This is an interesting article by Brian Toohey, a respected Australian financial journalist.

A school of thought in New Zealand has favoured the adoption of Australia’s compulsory superannuation regime.  But Toohey writes:

To this day, there is still no detailed policy report showing that net economic and social gains flow from forcing employees to hand over a growing slice of their salary to the richly rewarded fund managers in the nation’s booming financial sector.

The union movement in Australia strongly backed the scheme (which has boosted union influence in Australian economic life).  But Toohey writes:

Several younger union officials now say privately that they believe the majority of their members would be better off if compulsory super contributions were paid instead as a normal part of salaries, letting all employees decide how best to allocate their income over the course of their working life …  Some older union officials like to portray money diverted compulsorily to super as a free gift from employers. It is not. It is money that could otherwise be paid as wages – a point that the superannuation minister (and former Australian Workers’ Union secretary) Bill Shorten candidly acknowledges.

This is correct.  Like other non-wage labour costs (such as ACC levies), the initial incidence is on employers but the costs are ultimately borne largely by employees.  (In competitive markets firms have no choice but to shift the burden – they have to maintain returns which cover their cost of capital.)

Toohey reports on recent APRA figures which received wide coverage in Australia:

The Australian Prudential Regulation Authority recently released figures showing that the average nominal annual super fund return over the ten years to 30 June 2011 was a pathetic 3.3 per cent. Given that the average annual increase in the CPI over that period was 3.2 per cent, returns only beat inflation by the slimmest of margins. Australians would have been better off putting their money into government bonds and term deposits, or reducing their mortgage or upgrading their educational qualifications or those of their children.

A corollary of this finding relates to the impact of the scheme on economic growth in Australia.  Some people argue that a similar scheme here would boost growth in New Zealand.  I have never seen any account of Australia’s improved economic performance over the past 25 years that attributes it to compulsory superannuation.  Rather, the main explanation is the economic reforms initiated by the Hawke and Keating governments and carried on by John Howard.  These figures suggest why compulsory savings have not been a significant factor, at least over the past 10 years: the returns to the scheme have been poor and capital has been misallocated.

The Australian Productivity Commission has amplified this point as Toohey notes, saying:

Compulsory saving imposes a deadweight loss as it distorts decisions about which savings vehicles to use, as well as between consumption and savings.  In particular, younger people may be less able to invest in their preferred mode of savings (for example, owning their own home, which is a tax effective savings vehicle and offers social benefits).

There are other drawbacks with compulsory savings.  Toohey notes that fees paid to fund managers and administrators now amount to about $18 billion a year.  Last year it was reported that around $10 billion in superannuation accounts had gone missing – the owners of the lost accounts could not be tracked down.  The legislation backing the scheme has been endlessly tinkered with – over 2000 amendments to it had been made at last count – and further amendments are currently being debated.

Perhaps considerations such as these led the recent Savings Working Group not to recommend a compulsory savings scheme for New Zealand.


Bouquets and Brickbats for Treasury

Treasury Secretary John Whitehead has given two informative speeches this month (here and here).

A pleasing emphasis in them is the urgent need to switch resources from the non-traded goods sector of the economy to internationally competing industries.  With its high levels of foreign debt arising from successive current account deficits, New Zealand is exposed to external economic shocks.

Finance minister Bill English has been emphasising the need for economic rebalancing in the light of the trends illustrated in this familiar graph used by John Whitehead.

Click to enlarge

This emphasis was not a feature of earlier Treasury advice, for example its briefing to the incoming government in 2008.  Like former finance minister Michael Cullen, it primarily associated the current account deficits with allegedly low national savings rather than a combination of factors relating to competitiveness and the extent of overseas ownership in New Zealand. .

So a bouquet for this new emphasis.

But the breakthrough is only a partial one.  This chart used in John Whitehead’s 18 November speech, which purports to show what “we have been consuming” relative to the “income that we have been generating”, is misleading.

In the conventional ‘Econ 101’ chart, point B shows domestic spending on capital and consumption goods and services.  When such spending exceeds the local supply of these goods and services, the deficiency must be met from an excess of imports of goods and services over exports of goods and services.

It follows that it is wrong to describe point B as a point at which ‘we have been consuming’.  Instead it is a point at which residents and non-residents (such as foreign-owned firms in New Zealand) have been spending in New Zealand.  

To describe point B as being a point of consumption and to position it above the point of production or income (point A) invites the unwitting reader to infer that New Zealanders have typically been dissaving.  This is not the case.  National savings have been positive annually, with very few exceptions.

But as it happens, contrary to the representation in the diagram, point B has not been above point A on average for at least the last 20 years.   A glance at this graph shows that on average over the period the value of exports of goods and services has marginally exceeded the value of imports.  This implies that on average in this period point B on the chart has been below point A, not above it. 

Or to put it another way, gross national spending has on average been less than gross domestic product.

Instead the largish deficits in the current account of the balance of payments in the last 20 years have been primarily associated with a highish proportion of New Zealand GDP that belongs to foreigners (through direct and indirect investment).  This gives rise to the gap between GDP (the income generated from production in New Zealand) and GNI (the gross national income accruing to New Zealanders.

This second chart indicates that this gap between GDP and GNI opened up markedly in the early-mid 1980s when the cumulative effects of heavy overseas borrowing following the 1973-74 oil shock, the 1984 currency devaluation and the realisation of heavy taxpayer losses on guarantees for major projects all came to a head.

Of course these two charts do not constitute a thorough analysis but they raise questions about the quality of the Treasury’s assessment of the issue.

Other aspects of the Treasury’s analysis of savings and current account issues were criticised in this  Business Roundtable submission to the Savings Working Group.

Misdiagnoses of economic issues matter because they can lead to bad policy, such as the savings interventions of the last government.

Saving may encourage growth, but growth also encourages saving

The Savings Working Group announced this week is a good initiative and the group is well qualified for the task, but I do think they face some constraints.  An article of mine on this topic appeared yesterday on Business Day on Stuff.

In the article I suggest that a good starting point for the group would be to look at the results of the last similar exercise, which was part of the 2001 McLeod Tax Review, and focus on the facts about savings. In this post I’ll just touch on some of the review findings and some relevant facts.

 Some key findings of the McLeod Tax Review:

  • It was not apparent that New Zealanders save too little.
  • There is little evidence that changes to the tax system would induce higher saving.
  • The current account balance is the result of many influences (such as New Zealand’s international competitiveness), not just saving.
  • Most New Zealanders are making adequate provision for their retirement, given New Zealand Superannuation.
  • Higher private savings would lower the cost of NZS only if it were means-tested.

Some facts about savings:

  • Total national saving comprises government, business and household saving.  They are inter-related.  If governments save a lot (run large fiscal surpluses) the private sector is likely to save less. 
  • Saving is difficult to measure, but OECD statistics suggest New Zealand’s national saving rate is above that of the United Kingdom, the United States and some other OECD countries.
  • There is no ‘right’ level of saving.  People save to be able to consume more in the future. 

 Simply raising saving is not a valid policy goal, even if it helped to increase investment and economic growth.  Legislating for a 60-hour working week might also increase economic growth but most people would regard themselves as worse off. We value leisure.

Addressing New Zealand’s growth challenges and its vulnerability to high external debt levels requires a broad sweep of policy initiatives, not a narrow focus on saving.  Saving may encourage growth, but growth also encourages saving.

Read the full article here