Kiwisaver and The Savings Myth

It might better if New Zealand’s decision makers understand the nature of savings in a debt economy before ripping the New Zealand economy to shreds.

At the moment most of New Zealand’s potential economic growth is being diverted to prop up the unproductive investment sector at the expense of New Zealand workers and productive businesses.

The national media 17/5/11 (Radio New Zealand, Stuff.co.nz) reports rating agency Standard and Poor (S&P) saying that cuts to the NZ Kiwisaver scheme would increase national debt [presumably meaning government debt] levels.

In response, Prime Minister John Key is reported saying: "And I mean Kyran Curry [S&P] is a bright boy so I'm sure he can work out that if the Government actually stops to save and the private sector starts saving that increases national savings."

while Leader of the Labour Opposition comes out with : “"I'm really worried when Standard and Poor's come out this morning and say that the changes to KiwiSaver will discourage savings, we're trying to do the opposite."

The practical difficulty for New Zealand (and the world) is that none of the above or their advisors who dominate this county’s economic and savings policy has a clue what they are talking about.

A good place to start with the basics of national savings is our own Reserve Bank (RBNZ). It defines Saving as:

“ …[National ] saving [for new productive investment] is simply the portion of national income accruing to a country (or sector thereof) that is not consumed and is therefore available to finance investment” . [Text in square brackets added for clarity]

The RBNZ paper emphasizes, just as most basic economics textbooks do, that investment refers to the production of new physical capital assets.

Kiwisaver is, by and large, prevented from participating in new productive investments. Legally, it can only invest in existing capital assets like NZ and foreign shares, NZ and foreign bonds, NZ and foreign property and cash. Very crudely, each of the four sectors accounts for about 25% of Kiwisaver “investments”. The only bit that could be used for productive investment in New Zealand is the investment in NZ bonds. However, NZ bonds mostly help to fund the Government fiscal deficit rather than new productive investment.

Total Kiwisaver investment was about NZ$6 billion as of June 2010, and will now be closer to NZ$ 10 billion .

If the government reduces its Kiwisaver subsidy of about NZ$ 0.8 billion annually, it will achieve a budget “saving” (a reduction in its budget deficit) of a similar amount. Arguably, the Government is borrowing that NZ$ 0.8 billion. It is “borrowing to save”.

The “rub” for the government is that if income earners and businesses are forced to make up the difference, there is a further fall in their residual incomes available for consumption. In the absence of tax reductions for income earners, any increase in private Kiwisaver “savings” will reduce domestic consumption and further suppress the New Zealand economy. NZ$ 0.8 billion is about 0.4% of GDP.

The Kiwisaver scheme and its Government counterpart, the New Zealand Superannuation Fund are disastrous to the New Zealand economy because, in a debt-based financial system there can be no “earned” Saving other than what is available from within the productive economy to pay for new productive capital goods .

The only “saving” available for non-productive investment is “unearned” income, the net after-tax interest paid on bank deposits. In New Zealand, unearned income is presently about NZ$ 5.5 billion per year. That income supports the share market and property prices. Recently, nearly all the unearned income that is not left in bank accounts has been going into the share market, which is why the share market has recovered well over the past year while property prices have fallen slightly .

Unfortunately for S&P, the Government and the Opposition, those receiving unearned interest income are not the same group as the employees and businesses paying into Kiwisaver. Instead, Kiwisaver is being funded from productive economy incomes.
Every dollar going into Kiwisaver is a dollar off the country’s GDP. The only way to fix that would be for all the Kiwisaver contributions to be directed into new productive investment, stimulating the productive economy. That is not being done.

In a financial system based on interest-bearing debt it is not even theoretically possible to “invest” productive sector incomes outside of the productive economy without collapsing the economy.

There are no “national savings” other than the value of new capital goods produced on an ongoing basis. That, after all, is the orthodox economic definition of “national savings = investment”.

Until financial decision makers learn the basics of economic theory, New Zealand is doomed to waste its economic growth potential to subsidise the capital gains and executive bonuses of its major, mostly foreign owned, listed companies.

ENDS

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