Opinion: Gareth Morgan argues the 'Baptists' and 'Bootleggers' in favour of compulsory savings are just plain wrong

Opinion: Gareth Morgan argues the 'Baptists' and 'Bootleggers' in favour of compulsory savings are just plain wrong
Economist and motorcyclist Gareth Morgan

By Gareth Morgan*

The story goes that there are two ardent supporters of prohibition: Baptists and bootleggers. A similar unholy alliance now appears to be conspiring to foist compulsory savings on the New Zealand public.

The Baptists in this tale are the politicians and columnists who are convinced that the path to New Zealand’s eternal salvation involves forcing everyone to save more. Just look at Australia, they say, where compulsory savings have turned the country into an economic powerhouse. But hold on – Australia’s saving rate has fallen dramatically over recent decades. And Australia is one of the most indebted developed nations.

Does this really suggest that compulsion has been a key element in Australia’s economic success? Of course, it’s not simply that we’re not saving enough, according to the Baptists. It’s also that New Zealanders have the audacity to shun NZ capital markets in favour of overseas ones.

Ignore the decades of meager returns produced in NZ; it’s your patriotic duty to accept crappy returns on your retirement savings, and if you won’t do it by choice, we’ll force you to do it.

Don’t look for any economic theory to support this notion.

According to the literature, the big problem investors have is home bias – they don’t invest enough offshore to properly diversify themselves; this is one of the reasons that Gareth Morgan Investments (GMI) focuses on offshore investments. It would be a tragedy to see yet another round of Kiwis’ savings subjected to the risk of inadequate diversification in one of the world’s smallest economies.

Is it believable that forcing a whole bunch of extra capital into the New Zealand financial markets is all that is needed to free up our world beating entrepreneurs to expand into off-shore markets?

Or is it more likely, that flooded with capital and freed from any real constraint to invest wisely, empire building CEOs will waste the lot on ill-considered expansion plans? The history of value-destroying forays off-shore by some of our top firms (Telecom, The Warehouse) makes it hard to accept that insufficient capital has been the problem for New Zealand companies’ plans for world domination.

Fund managers are the bootleggers

The bootleggers in our story are the funds management firms, which for obvious reasons have a lot to gain from making saving compulsory. They just love this stuff. The success of KiwiSaver has come at the cost of existing investments in managed funds – bad news from the industry perspective given that traditional products allow them a much higher average fee load than KiwiSaver does. No wonder they’re turning to the government to rescue them with compulsory savings, which will effectively force consumers to continue buying their product.

The New Zealand funds management industry has a wretched long-term performance legacy from the era where they actually had to compete to get funds. How much worse will long-term fund performance be when the cash flows are assured, and the threat of customer redemption is minimal—the only options for investors being one of their identical crony competitors?

Performance evaluations on the Australian compulsory scheme have been highly critical of the fee load and manager performance results that have resulted from a captive funds base. It simply lines the pockets of government’s little savings helpers.

While misguided, the Baptists have it half right hoping that economic salvation could come through more efficient capital markets. But efficient capital markets don’t arise from handing more of New Zealanders’ hard earned savings over to the proven underperformers that fill the ranks of the bootleggers. So, what’s the alternative?

Don’t sentence Kiwis to handing over more and more of their money to the NZ fund management industry that has squandered the savings of successive generations already with the commercial real estate bubble of the 1980’s and the finance company debacle of the new millennium.

The government would be more astute to understand what underlies our atrociously deficient record on investment. It’s not lack of savings that’s led to our slide down the OECD per capita income rankings; it’s the tax breaks and directives to banks to lend to those who have accumulated property rather than put it to work, and have purchased farms rather than invested in farm productivity.

The lost decade is there for all to see. And now they want to fix it by forcing people to hand over more and more of their puny earnings to our “outstandingly capable” funds management industry – that den of obfuscation and consumer maltreatment that steered successive generations of retired folk to the poor house.

Build the income and savings will come

Rehabilitation of these charlatans has only just started; there is an awfully long way to go before they can be declared fit to be guardians of the people’s savings.

Calls to compulsorily raise savings are a clarion demonstration of just how economically illiterate many in positions of influence are.

If the horse were put before the cart just for once, it would be obvious that reforms that aligned tax and credit policies with income generation have to come first, and then surprise, surprise, the savings for investment would automatically be more than adequate.

*Gareth Morgan is an economist, motorcyclist and commentator who controls Gareth Morgan Investments, a fund manager.

This article was written for Gareth Morgan’s free monthly newsletter - Morgan Online. Subscribe to Morgan Online here.

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If savings is to be encouraged then it can be done by giving tax breaks, removing withholding tax and giving a decent return.

If it is made compulsory then the Government must ensure/guarantee a decent inflation-adjusted return and also the safety of both capital and return. This could be modelled on the Public Provident Funds in some countries like Singapore, India, etc. The funds collected are invested for infrastructure development and for the benefits of all participants in the economy, not just the finance/funds management industry.

Other wise , compulsory Kiwisaver or whatever else  will become one more case of robbing Peter to pay Paul, who will run away with the money.

There is speculation that with the increase of Sovereign debt in many western countries, the Governments will slowly get out of the commitments to citizens, including pensions to those who have already contributed while working and earning. This compulsory Kiwisaver may lead to such scenarios more easily.

The pubic should wake up to this and act to protect their  future.

V  "Maintaining the purchasing power of money should be the priority before people of limited means are forced to speculate in whatever asset class"  Totally agree V

Gareth is 100% correct IMHO. Being forced to hand over our hard earned to the shiny arsed spivs has been a proven path to poverty, they'll happily look after it alright - till it's all gone.

Sound money, a few well designed tax incentives and some policies aimed specifically  at getting our appalling, decades long, current account/balance of payments in order  is all that's required from Government.

We don't so much have a savings problem as we do an external balance of payments problem.  

We used to have an additional tax on luxury imports, why was that dropped?

Why are folk getting taxed on all interest income when half of it is stolen by inflation?

Why is income from capital gains mostly  tax free?

When are our cities going to start doing something useful that we can sell to the world? 

80% of us are earning less than the average wage,  the vast majority can barely cover their living costs, taking more, by force, from this group will achieve what exactly?

This is fun isn't it....get yourself a piece of the action...you too can steal from the poor...watch as the pollys weave themselves into the most favourable financial fissure where they will forever feed on your savings.

 "It simply lines the pockets of government’s little savings helpers."...from them comes the donations that return the bastards to power and so the life cycle of theft graft and corruption rolls along.

"Economist and motorcyclist" - methinks Gareth must have done some engineering somewhere along the line, given common sense statements like:

"The government would be more astute to understand what underlies our atrociously deficient record on investment. It’s not lack of savings that’s led to our slide down the OECD per capita income rankings; it’s the tax breaks and directives to banks to lend to those who have accumulated property rather than put it to work, and have purchased farms rather than invested in farm productivity."

"If the horse were put before the cart just for once, it would be obvious that reforms that aligned tax and credit policies with income generation have to come first, and then surprise, surprise, the savings for investment would automatically be more than adequate."

But as we know, the 'status quo'ists' like that cart just where it is, thank you very much, and SWG have been told not to mention it! What a surprise.

Am copying over these comments I made on threads of same topic earlier this week. 

1) The problem is earnings. Sort that, problem solved. Practical solutions, actually, abound. Shame gubmints of either colour can't do what is really required. Many know what needs to be done, even the stuff* we dare not speak of in polite company, err, about 4 to 6% of NZ wasn't it, and at least 60% of parliamentarians?

How can we save enough before we are earning enough?

Address earnings. 

 2) Garth George gets it:

Poor pay leaves little for forced savings

http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10667088  

3) Re. the SWG, are the group of people selected by government for this work capable of developing strategy for improving earnings?

Maybe a reason debate on cgt and land tax has been ruled out is because comp. super can be equated to another form of tax, to derive revenue and capital we now recognise the need for. [See first comment on this thread by Doctor 2.]

If the taxation burden was more evenly distributed over wealth generating mechanisms we'd probably have a lot less need for this debate. [And less need for the venom in the intergenerational wealth transfer debates, Bernard.] How can the the 'economic apartheid' that we suffer be brought to a close, so such debate can address these problems in a whole system context?

http://www.interest.co.nz/opinion/mondays-top-10-nz-mint-more-problems-compulsion-martyn-reesby-and-money-managers-shoot-property-spru#comment-570298

As you can see, South Africa managed it, why can't we?

What was apartheid really about for SA?

What is apartheid really about in NZ?

Cheers, Les.

www.mea.org.nz

* government know the logic, they just don't have what it takes to do the right thing - hence the stated exclusions. Oh well, at least we are only wasting $70k on this 'smile and wave' (pr) activity. Suggest the group members seek counseling from the TWG members about rejection/futility syndrome.

Mine baby mine !!!

With todays technology, we don't need to destory the earths surface as has been done.

Who is paying all the bills ?

Under the Labour government's watch , and under Plane Jane Diplock's nose , nearly $ 7 billion of savings was lost in the finance companies' debacle . ............. . Luckily the figure won't increase ( by a SCF $ 1.6 billion ) because of the government guarantee scheme ..................... Feel all cuddly & warm about that ? Ha !

If ANY NZ government touch or try manipulating my savings discretion any more than they try now then the last straw would have broke and i will shut my businesses, fire my workers & leave the country for good. Your choice facists

On average, we're the third most indebted nation on the planet, c'est no?

So don't we need to encourage retirement of the debt first?

Oh, that's right, the opportunities to do so just peaked, with the peak supply of energy.

So Gareth gets it wrong, because he doesn't get the limits to growth, and/or the fact that we've run smack-bang into them. Average investment will return negatively, beyond this point - an interesting paradigm shift. While things hang together, funding getting things onto a sustainable footing, while there is still the chance to do so, would be a good move.

He's not as bad as Carmel F, in the SST, though. I'd rather put my money to a crystal ball.

The above is 'In my humble opinion', of course, but  hey, I only ride a GB......   what would I know?

3 Cheers for Gareth Morgan from me.

"........If the horse were put before the cart just for once, it would be obvious that reforms that aligned tax and credit policies with income generation have to come first, and then surprise, surprise, the savings for investment would automatically be more than adequate."

EXCELLENT punchline.

Also, it makes no sense to force people who are in debt, to contribute to any savings scheme. It is fair enought when people buy a house to live in themselves, and take on a mortgage, and pay it off over whatever number of years. You should be allowed to do that before having to contribute to any savings scheme.

Lastly, I cannot repeat too often; if you allow urban land to remain cheap by disallowing the urban planners from strangling the supply, the result is seen in some parts of the USA: Average property prices enabling Average income earners to pay off the mortgage in 7 years flat. SEVEN YEARS. THEN the next 23 years can be spent "saving" or building up capital; compared to dimwit people like NZ-ers who think being in debt for 30 years is "wealth".

Compulsory schemes always suffer from the potential risks of loop-holes and rent seeking.

Anyway, the issue with our capital markets is not how to create larger global companies, but how to increase the creation of Trademe like companies.  While most maybe sold as the jump from large local to small global is very difficult it all adds to the increase wealth of the nation.

"Or is it more likely, that flooded with capital and freed from any real constraint to invest wisely, empire building CEOs will waste the lot on ill-considered expansion plans? The history of value-destroying forays off-shore by some of our top firms (Telecom, The Warehouse) makes it hard to accept that insufficient capital has been the problem for New Zealand companies’ plans for world domination." 

Existing companies are generally not good at innovation.

But it's not about ideas, but the shotgunning of ideas into businesses - most that will likely fail, a few that will succeed.  People are what make these ideas work.

The capital cost of establishing business is similar. But because NZ has a smaller potential market sometimes it takes long for ideas to be tested for success/failure locally.  So while diversification might realistically be better for the individual, it does nothing for our nation.

Second, an increased failure rate of good ideas leads to the same people maybe have a better chance at turning  a second idea into a successful business.

Fundamentally, if we play it safe we'll just stay on the same course.  More risk or investment in new local ideas is what is needed.

"A Kiwi will ............ tell you why your idea is stupid and won't work".

That hasn't been my experience Anon, maybe your ideas really are stupid and won't work.

But seriously, one of the things I like most about Kiwis is their healthy contempt for posers and the "do you know who I am" types.

Like when Show pony  Beckam and his LA football team where here - the crowds stayed away in droves. Same with Tiger Woods, so freaking arrogant he wanted "appearance" money on top of the prize money everyone else was competing for. Wanker.

This from Bloomberg on the American situation. He has a few suggestions for disbanding and starting anew: 

Retiree Ponzi Scheme Is $16 Trillion Short: Laurence Kotlikoff

http://www.bloomberg.com/news/2010-08-25/retiree-ponzi-scheme-is-16-trillion-short-laurence-kotlikoff.html

Daughter asking Dad: “God - Dad who is paying all the bills ?” Dad – “Mum my darling !”

PB- cracked record. It's hard to teach someone who clearly stands to gain by not learning.

"Wilkinson also called on the industry to play its part in ensuring high standards and integrity.

The KiwiSaver industry has been plagued by a range of difficulties in the past year including illegal door-to-door selling at homes, the mis-selling of the product and an investigation by the Securities Commission into Huljich Wealth Management after its former boss Peter Huljich "topped-up" its funds, altering its investment performance."

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10669791&ref=rss 

That's the way to do it - not!

When will gubmint types realise that their jawbones are NOT effective substitutes for appropriate legislation and regulation?

Maybe Kate Wilkinson caught this lack of appreciation for human nature from Alan Bollard (Calling for businesses not to hike and gouge because of gst increases, etc - huh?)

There's a lot of it about it appears.