit?
FM:  (gibbers quietly then puts on the Happy Face for the streamed meeting camera):  So, we're agreed then?  We haven't given this Novel Policy Lever time to settle in - we will laissez faire oops I meant to say Let it Run oops I meant to say Leave the Settings as is for a while longer to Gauge the effects on the Biggest Dial.
RBG:  Sorry, my good FM, but all My dials are the same size.  What exactly do you mean?
FM:  Why, the Electoral Dial, my faithful squire.  It's the only Dial that matters....

Labour's proposed policy is partially missing the point. - Why should I be forced to put more money into savings at a lower return than paying off my mortgage (higher return)
The key issue we have in NZ is an asset bubble in housing which is being caused by an immigration rate that is too high for the small NZ market to quickly adjust to, and a misinterpreted & too complex RMA restricting development.
Better to address the above two points first:
1) Give the RBNZ control over the rolling 12 month immigration rate so it can be maintained at a level NZ Inc can handle.
2) Tweak the RMA to ensure the economic effects of insufficient phased land supply over the planning horison (20-30 years) have to be taken into account.
3) Get rid of the transport componenti of developer contributions & allow Councils to introduce peak period road cordon tolling to reduce provide a revenue stream to fund road network upgrades and decrease the need for future upgrades.
Bidding up house prices in NZ is plain stupid as it is simply the land value increasing.  It is not as though NZ is short of land to urbanise.  It is also the most unproductive use of capital possible.  It's no wonder NZ's productivity is so low.
 
 
 

productivity is low in NZ because it is so expensive to invest into productivity, and the returns WILL NOT be good.   Any increase in profitability will be declared "inflationary risk" by the RBNZ/Gubmint and confiscated.

So the only real course is to stake a stand, keep risk low as possible, and wait it out.
any improvement will cost you, and will take time to recover - where the rules will be changed (wages pushed up, regulations changed, GST etc) several times before you get a chance to make a <horrified gasp] profit.
 
That's why property is booming in NZ.
It's solid low risk.  Interest rate recovery and wages pressure on price levels and foreign import prices will be guaranteed to push prices up (as the cost is passed on to consumers creating devaluation in the form of inflation).  Population is guaranteed to keep growing, between the breeders and the immigration dept, its a surety.  Thus buying good location now will give the only safe bet in NZ.  I recommend any CBD or city fringe, as that's where demand will be the most dense.

Property prices higher due to flight to safety from big brother !

The progressive restriction system works quite well,  those with big money can still take advantage of their wealth, while it keeps modest options open for small investors (startups, retirees etc).   

That's what farmers are finding with soil, to have good harvest, you have to nurse the smaller investors (microbes).     Pouring on the accelerant might give you immediate growth and performance, might give you market dominance, but it becomes like yeast in wine or beers, if you kill off the smaller investors, there is no-one left to afford your services...in the farming situation, that means more inputs, more expensive inputs and controls, and diminishing profitability...and any kind of scarce resource gets consumed too quickly pushing your operation expenses up.   In manufacturing we notice it as one becomes more dominant in the field, the less the support structure can be shared with others... eg you have to meet all the costs of your suppliers' factory, rather than only a pro rata amount for your runs, you have to develop and fund your own training and education systems because there's no skilled labour pool as there's few or no others to cross skill with, there are no modular or generic advantages as your dominance means everything has to come only from your development runs...which means you have to carry all the spares and replacements inventory for every product line.

Businesses try to get around this by monopolising and thus forcing everyone to pay the premium, but it becomes a water empire.

Far easier to protect and maintain the small enterprises, that gives people interesting things to do, and hope and responsibility for their own future.

Banks, mortgage lenders or home loaners only more like it.
When talking to a banker about lending on something other than a registered first mortgage of landed property, well you are in Singapore.
 
a 4 by 2, 4 by 2, 4 by 2 fixup is not the answer.
 

that you have a point.
eg. take out a clean sheet of paper..
mark up the features of a financial system for say 4m people with NZ features.
identify the stakeholders
add external currency and internal money flows
overlay what we have now.
identify where benefit accrues (refer to stakeholders)
hint: there are large gaps, that thoughts like yours identify.
 
one we have is that the banks we have are really just half a bank (sales and marketing, home lending), as the brains and high value/productive activities are held in Oz.
You ask about a big loan/non home loan and see where its checked off.
 

Increase rates maybe Factboy, but with eventually zero local funding, credit rating going through the floor as a consequence, the one thing I'm sure they would do, is redirect their capital to other more attractive parts of the globe, and dry up credit in NZ. Dry up credit in NZ, fantastic idea unless of course you want to buy a house or run a business etc.  

how does one "dry up credit" in a locally owned fractional reserve system?

Cowboy - go visit europe and see what credit drying up really means, and they have "fractional reserve " system as well. If any business, including banks, can't get an acceptable return on their capital, they will redirect some of that capital elsewhere. Even currently, for the Australasian banks there is already alot of internal pressure to direct more capital away from their home markets to the perceived growth markets of asia.

I was asking regarding a technical point, _how_.

I understand that government and other interests can constrain the limit of the fractional reserve, thus creating a "short rope" to a deep well.

But locally speaking, a fractional reserve is just, literally, a ratio.   In a fractional reserve, using fiat currency, there is no reason why the gold-holder can't lend out 2, 10, or even 20000 times their holding - the only limit is run-on-the-bank...which since we're talking fiat currency...
So how can that credit run out?

Capital is capital though Cowboy and the banks have the RBNZ's capital adequacy ratios to comply with (which have quite rightly been raised on them during the GFC). They can only grow their assets as a percentage of that capital, but  if they're aren't getting an acceptable return on that capital, or can get better elsewhere, they direct it elsewhere. It's capital that's the issue not liquidity, banks are full of the latter currently. 

That's what I was thinking,  it's only the RBNZ's choice not to let the banks "FED*" the can down the road until next year.   And that's primarily related to risk,  so local based credit extension could be easily extend almost indefinately (ala Chinese Union card)

* kick

They've always had those capital requirements though Cowboy, so nothing new, just higher. To expand their balance sheets they have to raise more capital, and that's one constraint that's always there's and no point in raising more capital if it can't get a decent return, or it dilutes your existing returns. Kiwibank are a good example at the opposite end where they're struggling for capital and are constrained even if the opportunities for expansion were strong.

But it's not the capital which is the limiting factor, it's RBNZ setting a maximum ratio

Further cons:

  • Interferes with stability of KiwiSaver, reduces public perception and confidence in the scheme. People will begin to dislike the scheme that takes 10% of of their wages.
  • Very regressive - benefits the people who can afford to give more to KiwiSaver regardless; disadvantages the people who can't afford KiwiSaver to begin with. Adding exceptions reduces its effectiveness and creates complexity and compliance cost.
  • IRD's systems probably aren't up to the additional complexity this adds until they've been upgraded (10 year project)

It wil not work because we are all missing one fundamental issue , and that is REAL INTEREST RATES . ( Ask Uncle Google about this ) 
Clearly David Parker has never heard of the FISHER EQUATION , if he had he would never have come our with this hare-brained scheme in trhe first place
REAL INTEREST RATES are the real rate of return or yield for for savers or the providers of capital to the bank , after adjusting for inflation and taxation .
Real interest rates are what money managers and foreign currency traders around the globe look at on the multiple screens on their desks .... 24/7
So if inflation is 1% and the Bank is offering 4% , the real rate of return is 3% .( roughly the OCR )
If we allow inflation to go to to 2% and we fail to increase the OCR in tandem , then the cost of  borrowed money becomes CHEAP leading to credit growth and overheating of the economy of cheap credit
We therefore us interest rates to control this monster that can wreak havoc with uor economy
This is one of the fundamentals of monetary policy

But this is just another tool in the tool-box.
With this additional tool, rates don't have to go up as far as they have been, but that doesn't mean that wont change at all.
e.g. Say inflation has risen from 1->2%
Interest rates might go up from 4 to 5% and saving rate goes from 6 to 7%. The real interest rate has stayed the same, whereas if interest rates had to do all the work they would be up to say 8%?  
 

dtcarter - some initial anlysis I saw from economists calculated that a 1% move higher in the VSR is the equivalent of 0.10% - 0.15% rise in the OCR in its impact upon the economy and inflation. If roughly correct, in isolation in itself, by my calculation if the RBNZ thinks it needs a 3% rise in the OCR over 3yrs, as it currently does, to do the job it thinks its needs, a rise in the VSR from 3% to 9% would mean only  an approx 2.25% rise in the OCR for borrowers, and a 6% pay cut for all NZers over that period. I hardly see the value (especially as that same analysis suggests zero impact from the policy on the currency for exporters, and therefore zero for the external balances) and I certainly don't see how any of the low paid/renters will vote for that change.

Thanks for the numbers. I would have thought they would have formed part of Bernards Analysis, but he does not like facts much.
It is a bit complex I guess as an increase in the OCR does take money out of borrowers pockets but puts it into savers. Over time RBNZ must have figured out how much less borrowers spend for a given OCR rise as opposed to how much more savers then spend, given that they are different groups with different consumption patterns. I cant see anywhere where Parker has tried to work out what the impact of his policy will actually be.
I did see something on One news last night which suggested that a .25% increase in the OCR would cost a mythical typical borrower $25 per week whereas putting and extra $5 into Kiwisaver would avert the need for the OCR rise. If the voters are depending on analysis like that most of them probably do think it is a good idea.

Grant and Waripori,
It would be interesting to understand the basis of Grant's bank economists' analysis (with some scepticism that it might be self serving). Waripori's simple analysis intuitively makes more sense. An increase in the OCR in theory reduces demand for credit, but increases internal returns on saving; so in theory at least the amount of money in the economy is similar, just in different pockets. Taking more out to put into peoples' Kiwisaver accounts does seem a complete cash withdrawal from the economy of that amount, at least until the people turn 65 and start spending the amounts. So on that simple logic, assuming roughly the same numbers of people involved, you would think the Kiwisaver withdrawal would be at least as effective as an OCR increase percentage for percentage.
Presumably the banks' analysis is based on the fact that the commercial banks print all our money, and with low interest rates, print virtual vault loads of the stuff. Again presumably their analysis suggests quite high elasticity of demand such that increases in the OCR slow their money printing presses down considerably, and credit growth slows significantly.
Grant you may confirm or not. Maybe you could share some of the assumptions. It is though easy to see how such analysis would be extremely self serving for the commercial banks, so they just might err on assumptions that arrived at that outcome.
Without their actual assumptions, it is hard to agree or otherwise. The outcomes you mention, Grant, do not pass a first sense test.
Similarly, the exchange rate assumptions get nowhere near a sense test. It would be good to have them explained.
 

Theyre fair points Stephen but having worked closely with many econmists in the past I don't for one moment think there is anything self serving in their analysis, as whether Labour's proposal ever becomes part of monetary policy makes little different to economists or banks...I can never understand why people think higher rates are good for banks (it lessens the credit quality and debt servicing ability of their borrowers, and slows borrowing).
I can't remember which bank put it out (a two pager initial analysis, Westpac I think) but I'll try and lay my hands on it again and provide more details. The truth is detailed analysis has limited usefulness as it wouldnt come in on its own if LG were Govt, it would come with a whole lot of other influences (capital gains taxes, central power distribution etc) which would hugely colour any VSR impacts)
I haven't tried to think through the impacts of VSRs but on face value if we talk about a typical borrower with $80k household income, and probably a $500k mortgage in NZ, a 3% rise in interest rates on $500k would have hugely more $ impact on that household than 6% VSR increase on $80K ? Maybe I'm missing something with that but one hardly compenses the other so obviously interest rates would still have to rise alot in additon to the VSR move if the initial 3% OCR rise was still thought as initially warranted?  I guess in terms of your sugegstion some of that higher savings returns goes offshore to the investors who have funded the banks, rather than all circulating in NZ ? Obviously I haven't thought the connetations through all that much. As far as "money printing " is concerned I think theres far too much mad eof that and no one here, or indeed bank economist can even explain how that really works and what it means. In the end banks floating cost of funds remains around 4.0 - 4.5% no matter what (3.2% bank bill, plus 100 plus bps funding cost)
 

Grant,
Fair reply, although it would be good to see the base assumptions. Presumably there are more people with 80k incomes than with 500k mortgages, but your maths is fine on the typical household, assuming a 500k mortgage is typical. Separately it occurred to me after my probably hurried first effort, that some people would borrow more to offset cash shortfalls from kiwisaver ouputs, which would be somewhat self defeating. Australian experience with compulsory super may inform that debate, and the bank economists may have factored that dynamic also. 

Another factor that i think is key, is that the interest rate only affects those who have a mortgage, and those who are on a floating rate.  Slowly over time the effect increases as those on fixed renew.
The savings ratio would have an immediate effect on everyone employed through PAYE, which i would guess a much larger number than those with floating mortgages.
 
wrt. stephens point about interest rates just moving more money from borrowers to savers and not really taking it out of the economy.  It the same with the savings ratio.  It just moves money from wages into stocks and bonds and the money-market.  It doesn't take it out of the economy altogether.  Here we could see a difference though, if there is a difference in the ratio of interest payments going to onshore /offshore lenders, vs the ratio of kiwisaver that is invested onshore/offshore. 

I heard Fran O'Sullivan on News talk yesterday evening say that, having talked to Parker , Labour have not modelled this proposal at all. They have no idea whether it will work or not.
DT Carters point about the money removed from wage earners pockets not actually disappearing but being reinvested is something obvious but not actually a factor I had considered. It may actually have a multiplier affect depending on how it is spent. Even if it it were all used to buy shares in the New Zealand market that money would presumably be returned to existing shareholders who might then spend it . If it  were used as fresh capital that would increase economic activity, especially if interest rate settings were lower than they would otherwise have been because of the VSR.
After 25 years of the existing monetary policy framework RBNZ must have a pretty good idea of the impact of a 1% increase in interest rates spread across mortgages, credit cards personal loans and bank deposits has on disposable income. It should have been possible for Labour to have paid someone to work out the potential impact of their alternative before they made it policy. This is an area of policy which  people overseas do pay attention to.

Fleece the poor to feed the rich again...what a travesty coming from Labour..
They are losers really...in September 2014 too.

In my view this policy simply confirms the "confluence" between big business and the re-distributive left. Both have come to an effective accommodation - where working class and middle class incomes are sequestered to provide both tax-payer funded cheap labour and capital for things like bank bailouts and fund managers etc. The left defacto obtains a fresh voting base as its part of the deal whilst well-connected business enjoys the deflationary pressure on wages. Cheap nannies and gardners etc are a nice bonus for the "hooray Henry's". This is exactly the rort that the British people appear to be finally waking up to.
 
This policy will further advantage overseas buyers of NZ property (particularly to the detriment of our young people) because they will not have been incumbered by government redirecting a significant part of their incomes. Socialism my friends: - government of the rich elite, by the rich elite, for the rich elite. When will someone start a genuine capitlaist party in NZ and give ordinary Kiwis a fair crack of the whip?

In short the politicians are part of the problem, not part of the solution. 

Politicians are always the problem, so no point talking about them.  We are debating the policy here.

Yes Smokey, Labour will be losers in 2014, they, like almost everyone else, have forgotten that 92% of  voters rejected Winstone's compulsory super scheme in 1997. Today we have the ugly spectacle of  Fed Farmers, Employers and Manufacturers Feds all sucking up to Labour out of naked self interest viz, debasing the NZD to their advantage and increasing prices of imports for everybody else (fuel for eg.) : I don't think working men will be stupid enough to vote to subsidise them!
Thank God Olde Ergophobia is full of years and beyond the grasp of all this- and we were warned- 1 Samuel 8: 7-22.
Regards, EP 

Not one of Bernard's best. He had all day to think about it and did not come up with much, although Don Brash's idea about a variable GST rate is interesting.
I think it is crazy to mix up retirement savings for individuals and monetary policy, as well as being administratively difficult and expensive for employers to keep changing rates. All the talk has been about raising contributions when the economy is booming and how this will benefit savers long term.What would happen over a period like the one since 2009 when the OCR dropped by about 6%. We would have to have negative Kiwisaver contributions to achieve the same result ( ie money is taken out of Kiwisaver funds and paid to employees and employers in order to stimulate the economy). What impact would that have on long term retirement savings? Or is it OK to drop interest rates but not to increase them? Good luck with getting people to save money with that sort of malarkey going on.
If we do want to be able to turn the econmic tap on and off without using interest rates the tax system would have to be better. Changing GST rates would be a bit of a nightmare as retailers would get stuck with expensive stock if the rate was reduced, but it could be done with income tax. The Government  and the Governor could look ahead and increase rates if they felt the economy was overheating and reduce them if it looked like stalling. The extra tax could go to the Cullen fund, which would have the same affect on National saving as increasing Kiwisaver contribution rates. The risk would be Governments mainlining the extra cash and being reluctant to give it up. It would need a separate and transparent tax component which could be set at positive or negative by the reserve bank.
This would have the advantage of catching everyone, whether in Kiwisaver or not and could be made progressive to avoid affecting low income earners unfairly ( as the Labour proposal does now )

the recent change in gst from 12.5% to 15% was a logistical nightmare,  why would anyone decide making fruit & vege zero rated is "too hard" then want "variable gst" changes.

The more sensible way is reduce the level of taxation and the remove the mentality that relies on it.  that way any need or impact would minimised, and perhaps we could give New Zealanders some real disposable income, and a reason to re-invest in New Zealand.

I don't think they are proposing to stop using interest rates to control inflation, they are suggesting to use the savings rate in addition.  The interest rate will still fluctuate, just not as wildly.

Central Banks are so overrated....

Considering they have done a pretty decent job of policing the financial system, despite political interference I dont agree.
regards
 

They have never been able to manage any thing, least of all supervision of the financial system. History is littered with instances of how banks have done many things wrong, right under the noses of Central Banks, mainly in the West. Remember GFC recently, and before that SLC, Junk bonds, forex rorts, Libor rorts, etc ?

The time before central banks was one of huge turmoil, bank failures etc. When you look at these modern scandals, really you can trace them back to political meddling since the Ronald Raygun era. Neutering even of the CB's powers and the political ill-will not to enforce what was left brought to a farce by the last Bush administration.
Really blame the govn we stupidly vote for for baubles, we are getting what we deserve.
regards

Agree. Also very few Cental Bankers stood up to their political bosses. Many just enjoyed the baubles of office and screwed the economy at will and the pleasure of business/corporate/political interests, as it happened recently in the US for the last couple of decades. I can think of one German Central Banker (his name escapes me) who was really independent a few years back. But he was the last of his sort.

Complusory Kiwisaver ?   yes
Lift the rate to 9% ?   yes
Vary the rate as a monetary policy tool  ?    No No.  Mixing up two different things will cause grief.
Is a variable rate KS a useful monetary policy tool ?    Even if the tool was in place and he uses it.  Just can't see the mechanism that will get Mr Parker the policy outcome.

The same could have been argued against LVR's, but that seems to be having an impact.
More tools is better. They don't all have to be used, but having access to them is important.

Take a step back two decades and we would say
Complusory Kiwisaver savings ?   yes
Lift the savings rate to 9% ?   yes
Vary interest rate on savings as a monetary policy tool  ?  No No. Mixing up two different things! 
 
But now it's orthodoxy.