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Growing the Savings Dollar

David van Schaardenburg offers some views on the superannuation debate.

Tuesday, July 7th 1998, 12:00AM

by Philip Macalister

As the New Zealand economy retreats into recession and our nation’s credit rating is called into question, the call from the politicians is for the public to increase savings levels. This is ironic from a number of perspectives and does require further examination.

While there appears little argument that New Zealand as a nation does live beyond its means, considerable diversity of views exist as to how to correct this. Of course today’s profligacy is tomorrow’s burden. What are some of the options to consider to correct these problems before they escalate?

Though New Zealand’s actual savings levels appear yet to be accurately measured, there is a common perception that they are too low. Little further analysis has been done on the way New Zealanders save, invest and the return they achieve on those savings. Take for example United States savings levels, which while below those recorded in Europe, have in recent years achieved on average a substantially better return. In effect one can afford to save less if one's investment returns are maximised within the set of opportunity that exists.

Inhibiting the quality of New Zealanders' investments and ultimately the level of their long-term returns are public policy decisions in tax and banking rules. An increasingly uneven playing field between differing investment vehicles creates uncertainty and an inhibition to save in a structured and professionally managed way. At the same time the Retirement Commissioner runs television campaigns to get people to save for retirement, most available savings structures, particularly those that can efficiently handle regular savings, are taxed at a higher rate and in ways not applied should the person do it individually.

Be responsible, be organised and the Government will increase your tax burden as you seek to reduce the Government’s future liability! This public policy framework is not only unique within the western world but also counter productive to savings levels and the return levels investors can achieve.

IPAC’s own research studies indicate that on average residential property ownership is not an efficient way to create wealth and therefore enhance personal savings levels. Unfortunately the banking and tax systems encourage New Zealanders to over-invest in residential property by greater ease of access to credit and not taxing profits made by property investors.

While politician’s exhortation is to increase savings, the Government, though having made considerable strides in reducing its role in the economy appears to have lost direction in recent times increasing Government expenditure in real terms. It is somewhat more appropriate and efficient for leave households, not Government, with a greater proportion of household gross incomes for the allocation between expenditure or saving i.e. reduce income taxes.

An important impediment to increasing savings is the generous universal state pension, which of itself eliminates much of the requirement to accumulate financial assets to fund retired life. Even though many would maintain the state pension of itself only provides a simple level of lifestyle, it is a moot point as to whether taxpayers should, or are prepared to continue to cover the cost of a state pension scheme which has no prefunding. Options to reduce this burden now and down the road are;

- reduce entitlement levels (linkage to average wage levels has no economic rationale);

- increased age of entitlement;

- isolate a portion of existing income taxes paid to be allocated to a personal locked savings account to fund an individual’s retirement.

All the above require further thought as to design but each option should encourage New Zealanders to take the need to save for retirement more seriously and/or start to save from present income.

From the above points there are a number of potential policy changes which if enacted would, we believe, go much of the way to resolving the savings debate that presently exists. It is time however for the politicians to move past the rhetoric and ‘walk the talk’.

David van Schaardenburg is general manager of IPAC Securities.

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