A sense of entitlement
So Bill English's decision to slash the KiwiSaver member tax credit has left you feeling robbed. You're sick of politicians tampering with the rules around superannuation and retirement saving.
Let's get real about the size of the government’s fiscal deficit. At 8.4% of GDP this year, it surpasses anything we've got data on stretching as far back as 1972. Although the Canterbury earthquakes are a significant extenuating factor, it's become clear that the government’s modest response of departmental spending caps at the last two budgets was not turning the fiscal accounts around quickly enough.
In criticising the government's fiscal decisions, some people forget that the government's money doesn't just grow on trees. The government can only balance its books by either raising taxes or reducing spending. Figures from The Treasury show that government spending as a percentage of GDP surged from 28.8% to 34.5% between 2004 and 2009, driven by big increases in health and education spending in particular. And still those departments get more money thrown at them! Given that the government's share of the economy is now at its largest since at least 1994, increasing taxes to further embed high levels of spending is not appropriate.
So we're left aiming for a reduction in spending “and that's where the hard choices arise. If people are given the choice of which broad areas they'd prefer to see spending reduced, they usually rule out significant cuts to social welfare, health, education, and law and order. But if we make those areas off limits, it leaves only one-quarter of government spending to try and achieve meaningful savings. If we slashed all other government spending next year by 60%, we'd only just get the budget backing the black but that wouldn't leave much for defence, transport, communications, economic services, culture, and core government services.
In asking why, the government has chosen to target KiwiSaver, it's worthwhile stepping back to 2005 and looking at the scheme as originally proposed by Michael Cullen. It had the $1,000 kick-start and small fee subsidy, but no member tax credit and no employer subsidies. The scheme's cost to the government was expected to peak at $280m in 2007/08, with 415,000 people signing up by mid-2010. However, the gold-plated version announced in 2007 ended up attracting almost 1.5m people by June 2010 and is now costing the taxpayer a whopping $1bn per annum.
The member tax credit has been a cynical ploy to alter the publics behaviour because of a perception that people had been borrowing too much and saving too little. Unsurprisingly, the policy has boosted the take-up rate of KiwiSaver, but it fails to consider what was driving people's saving and borrowing behaviour in the first place. Cheap and freely available credit, substantial tax-free capital gains in the housing market, and very low unemployment all boosted people's appetite to borrow last decade. Since the global financial crisis those factors have waned. People now feel less certain about their future economic prospects and have chosen to undertake more precautionary saving.
The changes announced this week will not be the death of Kiwi Saver. I'm not going to stop contributing to KiwiSaver if the government is still giving me a 50% return on the first $1,043 I put in. It doesn't take much intelligence to work out that you won't find that rate of return anywhere else.
Just as scathing of people's intelligence are advocates of compulsory saving for retirement. These people believe that New Zealanders' apparent lack of financial asset accumulation means that most people are too stupid to adequately prepare for retirement. The thinking behind compulsory saving fails to recognise that people generally respond tithe incentives in front of them. Why would young people save for retirement when their first priority is paying off their student loan or their mortgage? Why would a property investor use the bank to save for retirement when they can potentially get leveraged and tax-free capital gains by investing in housing? And if you're already struggling to make ends meet, why would you get too stressed about saving for retirement when, as it currently stands, a single person gets $340 per week from the government once they reach 65?
If the cuts to KiwiSaver have made you irate, I've got worse news for you. It's widely acknowledged that keeping Superannuation in its current form, universal from age 65, is not affordable over the long-term. If you think that the policy choices the government has grappled with for this year's budget have been tough, they've got nothing on the bigger superannuation cost blow-out faced by this country. If the government ever gets round to tackling that problem and scaling back the size of that safety-net, then we might see a real and sustained change in people's saving habits.