Compulsory Savings and Capital Markets
Compulsory Savings and Capital Markets
Calls are sometimes made for New Zealand to adopt a version of Australia’s compulsory savings scheme on the grounds that this would increase savings and make more and cheaper capital available to New Zealand firms.
Some of these calls have come from capital market players with obvious vested interests and should be treated with caution.
To evaluate such arguments, let’s first look at some facts.
Australia’s overall savings rate (comprising government, business and household savings) does not appear to be markedly different from New Zealand’s. The latest OECD statistics put it at 19.6% of GDP compared with 18.4% in this country.
Australia’s household savings rate is actually negative according to the OECD’s measure. At -1.3% of disposable household income, it is in fact the lowest of 15 OECD countries reported.
New Zealand’s household savings rate is not reported by the OECD, but on a comparable basis it may currently be in more negative territory. However, New Zealand is running a larger budget surplus than Australia (the government is choosing to do more of New Zealanders’ savings for them).
Australia’s compulsory savings scheme was introduced in the mid-1980s. Interestingly, according to the OECD, the household savings rate in Australia has fallen sharply since its peak of 9.3% in 1990 to the present -1.3% level. This is the fourth largest decline among OECD countries.
Reserve Bank of Australia studies suggest that, at most, Australia’s scheme has had only a small effect on aggregate savings levels. As logic would predict, the main effect seems to have been a switch in savings patterns – Australians seem to have put more of their savings into financial assets (as required by regulation) and less into other forms (such as home ownership).
Moreover, savings data in the national accounts should be treated cautiously. There are many statistical problems and they do not take account of changes in the net wealth of households, eg increases in house or share prices. These are a form of saving. Reserve Bank data suggest that in New Zealand the ratio of household net wealth to disposable income increased from 282% to 537% between 1979 and 2004.
In its report in 2001, the government’s tax review said that “when looking at the impact of savings on the current and future well-being of New Zealanders, the most relevant measure is national savings; that is, the sum of private and government savings. On examining the available evidence and the reasons why people save, it was not clear to us that New Zealanders save too little.”
Recent Treasury work has supported this conclusion, both for savings in general and retirement savings in particular. Those who argue otherwise, such as the New Zealand Institute, have not engaged with this evidence.
Australia’s scheme has undoubtedly increased the proportion of savings flowing into managed investment funds, but has it widened the opportunities available to Australian firms to access capital?
This seems unlikely, at least to any significant degree. Even though the Australian capital market is much bigger than New Zealand’s, it is still only a drop in the ocean of international capital that Australian firms can tap.
And indeed they do. Like New Zealand, Australia has a large capital account surplus, corresponding to its current account deficit. Investment opportunities in Australia are attractive, and foreign savings complement domestic savings.
Moreover, a large fraction of the additional compulsory funds is invested offshore. This is necessary in the interests of prudent diversification. Just as New Zealand institutions have limits on what they can prudently put into, say, Telecom (necessarily, around 70% of Telecom stock is held offshore), so too do Australian funds.
In the past decade, while assets allocated to equity in a typical balanced fund in Australia have stayed around 65%, international equities have taken a bigger slice of the pie, up from about 20% to 30%, according to the Australian Financial Review.
Moreover, even if it were true that higher savings would lower the cost of equity, the existence of open capital markets and similar savings ratios in Australia and New Zealand means that any such effect would be immaterial.
So this argument for compulsion is also dubious.
Does all this mean that there is nothing the government can do to facilitate savings and the operation of capital markets in New Zealand?
Not at all. The introduction of GST allowed income taxes to be reduced, thus reducing the double taxation of income. There is a strong case for further reductions in government spending and taxation, and a flatter tax scale.
The incentives created by welfare programmes, including New Zealand Superannuation, are also relevant to any debate about saving.
But attempts to engineer savings behaviour, in forms such as Australia’s compulsory scheme or the government’s KiwiSaver proposals, do not seem warranted, either in the interests of savers or New Zealand capital markets.
Roger Kerr is the executive director of the New Zealand Business Roundtable.