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Maybe we are saving enough?

Saturday, January 7th 2006, 12:58AM 5 Comments

by Philip Macalister

As this year is likely to be a big one for the savings industry it seems appropriate to start with a Blog the subject. The reasons I suggest savings will be a theme of the year is that KiwiSaver is likely to be properly born, as being more a twinkle in the eye as it is at the moment, tax issues will be centre stage as will regulation of the sector.

One of the arguments I'm often reluctant to be drawn too deeply into is household savings rates. The reason for my reticence is that it is one of those subjects you can argue with a raft of data and prove both sides of the argument.

While reluctant to bat for one side or another my inclination is that generally we, as individuals, are doing OK. On this basis I tend to side with the two protagonists of this moot - self-appointed superannuation guru Michael Littlewood and Treasury's Grant Scobie.

I understand the arguments from economists about household savings rates, but these often seem to be big picture economic arguments as opposed to something which is at an individual level.

One of the reasons I tend to think we are saving sufficient for our own personal needs is that I find it difficult to believe that people approach retirement - and the prospect of several decades of retirement - totally unprepared. Kiwis are a pragmatic bunch of people and the concept of not getting things sorted seems out of kilter with our culture.

In saying that I believe that many people will not be as well off as they expect and will fall into what I call the comfortably poor category. But with their state pension, a freehold house and a little bit of savings they will be ok.

The reason for penning this Blog is that a recent one of the Herald's Summer Surveys tends to support my argument. It showed that people's debt levels weren't as high as some suggest and that people are pretty relaxed about their financial situation.

The poll shows 40% of those surveyed have no borrowings and another 40% plus owe less than $200,000. Most of these two groups (72.5%) have no financial worry.

In terms of net wealth, more than one third (34 per cent) have total assets of more than $400,000 and around the same number say they are worth between $100-400,000.

While 80% of the population look to be in OK financial shape (probably not ideal physical shape after the holidays) it leaves the other 20% which I suspect are getting into deep trouble. More on this in an upcoming Blog on debt.

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Comments from our readers

On 9 January 2006 at 9:22 pm Richard Bruynel said:

Hi Phil,

I think you are spot on with the "pragmatic bunch" comment. Over the holidays I was talking to an uncle, just entering retirement, who reckoned that with a freehold house + state pension + $10,000 p.a. retirement could be comfortable. He figured having $100k of savings at retirement would give $10k p.a. (partly draw-down)until age 80, which was long enough.

Cheers, Richard

On 11 January 2006 at 11:02 pm Dean Apps said:

Hi. Maybe we are saving enough, but are we diversifying enough? I get the impression most Kiwis' savings are going into bricks and mortar at some stage, rather than other forms of investment. Property investment is fine as far as it goes, but liquidity (aka emergency funds) is also an important consideration which seems to be left out of the equation. It isn't just the saving, it's how we're saving. Maybe someone out there can allay my concerns?

On 13 January 2006 at 6:38 am Jens Meder said:

Hi, Phil! I am a little disappointed to see you sympathising with the statuas quo (plutocrat?) conservatives Michael Littlewood and Grant Scobie, who still don't admit that wealth and economic growth generation without preceding or current savings commitments is physically impossible, and who have so far evaded to give a single example of wealth creation without the profitable investment of someone's savings.

However, if you have more insight than them and come up with an example, you should do it to shut up truth seekers like me, who will admit a mistake if shown to be wrong.

Since there is no wealth creation without savings, it is obvious that any savings rate is adequate for any status quo, whether in a state of relative or absolute economic decline or growth. But we want accelerated growth, don't we?

Plutocrats would like nothing better than reduced taxes to make wealth creation easier for themself, and retain their ruling position, whereas freely consumable tax reductions are hardly worth to save for lower income earners, and are easily wheedled off them through glamorously persuasive advertising.

And can't you see the advantages through the universal NZSF savings effort, which should be amended to help saturating the housing demand, and since NZSF accumulation carries on until (an account owner's) age 65, all those Kiwis whose saving stops with home ownership, will end up with more at retirement, relieving the taxpayer's universal super financing burden, and safeguard its sustainability at entitlement age 65. Messrs. Littlewood (&Scobie?) don't even admit there is a universal super sustainability problem, which they would solve simply by raising its entitlement age, which is of no concern to rich plutocrats, as they retire when they feel like it even without the need of universal super.

Yes, and plutocrats are not too enthusiastic about the all-inclusive ownership society either, as this would eliminate their wealth ownership based special status? I hope there will be some well substantiated. frank debate about all of this.

In excited anticipation - Jens.

On 25 January 2006 at 8:31 pm Phil said:

I had this note from Michael Littlewood which I am sure he won't mind me using in an abridged form.

"If I am able to appoint myself as a 'superannuation guru', can I please use those same powers to unappoint myself?"

Michael prefers to be known as "someone who has a particular interest in public policy issues that are superannuation-related but more particularly as someone who has a limitless fascination with good information and who uses that to ask questions of the doomsayers.

"They, incidentally, seem curiously incapable of engaging in meaningful debate on uncomfortable numbers but that's another story (perhaps a topic for another blog)."

To me the comments of Michael being a guru were intended more as a compliment and acknowledgement that he has been prepared to research the issues and get them into a public arena. I know many people don't necessarily agree with Michael's comments or opinions, but he deserves credit for attempting to engage you in this important debate.

Michael - makes the point that "guru" is not something that he would call himself, never mind appoint himself to.

On 26 January 2006 at 9:40 pm Jens Meder said:

Phil, I have to agree with you that Michael Littlewood desrves appreciation rather than (my) criticism, for he indeed is one of the few inquisitive minds risking participation in open debate and possible refutation rather than evading it, as done by most public commentators and even politicians.

Perhaps my criticism would be more justified on Treasury authors Scobie & Trinh who - with the help of sophisticated equations - come up with misleading "discoveries" that "causative links between savings and growth are exaggerated", leading Mr Littlewood to justify doubt in the crucial role of savings in growth & wealth creation.

Even formally correct saving and investment can increase poverty if the investment is unprofitable or in straightforward consumption, as possible if invested in the "gilt edged security" of Govt. Bonds not backed by any tangible assets (such as infrastructure) other than the taxpayer's obligation to pay - but this does not prove that growth is possible without someone's savings, i.e. sacrificed consumption.

And I believe it is Scobie & Trinh (and some misguided Keynesians before them)who came up with the "wisdom": "Growth is more likely to raise savings than the other way round".

My grandmother knew already, that if you worked harder and earned more, you could save more. But if you consume the lot and don't save, you don't become any wealthier, and someone with a lower income and reasonable savings and profitable investment rate, will eventually pass in wealth and earnings the initially higher income earner with no savings.

And doesn't the fact that "across the rich world, people are saving less" (The Economist, April 9th, 2005) render the "wisdom" quoted as irrelevant, because if you are rich enough with enough savings, you really don't have to save any more at all, apart from perhaps the depreciation rate to maintain the value of your saved capital?

It is in the enlightened self-interest of those of us happy in our prosperity to achieve socio-economic harmony through getting the have-nots also involved in wealth creation & ownership, as is politically more easily achievable through allocating the NZ Super Fund to personal accounts, than anything else I am aware of so far?

Readers, please come forward with arguments for or against.


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