Full marks to Labour for trying to do something about the narrow objectives of monetary policy. The current account and resulting high overseas indebtedness have been the Achilles heel of the New Zealand economy for a long time.
However the economics behind the proposed variable KiwiSaver policy is highly contestable.
Labour’s argument is that the current account deficit is fuelled by a shortfall in national saving and that by forcing every worker into KiwiSaver and then gradually raising the combined contribution rate to 9%, individual saving will rise and therefore national saving will also rise. This will reduce the need to borrow and sell assets to foreigners to fund the current account deficit.
The presumed advantage will be that interest rates do not need to rise as much to reduce demand in the economy. Thus the exchange rate will be lower and exporters encouraged more than otherwise would be the case.
But inflation is actually very low. What is the demand that actually fuels the current account? It is not the spending of the low income families that are barely surviving. Forcing them into KiwiSaver is going to reduce the very demand that keeps their local economies going. Making them save even more to balance the economy in boom times is a bizarrely regressive idea for a Labour government-in-waiting.
Other higher income employees are capable of reducing their other saving if they are forced to put more into KiwiSaver, hardly contributing therefore to any increase in national saving. Moreover if the state continues to subsidise KiwiSaver an increase in member numbers is costly to public saving. This offsets any gain to national saving, if in fact there is any.
It is the wealthy baby boomers in early retirement who are spending like there is no tomorrow. They are sitting on expensive real estate and feel wealthier than ever, many are still working and are getting a very large hand-out from the state in the form of universal NZ Super as well as the advantages of the gold card. Spending on imported cars, overseas trips, property upgrades helps blow out the current account much more than spending by the poor on basic food, school expenses, rentals and travel costs.
But will the over 65s be affected by a compulsory or variable KiwiSaver? No way. That burden falls only on the working age. Many of whom are already struggling with student loans repayments, poorly designed working for families abatements and high housing costs.
Let’s do the sums for someone earning $36,000. Assuming the employer contributions result in lower wages over time, an extra dollar effectively is taxed at 17.5% PAYE. With 12% student loan repayment, 25% (by 2018) abatement of Working for Families, 9% KiwiSaver the effective marginal tax rate becomes 53.5%.
And no, don’t expect the struggling 30 year-old with two kids to be grateful because increased contributions to KiwiSaver is still their money. They can’t access the money for 35 years and there is no guarantee that an offset wont be made to New Zealand Super by then. After all Michael Cullen has recently advocated this, and Labour Australian scheme that so impresses Labour has at its heart a means-tested age pension.
Labour will raise the age for NZ Super affecting the least well off the most in terms of a drop in living standards. But the higher age won’t come in for a long time and the impact on the current wealthy, capital-gains-rich over 65 year olds will be nil.
As Piketty in Capital in the 21st Century is surely highlighting, you don’t cure the ills of modern economies by taxing the poor more. He points out when the rate of return on capital outstrips the rate of growth, (a situation the financial services sector thinks is normal), inherited wealth will always grow faster than earned wealth. KiwiSaver contributions are only on earned labour income. In an increasingly unequal world, what a perverse tool to use to cure the ills of the economy.