Key: Association of Superannuation Funds Address
John Key MP
National Party Finance Spokesman
10 October 2006
Address to Association of Superannuation Funds of NZ
Sky City Convention Centre, Auckland
Thank you for inviting me to speak this morning.
The adequacy of our savings, and possible changes to our policy settings to encourage savings, are hot issues in this country. These are topics which are now discussed in living rooms and smoko rooms around the country, not just in boardrooms or university lecture halls.
To my mind that is a healthy sign. It is good to have lively and informed debate on issues of the economy and public policy. With respect to savings, I particularly acknowledge the recent contributions of David Skilling and the New Zealand Institute.
I often get asked for my opinion on the savings issue. To put it succinctly, I am not one of those who think everything is fine in the world of savings; neither, however, do I think the problems are as dire as is sometimes portrayed.
I'm going to be more fulsome about that in a minute. But before I do I want to make a couple of initial points.
First, a lot of the debate around savings seems to involve claiming, or rejecting, the idea that people act rationally. Outside of the planet Vulcan, I find it hard to believe that people always do act completely rationally. There's no clearer indication of this irrationality than in the housing market, where the smell of coffee brewing and biscuits cooking during an open home can add $10,000 to the sale price of a house. And when it comes to savings I think a lot of people really do take a short-term view and don't always act in their own best interests. Whether that justifies government involvement in promoting savings, however, is another issue.
Secondly, it appears that the savings debate sometimes takes on a moral dimension - as if saving is good just for its own sake. Let us not lose sight of the fact that in this debate we are essentially talking about choices between consuming now, and investing for a higher income and greater consumption opportunities in the future. It's not like playing Snakes and Ladders, where the Thrift square takes you up a ladder - as do other virtues like Courage and Sympathy - while Indulgence takes you down a long snake. Outside of children's board games, Thrift simply postpones Indulgence.
It's no news that at a macro, or country level, some of the headline statistics around savings in New Zealand are not pretty. But, as anyone who has delved into this knows, the devil is in the definition as well as the details. It's not just about net cash flow in a year. What counts as consumption, what counts as savings, whether you are counting measurable flows of income or using a comprehensive definition of income, all complicate matters. The data is difficult to make sense of at times, particularly when comparing between countries.
it's worth thinking about who the big-saving countries in
the world are. At the risk of over-simplification, the big
savers tend to be:
* Oil-rich countries, which have large incomes now that are not guaranteed in the future
* Some Asian countries, like China, Singapore and Korea, and
* The richer group of OECD countries (with a few notable exceptions).
Well, despite the promise of the South Taranaki Bight, I'm pretty confident we won't be joining OPEC anytime soon.
And the Asian savers are notable for not having the tax-funded welfare institutions that we have, and which we jealously preserve, like a universal pension, free education and free health care. I met the Singaporean Welfare Minister when I was over there last and in the course of conversation he told me his yearly budget is about $40 million. A rough calculation tells me this would be enough to keep the New Zealand welfare system going for less than a day. I think that tells you a lot about the differences between our countries. They have to save because the state doesn't provide the services that we take for granted.
And it may be that some OECD countries are richer than us because they save more, but I'm more inclined to think they save more because they are richer than us.
So, for a variety of reasons, it is no wonder we aren't the world's biggest savers. I also take heart from the fact that our net national savings rate is not all that different to the rate in the United States, Australia and United Kingdom - other countries we typical benchmark ourselves against.
On the whole, then, I don't see the evidence for a savings problem at the macro level as particularly cut and dried.
However, at a micro, or individual, level I still believe many people are not saving enough for their retirement.
Grant Scobie and colleagues have done some excellent research in recent times showing that, on the whole, New Zealanders appear to be saving enough to maintain their standard of living in retirement, especially older cohorts of New Zealand. The average person seems pretty sensible in terms of putting money away.
Averages, however, can hide a lot of variation. I heard someone say once that if you put your feet in the freezer and your head in the oven your body temperature will be about average. Likewise with savings. For every prudent saver at one extreme there is a profligate spender at the other, and a range of people in between. Some people try to save but are hampered by ill luck or family circumstances. Others inherit money at fortuitous times and invest it wisely.
In my electorate work I see the consequences of a lack of savings - older people who are struggling to make ends meet, or to cope with unforeseen events. A leaking pipe, or a hole in the roof, or any other minor problem requiring writing out bills, becomes a catastrophe.
I therefore think there's no harm in erring on the side of encouraging more savings. I bet there's not too many people who get to age 65 and say "I wish I hadn't saved so much money." While there probably is such a thing as saving too much for retirement, it's not likely to be a widespread phenomenon.
So what can, or should, the government be doing?
One important role for the government is in funding on-going financial education, and here I would like to acknowledge the good work of the Retirement Commissioner, Diana Crossan.
The big area of debate, though, has been in the area of savings incentives, and in particular tax incentives.
I am yet to be convinced that tax incentives would significantly increase overall national savings, although I think it is clear that tax considerations profoundly affect the allocation of savings, and that this allocation can have important effects on our economy.
The conclusion which is often drawn from this first point - that tax incentives don't appear to increase national savings - is that New Zealand should introduce compulsory savings, to supplement New Zealand Superannuation. After all, we effectively have compulsory savings at the moment through the tax system. The government saves and invests on behalf of householders, although not in individual accounts, and doesn't ask for volunteers.
As I've indicated in the past, I can see some of the benefits of compulsory savings, although I can also see many of the problems. For a start, the evidence on whether compulsory savings increases the overall national level of savings, and not just the composition, appears to me to be less than clear.
More importantly, I think there needs to be a pretty high hurdle before you override people's own decisions about what is best for them, however, suboptimal, and replace these with the government's decisions about what is best for them. Merely observing that people's behaviour is not rational is not nearly enough.
With compulsory savings it is hard to get past the fact that there are people who probably shouldn't be saving for their retirement. Young people, who are saving for a house deposit or to go to university or even to go on their OE, would be hampered by the government forcing them to save.
So while I wouldn't rule out considering compulsory savings, it wouldn't be my first cab off the rank, nor even my second.
While I am doubtful that tax changes affect the total amount of saving, I think it is obvious to anyone that they affect the allocation of savings.
Currently in New Zealand there is a huge difference in the tax treatment of various assets.
Say you are in the fortunate position of having $100,000 to invest. You could put this into a managed fund which actively invests in overseas equities. In this case, the New Zealand tax system would tax these investments on capital gains as well as on dividends, at your marginal tax rate, say 39%.
Alternatively, you could put this towards a small holiday home. In this case any capital gain you make over time would be tax free. And the services which flow from this investment - being able to stay at the beach for free - would also be tax free. Why wouldn't you do that instead? And plenty of people do.
It is clear that in New Zealand we invest in housing, which is tax advantaged, to a far greater degree than we invest in financial assets, and that in this regard we stand out in comparison with other developed countries. Grant Scobie's latest work shows that in 2001 one in five New Zealand couples owned some form of investment property. On the other hand, the Reserve Bank has reported that households have far fewer financial assets than in other comparable countries.
This is not to discourage home ownership at all. National has a proud tradition of supporting people buying their own home. The question is how much of a home do you buy. Do you buy a $600,000 home, or buy a $400,000 home and invest $200,000 in stocks and bonds? Ideally, the answer shouldn't be dictated to you by the tax system, it should be based on returns and diversification.
Over-investing in housing is risky, and more importantly is likely to be a misallocation of resources, sidetracking savers away from potentially more productive ventures such as investing, whether directly or not, in real businesses. As a country, as well as for individuals, the quality of our saving - to what ends it is directed to - is just as important as the quantity of our saving.
Also, as I have said in other speeches, one of the effects of New Zealanders not owning financial assets, and therefore not owning New Zealand companies, is that these will be bought up by overseas investors. As a result, head offices will be relocated overseas, and profits will be streamed offshore, to be taxed where investors can get franking credits or pay lower company tax.
Therefore, I think we should be looking at measures that will encourage individuals to hold more diversified portfolios without further encouraging investment in tax-advantaged assets such as housing.
One way of doing this is to make the currently tax-advantaged investments less tax-advantaged by whacking them with more tax. This idea lies behind the not-infrequent calls for capital gains taxes on housing, and even for taxing the consumption benefits you get from your own house or bach.
I don't agree with this approach. I think the right way to get more of a level playing field is to lower existing taxes on savings, or lower the rate at which we are taxing underlying investments.
A reasonably common way to do this overseas is to have a tax-preferred savings option, usually for retirement savings. I am not totally against this idea. It would do something to rebalance the tax treatment of investments between housing and business investment.
However, it does smack to me of overcoming one distortion in the tax system with another, which sounds a lot like a one-way trip back to the 1970s. There is also a danger of such schemes becoming mucky and straying from their original purpose.
Kiwisaver is a great example of this. With Kiwisaver, you can now divert your savings towards your mortgage, as if you couldn't increase your payments directly by ringing your bank. And the tax-favoured status which has been introduced at the last minute is only for employer contributions, not employee contributions, which doesn't seem fair, and gives us an odd eTE system.
It would be better in my mind to move towards tax neutrality as broadly as possible; that is, not just applying to one savings vehicle but applying to as many as is feasible. This would go some way towards giving us a system in which decisions about how, when and in what form people choose to save are not influenced by the tax system.
At the extreme, a cash-flow tax, rather than our present income tax, would not tax investments at all, or at least not tax the normal returns of investments. All investments - in housing, in shares, in bonds, in small businesses, and so on - would therefore have the same tax treatment, and there would be no distortion between consuming now and consuming in the future. The other advantage of a cash-flow tax would be that it would simplify business taxation enormously.
The trouble with a cash-flow tax is that it costs money - not so much in terms of raising the tax rate on consumption, but in terms of the transition between the current income tax system and the new system. This consideration is what kept the 2001 Tax Review from recommending such a system for New Zealand.
Another option is simply to look at a reduced rate of tax on the returns to saving, that is, to lower taxes on dividends and/or interest payments. This would go some of the way towards eliminating the distortion in the timing of consumption, and was an option that was also considered by the 2001 Tax Review.
Such a tax reduction, amongst others, has recently been introduced in the United States. Dividends and capital gains, which used to be taxed at 35%, are now taxed at only 15%, although this provision is due to expire in 2010 if not cemented in before then.
A few months ago, the US Treasury produced a report looking at the long-term effects on economic growth of all the recent tax reductions in that country. The report finds that if these reductions are allowed to continue, and if they are accompanied by a degree of restraint in government spending, the US tax cuts will lead to a significantly more prosperous economy, by affecting the incentives to work, save and invest, and to allocate capital among competing uses.
But the report also finds that when it comes to promoting economic growth, not all taxes are created equal. The reductions in tax on savings gave a particularly large bang for their buck, accounting for less than 20% of the static revenue loss from permanent tax relief, but producing more than half of the long-term growth. In addition, lower taxes on dividends and capital gains were found to promote growth even if they weren't accompanied by restraint in government spending.
It would do no harm to look at the pros and cons of a similar approach for New Zealand.
In summary, then, I think the savings issue in New Zealand has too often been characterised as a polarised debate, with one pole occupied by those who say all is fine and we don't need to do anything, and the other pole occupied by people who say we need to have a compulsory savings scheme.
I don't buy into this. As any primary school pupil could tell you, there is an awful lot of land mass between the North Pole and the South Pole on planet Earth, and you wouldn't want to live at either of these extremes. I think the same applies to savings.
We need to take stock of the available options for improving the savings of New Zealanders who are currently not saving enough, and for improving the allocation of our savings, and match the size of any policy initiatives to the size of the problems. This will no doubt involve a process of ongoing review. It will also no doubt involve costs to the Crown.
Conferences like this one are part of the process, by getting savings professionals together to discuss the key issues as they see them. I am always keen to hear people's considered opinions on the topic of savings, and I wish you all the best for your conference.