Financial Planners and Insurance Advisers Assoc.
Hon Michael Cullen
24 July 2003
Thursday 24 July 2003
Financial Planners and Insurance Advisers Assoc.
Delivered for Dr Cullen by Associate Finance Minister David Cunliffe
Thank you for inviting me to open your conference today. I would like to present the apologies of my colleague Dr Michael Cullen, who has been detained in Wellington on urgent government business. Your theme is “facing change”, and while change is about the only constant in this world of ours, it is particularly acute for your industry at this time.
The insurance industry has been through turbulent times, and the performance of stock markets over the last three years has made the provision of financial advice somewhat difficult, to say the least.
This turbulence in the savings and insurance markets comes at the end of a long decade of apparent decline in the level of personal saving. There is still some debate on whether savings have simply shifted – out of employment based superannuation and into more personalised portfolios – or whether the 1990s were a decade of persistent decline.
On the face of it, there are some worrying indicators. At the personal level, household debt increased from around 58 per cent of household income in 1991, to over 113 per cent by 2002. Outstanding balances on credit cards have increased by over 50 per cent in the last three years. In 1991, 22.6 per cent of the employed workforce were members of employment based superannuation schemes. By 2001 that had slumped to 14.6 per cent.
The question that arises is “so what”? Why should the government tell people how to spend – or more specifically not spend – their money? If people choose to live for the moment, or borrow money to spend on consumer goods, should they not have to live with the consequences? There are two main reasons why the government is interested in the policy environment that surrounds saving.
The first is fiscal risk. A few years ago a survey of the living standards of the elderly painted a picture of life in retirement as basically adequate. Individuals who were under financial stress tended to be those who had experienced some life shocks in the decade before retirement. These would be redundancy, health problems or such like. They entered retirement with few assets or with debts, and New Zealand Superannuation was not sufficient to finance a comfortable retirement and compensate for the financial disadvantage these people had.
The risk is that rather than life shocks, life styles may mean more and more people entering retirement with weak financial backing: credit card debt, and no private superannuation. It is all very well to say that this is their problem: political reality is that if the numbers are large enough, the pressure will come on the government to do something about it.
The second reason the government is interested in savings policy is what economists would call market failure. There may be barriers to saving that leave actual savings levels lower than what people objectively need and want to achieve. Examples would be if savings were overtaxed, or if lack of information or lack of confidence, or if difficult or expensive access to savings products worked against best practice in personal financial management.
Interventions are awkward. This is not a simple area because there are many players involved. The government itself can offer incentives of many different types, and governments can and do compel some forms of savings behaviour. Singapore and Australia are two examples.
Employers and unions can shape the remuneration package, and there is a substantial body of research that confirms that the workplace is a very efficient vehicle for promoting savings.
There are financial advisors like yourselves who have extensive networks and long-standing relationships of trust with savers. There is the industry itself which provides savings products of varying types and quality, and at varying prices. Finally, we need to acknowledge that other governments can influence the savings of New Zealanders depending on how they structure the taxation of New Zealand sourced private retirement income.
Good policy in this area needs a good policy process. A problem in the past has been that there has been very little active engagement around a constructive policy agenda. The government has been expected to deliver the right sort of policy and all the other interest groups take pot shots at it: often around self-interest I have to say.
A positive sign is that there has been a resurgence of interest in and debate on savings policy this year. It is partly coincidence. Last year Statistics New Zealand published the results of its Household Savings Survey, and that has created a rich new information source for analysis and commentary. In fact the survey was not about household savings but about household assets and debts, and these are driven by things like inheritances and changes in house and share values, and not just savings. Despite that there is a renewed vigour in the debate, which has been led and encouraged by the Retirement Commission.
At the same time, coincidence meant that it was time to reconvene the Periodic Review Group that was established as one of the terms of the multi-party Superannuation Accord. While the Accord has been overtaken by events, the Act that requires the PRG to be convened remains on the statute books. The PRG was appointed at the end of last year and is due to report at the end of this year. Previous PRGs have concentrated on aspects of New Zealand Superannuation: its adequacy and sustainability. This time the government framed the Terms of Reference of the PRG to make it focus more on employment based superannuation and less on the endless relitigation of NZ Superannuation. That has attracted new attention to savings as various organisations had to rethink their attitudes and approach in drawing up their submissions to the PRG.
Yesterday we had the Saving New Zealand Forum. While the Savings New Zealand process is the initiative of the Insurance and Savings Industry Association, ISI has tried to broaden participation in the debate and is hopeful that it can lead to more of a consensus on how savings policy ought to develop.
These three initiatives have raised the profile of the savings question. It is important, though, not to get carried away with policy process and see a new policy package – in whatever form it may emerge – as being the total answer.
Sitting in behind the question of how much people save are three rather large drivers of saving: incomes, culture and the macroeconomic environment.
The Household Savings Survey produced fascinating insights into the detail of who owns and who owes what, but it also confirmed what we really knew anyway: that asset values are largely driven by how much we earn and how old we are. Assets are unequally distributed. The distribution of wealth is about twice as unequal as the distribution of income. Up to the age of retirement, older groups own more than younger groups. But even from a relatively young stage of the life cycle – from age 35 – there is a consistent pattern that the top twenty per cent of the population in each age group own sixty per cent of the wealth.
Increasing saving does depend on improving the ability to save and that means raising incomes. Savings policy cannot be seen as distinct from the government’s dedication to grow the economy and to return New Zealand to the top half of the developed world in terms of per capital incomes.
The savings culture of a nation is another aspect of the equation. It is the least well understood and very difficult to explain or change. The Japanese are very heavy savers, even when interest rates are hovering around zero. We tend to save little, and our household savings rates have tended to fall even as the interest rate margin vis a vis the rest of the world has remained high. The question is whether we are seeing a culture change here, and an increase in our national appetite for personal debt. It is entirely another question whether there is anything we can do about it.
Finally there is the issue of macroeconomic stability. We tend to take this for granted these days, but memories are short. Large government deficits and persistent high inflation were part of the macroeconomic background only twenty years ago. High inflation is a great disincentive to the holding of financial assets: borrow and buy property was the natural response under those conditions. We have won back a stable macroeconomic environment at some cost and maintain it despite pressure to loosen, and it is very important that we hold our national nerve on this front. A lot of the commentary on encouraging saving tends to suggest that the government should do more by way of incentives, but it is important to remember that it is very easy to stimulate and reward some behaviours but to shift to a looser macroeconomic stance as a result. We will not be drawn there.
Stable macroeconomic policy within a growth framework will do more to encourage savings than incentives in an unstable environment and in a stagnant economy. That does not mean that we should not do more.
Savings is an important aspect of the policy agenda. We can wait and analyse ourselves into inactivity. I have serious doubts about the wisdom of that. If I can give you a parallel example it would be action on the infrastructure. In the 1990s, nobody worried about the neglect of infrastructural investment. The market would take care of it. Now we are facing the urgent consequences of that neglect.
Same with saving. We can wait until the costs of fixing the problem are too urgent and too expensive or we can get moving on a new initiative soon. If we encourage savings, and there was not really a problem, what is the result: we are all wealthier than we would have been. I can live with that. If we neglect savings and there was a problem, what is the result? I have no problem erring on the side of caution.
To conclude. Good luck with your conference. You have real difficulties to confront. The debate on reinvigorating private savings is alive and well. Please contribute. As a nation, we must move forward with purpose, but in a considered way. We must talk among ourselves. We must find solutions, not fire off from entrenched positions. The subject is too important to leave until we are old.
I have a lot of pleasure in declaring your conference open.