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Saving New Zealand

Written by: David Weusten

Article Overview: New Zealanders have a very poor record of saving and the writer offers a simple yet effective solution.

Saving New Zealand

Is the title an oxymoron? Will Kiwi’s ever save on their own volition? I don’t believe so.

“New Zealanders aged 18 and older have an estimated total net worth of $367 billion with a median value of $60,000, according to a new survey conducted by Statistics New Zealand on behalf of the Retirement Commission. Source 2001 Household Savings Survey ”

The bombardment of advertising that tells us all to buy now, pay later works every time. We now have a collective $4 billion on Credit Cards much to the delight of banks.

Shopping is a drug and Kiwis are overdosing. Households spend on average 10 percent more than they earn each year. Source The Press 16 October 2004

It is interesting to watch, as the stampede into investment property seems to match the nature of the sheep we are famous for, all following the other. Chasing perceived benefits and tax incentives.

Why have so many Kiwis invested in property? Because of the incentives! But does it add value to the New Zealand economy and provide the saving culture New Zealand should have and desperately needs? It would also be fair to say that the property investment industry focuses on reducing taxation revenue to the Government when making their sales pitch to their targets.

It is also very exclusive, because it is restricted to those earning over $60,000 pa and have cash or equity of $100,000 available. Just read all the investment property promoters advertising material and selection criteria. It is amazing to me that this left leaning Government has done nothing to address this inequality. I wonder if it is because so many politicians have property investments themselves.

Suggestion

I would like to suggest that the Government introduces tax incentives to encourage Kiwis to save as a viable alternative to property investment for those that can’t get into investment property or choose not to.

It is very simple really. If all interest and dividend income received up to a maximum of $10,000 per annum was tax free to the individual (qualified by total individual income remaining under $60,000 pa) whose name it was earned in, would that then see every body changing their investment habits (or starting a savings plan) to insure that they earned that tax free income. I would bet it would! I would for a start. The tax would still be charged at source and the refund claimed back from the IRD. This lump sum refund would probably be reinvested to insure the maximum tax-free income was received each year. This savings income would not be included for any income assessment carried out by government bodies when calculating incomes and entitlements.

The beneficiary’s would look to build some savings to keep the interest that would other wise cost them approx 70 cents in the dollar. Their standard of living would increase and as their savings increased their attitude to spending, saving and property would change.

I would be looking to build up a savings fund for each of my children so they could benefit from the tax free income, in time this $10,000 pa could cover their tertiary training costs (or substantially reduce borrowing needed).

The end result would be a massive change in focus on savings and probably property investment as there was an attractive and viable alternative to Kiwis wishing to get ahead.

I could see a time were every adult New Zealander would have approx $100,000 in cash deposits, Fixed interest investments and/or shares. That would add up to a lot of money available to the New Zealand economy that the country would not have to borrow from overseas and use our precious foreign currency when we have to pay interest. It is estimated that 6 cents in every dollar earned from our exports is used to cover our overseas interest costs.

So what is the cost to the Government?

If say 1 million (unlikely) of us could immediately put $100,000 into a fixed interest investment that would amount to $100 billion and if that produced a reasonable 6 % return for each person, then $6 billion would be introduced to the economy each year. Using the first marginal tax rate 19.5 % then the Government would forgo $1.17 billion each year. It should not miss it though because it is not getting it now.

It would be fair to say this could not be considered the actual cost to the Government as the borrowers of that $100 billion would be making a profit on this and paying tax and assuming the tax free income was spent the Government would get GST of 12.5% or $750 million back. It would not be hard to argue that there would not be a cost to the Government at all but a significant benefit to them, the economy and the people.

Conspiracy theory

I have had it suggested to me that the Government actually has no interest in getting New Zealanders saving and in fact is actively encouraging people to get into debt.

To look at examples,

Student debt

Student debt still increases by $40,000 per hour and will reach $7 billion in 2004. One in ten New Zealanders now has a student loan Press Release: Lincoln University Students Association, 9 October 2003

Another milestone for Generation Debt
New Zealanders should be outraged that the future of an entire generation of students has been saddled with a debt of $7 billion, Green Party Co-leader Jeanette Fitzsimons said today.
At about midday today (April 28), the total owed by New Zealanders in the student loan scheme is set to surpass $7 billion and continue to climb at almost $1 billion every year. Ms Fitzsimons said student debt could no longer be considered just a student problem.
"A generation of New Zealanders have been saddled with a $7 billion debt on their future," said Ms Fitzsimons. "Absurdly, this is recorded as an asset in the Government accounts and contributes to the Government's 'net worth'! Press Release: Green Party28th April 2004,

More and more students are left with the choice of leaving the country, declaring bankruptcy or trying to survive with a debt millstone around their neck. The Government values education so much they are even charging interest on this debt to further impede the student. One would think the pay back for the Government from their investment would be that Kiwis were better educated and thus add to the “knowledge economy” that I believe the Government still talks about encouraging. Talking the Talk is one thing, but where is the “Walking the Walk”?

Household debt

Household debt has continued to grow as we have embraced spending in response to the retailer’s encouragement. Withdrawing equity from our homes and/or borrowing against anything, everything or nothing and putting the repayments on the never - never. The extreme of this is the RAM loans, where repayment happens at your death or leaving your home.

Household debt and servicing costs
Jun 00 Jun 01 Jun 02 Jun 03 Jun 04
Percentage 101.9 % 104.9 % 108.8 % 119 % 131.1 %
Source www.rbnz.govt.nz

The above table shows just how hard it is to repay (service in lenders jargon) the collective debt now. Money is currently being lent out at an alarming rate with little or no investigation into the borrows ability to repay it. Clearly an area for legislation if a Government had any care or compassion for its people. With 31 % in excess of our income now required to repay our debt, how long can this last before the reconing. I am a budget advisor and those that provide this service are seeing an increasing number of people at crisis point.

Growth in debt

($NZ Million) Total Household Claims (debt)
Housing Other Total
Sept 2002 72,997 7,416 80,412
Sept 2003 83,503 8,037 91,540
Sept 2004 97,087 8,392 105,479
Source www.rbnz.govt.nz

Over 31% increase in two years, where will this end? Does nobody in Government circles care. This issue has huge risks to the New Zealand economy, and in the same league as Infrastructure, Health and Education. Get this one “Sorted” (to take the retirements commissions marketing initiatives name) and the economic implications should flow through to the benefit of the other three issues mentioned.

Retirement Commission

The Retirement Commission was established in 1995 when it was initially called The Office of the Retirement Commissioner; much of the focus in the early years was on establishing an understanding of public concerns and knowledge of retirement income issues.
Since 1996 the Commission has been running a public education programme designed to help New Zealanders understand retirement income policies and the benefits of supplementing New Zealand Superannuation (the state pension) with their own savings.
After five years, the Commission had established itself as an independent and impartial source of information, and had successfully convinced New Zealanders of the need to save for retirement. Source Commission web site
The Commission’s responsibilities include:
• Raising awareness of the need to plan for retirement
• Providing education on financial management and planning tools
• Collecting research on retirement planning behaviour and attitudes
• Providing information that aids development of national policies impacting on retirement.

We have the worst household savings rate in the OECD – it is about minus 10% Source Tony Alexander, BNZ chief Economist.

While the commission may have been proud of their results to date, for me though there is only one measure of their success and that is by the growth in the amount Kiwis are saving. Taking into account Tony Alexander’s comment above, then they have been an abject failure using my measure.

They should be in the Governments face as an advocate for the people to get whatever incentives it can to encourage people to save.

We all know we need to save but why, where is the incentive? Property investment has Government incentives and look at how well Kiwis support this.

Maybe I am right to suspect there is a hidden agenda.

Summary

Placing tax free status (tax still taken under the current system and refund claimed at the end of the financial year) on the first $10,000 of income derived from interest or dividend income would have an incredible impact on the lives of low income Kiwi’s. The marginal tax rate on this section of society is often the most punishing and yet remains under a Government that likes to think of its self as the working family’s Government. With the significant bulge in the Clarke Government’s purse they are uniquely situated to give it a go. Using the marketing words of Nike “Just do it!”

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