The government-appointed Savings Working Group is looking at automatic KiwiSaver enrollment and a more wholesale approach to KiwiSaver's retail structure, with possibly fewer providers.
Group chair Kerry McDonald made the comments today in a media briefing accompanying the group's interim report to Finance Minister Bill English on how to improve New Zealand's national savings. The group will release its final report in the New Year, ahead of the Government's May 2011 budget.
McDonald said automatic KiwiSaver enrollment could be triggered in various ways, such as when a person over 18 gets their first job, or when they reach a certain income threshold such as NZ$20,000.
'NZ's credit almost maxed out'
The report continued the group’s rhetoric that something had to be done to turn New Zealand’s savings record around, and that changes would not be easy.
"High foreign debt puts New Zealand in a difficult economic situation. The country is vulnerable – some say “highly vulnerable”. And continued increases in debt are unsustainable,” it said in the report.
"New Zealand’s vulnerability is heightened by the sensitivity of international capital markets to high debt, weak balance sheets and crumbling fiscal positions in the wake of the global financial crisis. It has also been reflected in Standard and Poor’s recent decision to put New Zealand’s foreign currency rating on negative outlook, itself a reflection of the nervousness of others about our vulnerabilities," the report said.
"The bottom line is that New Zealanders collectively have been spending too much and saving too little, using large amounts borrowed offshore to fund new investment. Its credit is about maxed out. It’s time to get real. We need less consumption by both government and households, more savings, better quality investment, more exports and increased import-substitution," it said.
"It’s akin to standing on top of a crumbling cliff, uncertain of the exact risk and needing to step back quickly to reduce the risk."
The position had improved slightly in recent months, but this largely reflected the weak economy and lower consumption, investment and imports, and lower profit remittances offshore.
“This is no reason for complacency though as this seems likely largely to reverse when growth resumes,” the report said.
Fewer and bigger providers
There could potentially be fewer Kiwisaver providers, with those left large enough to capture greater economies of scale, McDonald said.
"There are issues around disclosure of information, there are issues about charges and the levels of fees, there are issues with getting a better after-tax return to savers," he said.
"One of its problems is it operates at the retail level, and retail service providers tend to be smaller, so you’re not getting the economies of scale that you might at the wholesale level. Wholesale fees tend to be lower anyway.
There were overseas providers of similar schemes that operated at a very large scale, with very much lower fees, McDonald said.
"Now, we haven’t finished the detail of this yet, but our thinking is very strongly focussed on those issues," he said.
McDonald said the group was still considering the pros and cons of compulsory savings, with evidence from Australia showing compulsion might, "at least to some degree," help increase savings.
"We're not convinced that's the way to go, but we think there may be quite an attractive 'soft compulsion' option, ie, auto-enrollment for KiwiSaver," McDonald said.
The 'soft compulsion' option would come with an opt-out option, he said.
Too much NZ wealth invested in housing
There was a view that the element of compulsion got people much more strongly focussed on the question of saving, how they save and the quality of savings, McDonald said.
“Because another issue is a lot of New Zealand’s wealth is currently in houses. So if you’re taking a portfolio view of savings, the portfolios aren’t very good - too much housing from a wealth portfolio point of view and not enough in other areas. So if the housing market goes down, it leaves people exposed, he said.
"Australia’s probably got a much more balanced portfolio, with a higher level of superannuation savings, and correspondingly less in housing. Interestingly, compared with Australia, New Zealand’s got much more savings, or wealth, in small businesses or closely-held businesses.
"But that portfolio and quality issue is quite a key one," McDonald said.
Tax-free, inflation-indexed govt bonds
There were also currently no rules on how KiwiSavers should withdraw their savings in retirement and there was a shortage of suitable investment products for retirees who were not financially savvy, McDonald said.
"Should the government issue tax-free, inflation-indexed bonds with, say, a 2% real rate of return, so that individuals can inflation-proof their own retirement investments. Or should their be an option for individuals to use part of their KiwiSaver funds to buy a higher level of NZ Super? Or should the government provide annuities, on a full-cost basis, to remove the risk of institutional failure?"
McDonald said the group was more inclined to the principal of higher GST and lower income tax from a savings point of view because high income taxes were a disincentive to save.
"The language we’ve used is an increasing shift from income taxes to expenditure taxes ‘over time’," he said.
"This is from a savings perspective, because income taxes are clear disincentives to save. We’re conscious that there’s just been a shift, so we’re not saying there should be another shift now. We say as a matter of principal, it is a good way to go and all of the thinking would be all of the shift is on a compensated basis."
'Taxes on savings too high'
Another key issue was that effective marginal tax rates varied quite markedly between the income of different lines of investment.
"So owner-occupied housing – you can do well out of that, tax is zero. Investment housing – the marginal tax rate is pretty low. Foreign and domestic shares – it gets higher. And the highest of the lot – if my grandmother puts NZ$1,000 in a basic savings product to get interest, that incurs the highest tax rate of the lot, which we think is anomalous," McDonald said.
"So we are focused strongly on the view that there needs to be indexation," he said.
"Either just the inflation component, so you’re taxing on a real basis, or if that’s too complicated within the tax system, just making an equivalent arbitrary adjustment. So you might have a different tax rate for particular savings products.
The group was “playing around” with various rates.
“My preference would be to do it on an indexation basis rather than to introduce another rate of taxation,” McDonald said.
(Updates with GST over income tax, tax on savings too high, more from report, too much in housing, link to full report auto enrollment, tax free bond option, fewer and bigger providers)