Kiwisaver and the current crisis

How do we think the introduction of Kiwisaver has influenced the current economic environment?

Well, Kiwisaver will have worked through a number of channels but fundamentally, in the short term, it would have propped up savings (note, when I say savings I am talking about PRIVATE savings, not NATIONAL savings) and thereby reduced CONSUMPTION. Where does it increase savings:

1. It effectively implies a higher tax rate – as money going into Kiwisaver is money that could have been redistributed through the tax system.
2. By using tax money as a carrot it increases the incentive to save beyond that implied by the market – fundamentally, the government takes your own money and says it will only give it back if you save.

As we are struggling with a crisis of confidence, a short-term decline in consumption is probably not what we needed 😛

Some may argue that not all the money is coming from the household’s pocket – they are receiving wealth from the employer as well.

However, this does not help the situation. Firstly, in the short-term it is very difficult to borrow off your Kiwisaver account – hence why savings increases in the short-term (but changes ambiguously in the long-term, depending on the scheme). As a result, this does not help anyone.

Furthermore, businesses must either cut wages, lift prices, or cut production in the face of the additional Kiwisaver cost – this hardly seems like a set of choices that is conducive to a hardy economic environment.

But it increases the pool of domestic savings

In the short-term, the pool of domestic savings will increase when Kiwisaver is around. This is actually a useful factor – as it implies that households were starting to reduce their stock of debt before the currency crisis began.

Fundamentally, New Zealand will probably cut back on its consumption anyway given the increase in credit costs over the coming years – as a result, Kiwisaver has helped to limit the extent of this adjustment.

As we have to spend less anyway – the fact that Kiwisaver provides a vehicle to save in is not, in of itself, a bad thing.

This seems like waffle

It is – I don’t really agree with these macro-views of how things work, but they are a useful thing to set out before discussing the policy in general.

A opt-in Kiwisaver scheme with no carrots would have been a great idea, regardless of the nature of the economic situation. Sure consumption may have fallen, but the benefit of that consumption would have been very peripheral – and any increase in savings would have helped to deal with the fundamental time inconsistency problem associated with savings. In the current situation you may say there is a cost from confidence – however, I think if that is the case we would get more voluntary opting out and contribution holidays 😛

However, the employer contribution and the government subsidises distort the scheme. The wage paid to employees ALREADY takes into account the values of labour associated with the buyer and the seller – adding an employer contribution is at best pointless and at worst an annoying compliance cost.

As we have said earlier, the subsidises are equivalent to saying – I will take your wallet, I will give you back the money if you stick it in my bank and don’t touch it for 20 years. This is not only unfair, it is a distortion.

These distortions and costs to economic activity will always be costly, but introducing them at a time when consumer confidence is low, business margins are tight, and the global economy is slowing drastically seems like bad policy.