Australia’s decision to increase contributions to its compulsory superannuation scheme has raised the voices of those calling for similar scheme in New Zealand. The argument most often put forward for policies to boost saving is that inveterate low saving by New Zealanders is starving domestic enterprises of capital for expansion. A subsidiary argument that low savings and reliance on overseas debt to finance investments is making the New Zealand economy vulnerable to shifts in international sentiment. To many who make these arguments the solution is simple make people save more.
That compulsory Super will lead to better economic performance rests on three premises; that higher saving contributes to better economic performance and reduced vulnerability, that saving compulsion will be effective in raising national savings, and that saving compulsion is the best policy for raising national savings. The validity of each of these is questionable.
Does a lack of saving really contribute to poor economic performance? The chart accompanying this article shows the savings rate of OECD countries plotted against average annual growth in per capita GDP for the period1997 to 2007. There appears to be no relationship between country savings rates and growth in per capita output. Anecdotally there have been countries with relatively low savings rates that have performed well, such as Australia and the United States, and countries with high savings rates that have had mediocre performance, such as Japan, Denmark and Austria. New Zealand’s own growth performance has not compared too badly against other OECD countries, despite having one of the lowest savings rates.
The likely reason for this lack of connection between savings and growth is that countries do not have to rely on their own domestic savings to finance investments. In a world where finance flows freely, savings in one country can easily be allocated to investments in another country to seek the best returns. In such a world, more important than whether a country is saving â€˜enough’ is whether it is allocating its savings and the savings it borrows from the rest of the world to the most productive investments. This will depend on the environment created for investing including the fiscal and monetary policies, tax system, labour market policies, regulations, and incentives for innovation.
Some argue this is all very well, but imbalances can arise when some countries save too much and others save too little. This creates vulnerabilities that can have severe consequences witness the recent international financial meltdown. But the recent financial system difficulties were not the result of international savings imbalances per se. Rather they were a manifestation of failures in financial system regulation and government distortions in housing markets in many developed countries. New Zealand, although obviously not unscathed by the crisis, has averted the catastrophe some countries have experienced, even though its savings record is considered one of the poorest in the developed world.
Leaving aside the question of whether higher savings can enhance the performance of the New Zealand economy, can compulsory savings increase the overall level of savings in the economy? Australia’s experience suggests that national savings does not necessarily respond to saving compulsion. Evidence is mixed, but it appears that Australia’s Superannuation Guarantee scheme has had at best only a small impact on the country’s saving rate. It is clear that many Australians have either switched saving vehicles to those covered by the Guarantee, or offset higher savings with higher debt. Australia, like New Zealand, remains a low saving country overall.
The determinants of countries’ saving rates are complex. They depend on domestic factors such as stages of economic development, demographic age profiles, cultural attitudes to saving, and the design of tax and benefit systems, among other factors. They also depend on international influences such as the saving rates of other countries, and trends in international interest rates and finance flows. To try and manipulate domestic savings in the face of these forces is likely to be fraught with disappointing outcomes.
Is compulsory superannuation the best way to try and lift savings anyway? Ideally any policies that aim to increase savings should target the underlying reasons for the perceived deficiency in this area. The tax system is the best place to start looking for answers. There are a number of aspects of the tax system that may discourage savings including the balance between income and consumption taxes, the tax treatment of housing, and the taxation of fixed interest investments. The benefit system, too, can have material impacts on the incentives people have to save for their retirement another eventuality. Addressing issues in these areas is likely to have more impact on savings, as well as having positive side effects on the economy.
Compulsory superannuation is not a panacea for New Zealand’s mediocre economic growth. If low savings is seen to be a problem by policymakers, better to address the underlying causes than the symptom. We already have a quasi-compulsory saving scheme in KiwiSaver. Let’s see its full effect on national savings in the years to come. In the meantime, there are likely to be more fruitful avenues for raising our economic performance.
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