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Labour promises RBNZ would vary compulsory savings rate as alternative tool

A Labour government would use hikes in its compulsory saving to battle inflation, rather than interest rate hikes.
 
Party deputy leader and finance spokesman David Parker told a business breakfast in Auckland this morning the Reserve Bank would be given a new tool: the variable savings rate (VSR).
 
"Instead of paying more interest on your mortgage, a similar amount of extra savings would go into your KiwiSaver," he said.
 
"As everyone would be enrolled in KiwiSaver, and as contributions are increased over time from 6% toward the intended total of 9% of earnings, consumption pressures will be lower."
 
The VSR would be included in the policy targets agreement with the Reserve Bank.
 
The idea is this would have a disinflationary effect but also mean lower interest rates and would also mean a lower exchange rate, he said.
 
"Using changes in savings rates as an alternative to changes in the official cash rate would mitigate the currency effects of higher or lower interest rates, and reduce overseas transfers on the proportion higher interest payments which currently go to overseas lenders.
 
"Distributional and hardship effects for the lower paid would need to be considered, but could be accommodated in the detail of how the variable rate was applied.
 
"This does not mean we are going soft on inflation. The crippling effect of high and volatile inflation is clear.
 
"No positive growth/inflation trade-off exists in the long run. On the contrary, uncertainty about the inflation outlook adversely affects decision-making by households and businesses, and lowers the potential growth rate of the economy over time. High inflation is hardest on those who lack the means to buy and leverage assets which inflate in value."
 
Mr Parker also recommitted his party to a capital gains tax, excepting the family home but included on businesses and farms.
 
What do you think? Would Labour's 'big tool' variable compulsory savings rates help battle inflation and bring the exchange rate down?  Click here to vote in our subscriber-only business pulse poll.

More by Rob Hosking

Comments and questions
63

Superb! Achieves the same impact as interest rate hike by reducing discretionary expenditure. But the benefit goes to struggle street instead of to those holding capital. Those who pay the price get the benefit.

This is an incredibly important move. The first really serious attempt to help the young middle class in a long long time.

Except it would take money off people who don't have mortgages to put into a Kiwisaver fund with probably quite low returns if cash based because bank interest rates are artificially lowered. Hitting people in the later years of their life the hardest sounds like a brilliant plan.

Allowing people to save more for their retirement, instead of forcing them to pay more money to their bank is not "hitting people in the later years of their life the hardest".

"Allowing". No forcing. I would rather manage my own savings rather than have govt tell me what to do.

I am not in kiwisaver, yet i still save. Why should i be forced to suffer government oppression so those that cant help themselves have nanny government cradle them all te way to the grave

Exactly right Anon. Pretty much takes after tax money of those lower to middle earners that don't have a mortgage.

No. The benefit will go to high income earners, who will now find that lower interest rates will enable them to buy more houses. Worst hit will be working people on low wages who can't afford to save a deposit and rent.

And who need retirement savings the most!

Lower interest means higher house prices. Lower exchange rate means higher prices of most goods. Easy fixed - a few general wage orders to compensate wage earners; all in the name of a scheme designed to control inflation. This is intervention at its worst, trying to control all aspects of the economy. Muldoon would have been green with envy at this proposal.

Great move by Labour. The Compulsory Savings Structure works - just look at countries like Singapore and Australia. Increases in billions of dollars of savings every month and the rate can be varied to allow for economic conditions.

If that economic buffoon Muldoon had not scrapped Compulsory Super in 1976, NZ would be in great shape to handle all the crises over the last 30 years.

Daftest of the comments I've seen. Muldoon didn't "scrap" any super scheme. NZ'rs voted for it to be ditched. As always with Labour lately, they are trying to fix something that isn't broken.

House prices will go through the roof on the back of this wouldn't they?

And what about those without mortgages? Do they have to suddenly contribute more to Kiwisaver too? Or is there a link to a mortgage?

Any what about corporate borrowers? They get the benefit of lower interest rates but don't have kiwisaver accounts?

I agree with your points but would also draw attention to the medium/longer term outlook with current 55yr olds being able to draw down their increased kiwisaver in 10 years time. I think a fair proportion will then invest that into property and drive prices up.
A short term plan that will appeal to the voters that only see the next five years ahead.............

... five years ahead, how about only to next week!

I wonder what blue-collar Labour voters with KiwiSaver accounts and living in rental accommodation will think when their take-home pay is reduced, via this VSR, in response to a hot housing market? Borrowers and non-borrowers alike are punished. The OCR is much more targeted in this respect - it simply sets a lower bound on the price of money.

This is inflationary, no doubt about that. All imported goods would rise in price, almost all local goods would increase as would transport costs. House prices will lower with interest rate increases across the board, but this scheme would have no influence on property prices as so many buyers, including foreigners, couldn't care less about kiwisaver contributions. It would provide great incentive for landlords to gear up so as to not make a profit, assuming kiwisaver extends to the self employed. Mr. Parker's idea to control inflation would do the opposite, and very quickly.

Exactly how doe's this guarantee lower interest rates and exchange rate?

It doesn't, you are just supposed to believe it will and vote Labour. Interest rates are artificially high in NZ and as a consequence our dollar is also artificially high. BUT an artificial correction such as Labour is suggesting will not work. A lower dollar means a drop in real wages for every New Zealander, and a boost in inflation which means a further (artificial) tightening by the RB and we are back in the circle!! Dopey old Labour.

This moves all the heavy lifting onto PAYE payers, ie employees, leaving property speculators a free run in terms of lower interest rates. Absolutely brilliant!

Interesting too this morning on Breakfast that Cunnliffe said Jones wasn't going to join National. I mean it is amazing that Cunnliffe even had to ask him that, shows what a mess these guys are in.

Businesses are a large part of the economy and interest rates have a major influence on them in terms of their allocation of capital, expansion plans, cost of debt and bottom line etc. But as businesses are not individuals changes to the VSR will not have the effect on them that a change in the OCR currently does. How is this (the VSR) going to possibly control inflationary pressures when, by its very nature, it does not fall upon the whole economy but excludes a very important part of it?

This appears to be a very poorly thought through plan by Labour that is likely to have major and negative unintended consequences for the New Zealand economy as a whole.

Maybe that is why Parker lost his Otago electoral seat.The voters sensed he didn't think through anything.Since that he has been an electorate seat nomad around NZ.The results are the same as Otago.Parker fails to get his message across.If it wasn't for MMP he would not even be in Parliament.We have been fortunate to have an economic savvy Bill English,who has kept NZ economy in a common sense position,With his well thought through ideas.

...and you're surprised because...?

The plan does not remove the OCR as a tool to restrict inflationary pressure. It just provides the Reserve Bank with an additional tool.

And yes - this new tool would impact businesses less than the OCR. That's a good thing, because businesses employ people, and reducing interest rates on businesses allows them to invest more in productive enterprise.

So if the Reserve Bank puts the OCR up and the Green-Labour Govt also puts the VSR up, that's going to be a double wammy on working age mortgage holders, correct? Or is the Green-Labour govt going to subsidise such people through more middle-class welfare to solve a problem their own policies have created in the first place?

This shouldn't be that hard David B.

The policy will give the Reserve Bank a new tool to control inflation. That means that the OCR will go up by less than it otherwise would. The OCR will still be used, but using other tools will lower the impact of each of the tools. The OCR will not go up to as much as it would have. There is no "double-whammy".

I put this policy alongside giving people $60 per week to have babies and a gender quota for politicians.
All this will do is to make sure the crazy housing prices in Auckland continue unabated. Property investors and speculators will continue getting fatter at other people's expense.
We do not have any major parties that can give us any confidence in the future. National certainly has no direction either.
God save NZ, the politicians certainly won't.!!

So in summary this policy:

- is a boon for debt funded property owners (they benefit from lower interest rates)
- is bad for property owners without mortgages, and for renters (they have to pay more into Kiwisaver without the corresponding benefit of lower interest rates)
- will increase inflation if it lowers the exchange rate
- will increase house prices rather than lower them

As usual, a very poorly thought through piece of policy, with a variety of unintended consequences.

You forgot to mention that it will also reduce the return to savers (including kiwsavers) as it will keep interest rates lower (supposedly).

Why not encourage more savings via kiwisaver via a reduction in tax rather than tell people to save more. Its the old nannystate stuff again.

Hopefully NBR will do the maths on this. In order fr their system to be 'cash-neutral', what additional amount will the average employee have to pay into kiwisaver per 1% of interest rate hike? My suspicion is heaps, because all the corporates will no longer be paying the higher interest, but will not be contributing to kiwisaver. So a massive imbalance there. Unworkable I would say.

Hi anon, NBR economics editor Rob Hosking is working on an analysis piece, which will be published on this site before 4pm today. CK

Superb, looking forward to it. On the face of it sounds like massive wealth transfer from those without mortgages but with kiwisaver accounts (low income earners and those babyboomers who have paid off their mortgages) to those with significant property debt but without kiwisaver accounts (corporates, property investors, and foreigners).

Very strange.

Overall not a bad idea, but the devil is in the detail and of course, whether the distribution of effects is equitable between the different socio-economic sectors of society it would impact.

the golden rule is that if I don't understand and then no one will.

I don't understand it and having an IQ of 128 which makes reasonable sensible guy (no jokes please) - i DON'T UNDERSTAND it.

This is very confusing policy - so by increasing my kiwisaver I get a lower mortage rate - does not make sense - and when i pay my mortgage off I than have to pay higher kiwisaver to help someone elses mortgage off?

Surely they will bring back in the ability to use kiwisaver to pay off your mortgage. Most people are effectively borrowing to pay for their kiwisaver contributions through various debts but you don't get a deduction for the interest costs yet people that own investment properties do. Seems unfair.

Great. Live in Wesport, say, where no jobs and no growth and housing is affordable. House prices go bonkers in Auckland. Take home pay for each person, and the town gets cut - Wesport spirals downhill from there. How does it affect people who budget every cent of their takehome pay and suddenly have less? It probably won't work on the other side either - over GFC it become clear workers started to hoard cash as savings. Releasing money via lower compuls savings will not make any difference because people will adjust other side of their account and save more. if Kiwisaver is not adjusted in its form, all this will be a a greater tax on employers

If the aforementioned plan is to increase contributions when the economy is 'booming' and reduce in recession. This variable rate will increase the volatility in the share market by exacerbating trends. 'buying high, selling low'

This plan punishes the people who is on wage-earner and doesn't have mortgage. Let these landlords get away again.. (remember we have already had no capital gain on these rental property).. This plan is to win the richer's vote.

To be effective (maybe) this proposed policy must also include compulsory Kiwisaver contributions from all taxpayers.

politicizing Kiwisaver further as a tool to do a job that is not retirement funding is not a smart move. legislating contribution rates that can go up and down does not give financial certainty to people who are on fixed incomes . prescription is not necessarily a medicine for the masses. In my opinion this will create a larger pool of non contributors. in fact going the other way and using Kiwisaver as only a retirement tool may gain more contributors.
I agree with David B that if you start extrapolating this, there could be many unintended consequences .

So I would get to borrow money cheaply to buy highly geared real assets that return me a tax free capital gain whilst everyone else pays for it? Count me in!

but aren't they going to introduce a capital gains tax as well?

Somewhat surprisingly it actually seems to make some sense.

If the same dollar amount is removed from consumer spending power by Kiwisaver as higher interest rates would do, then the consumer is no worse off- in fact significantly better as they are building their Kiwisaver asset.

Our savings are too low hence we borrow overseas to fund our love of housing and suffer the cost of living with higher interest rates than comparative economies. And our exchange rate is often over-inflated by our inflated interest rates attracting "hot money".

I look forward to the discussion and analysis which tests this proposal in more detail. National's critique so far has been pretty superficial-a bit like the media discussion of legal highs.

why would someone at 20-25 yers of age just entering workforce, and independent life, wish to be FORCED to have higher proportion of earnings locked up until retirement age against their will?????

Because it is called saving for your retirement and they do it in many OECD countries. Why do you think kiwis are different?

And what about the dreaded foreign investors who Labour hate, who don't have Kiwisaver accounts, and who will continue to buy houses in NZ?

Their is a reason why VSR is not used in any other country. Labour just couldn't work out why.

In reply to MJW, you must be a Labour party stalwart to write that opinion. Why would you want to reduce discretionary expenditure? That money is NOT the Government's to meddle with - even if all people & small businesses could afford KiwiSaver (which they can't). Plus it would depress the local economy and hike imported inflation. What of Working for Families - which is middle class welfare? David Parker is a lawyer not a businessman, and this policy exhibits just how thin their talent is.

I hope that some of the commenters on here can appreciate that the OCR was once upon a time "a new idea"...

There is nothing quite like a spirited exchange of "new ideas" isn't that what an election campaign and open democracy is supposed to be about?

Oops I forgot - it should be about media spin, photo opportunities, glib soundbites and focus group workshops that get to the nub of self-interested policy formulation of the "what is in it for me kind?"

This means a double smack in the teeth for disposable income Prices up on essential goods because of a lower dollar, and less take home pay for workers. All in the hope house prices will fall because interest rates increases might be less. Definitely a touch of Muldoon showing.

What happens when they want to reduce the compulsory savings rate to stimulate the economy (similar to reducing interest rates now) - do they tell people in Kiwi Saver to save LESS for their retirement??
So now they control how much we save and when?
This concept has perhaps not been thought through.

If increasing kiwisaver contributions from an employee could lower interest rates, then why bother making it variable? Just make it compulsory and increase the contribution now, then leave it.

The NZ economy is in better shape than most developed countries around the world. As to compulsory kiwi saver - very bad idea. The idea of the government making decision (political or economic) on behalf of individuals should remain where it belongs, in the past.

This policy is so brilliant........McCulley needs to offer Parker a Reserve Bank job ASAP

The Singapore CPF employer contribution has been varied in response to economic conditions, in much the same way a Labour proposes. http://en.wikipedia.org/wiki/Central_Provident_Fund

We all acknowledge that NZ's savings rate is too low but the goverment simply cannot pass the buck to unelected officials to arbitrarily dictate the amount of savings individuals should contribute and call it monetary policy. The fact of the matter is is that the government can raise kiwisaver contributions, can make it compulsory and if they felt it would benefit the economy to increase savings (even temporarily) then if Labour are elected they could do so. If warranted, the RBNZ would keep interest rates lower or even reduce them if the savings effect reduced aggregate demand to that extent.

As per a previous comment, I find the politicising of Kiwisaver to be concerning and somewhat disingenious. Labour should be promoting Kiwisaver as NZers preeminent savings tool, not casting doubts as to how it will be used in the future. Why not support people 'choosing' kiwisaver by suggesting to lower the tax paid on kiwisaver returns?

From a strategy perspective, its also a little naive. You will have plenty out there concerned about rising interest rates and may find some voter sympathy, however this is likely to be meet with the same, if not more, concerns from Kiwisaver members and turn away voters.

We can moan about National and their policies, but if this is all the opposition can push forward into the intellectual debate then it isnt much of an opposition.

They have highlighted the issues well, but they simply havent thought through the solution at all.

Huh? Oh, I see. You think it pushes house prices up by not making mortgages more expensive. But isn't the fundamental adjustment to inflation to reduce the amount of money in circulation? Currently, the only tool for that is the overnight rate.

Reducing people's discretionary income makes a mortgage at any given interest rate less affordable. Storing the cash in a place where people can get it later seems like a good idea. Why just export it all to Australian banks?

Because if you don't live until 65 or have other savings/investment goals then you'r earning less interest due to a lower OCR and paying a payroll tax so that someone else can buy a house - and it's mandatory. Tell me how that's fair?

If people don't want their interest going to Australian banks then change!!! Kiwibank and TSB are a good starting point.

“Mystical references to society and its programs to help may warm the hearts of the gullible but what it really means is putting more power in the hands of bureaucrats.” – Thomas Sowell

Wrong, both Kiwibank and TSB have a significant part of their books funded by overseas wholesale funds.

Of course they are reliant on wholesale funding, who isn't??? The point is their profits remain onshore. Due to the wonders of fractional reserve banking and making profits on printed money, why would you bank with anyone but a local bank?

I look forward to some great alternatives to the current policies of Labour and National in these columns.

If increasing Kiwisaver contributions does lead to lower interest rates then as a property investor, I'm all for it.

And every time the RBNZ invokes the VSR Every employer must recalculate the pay of Every employee - think of the total NZ compliance cost!

The best financial advise is that you pay your mortgage before you save. But labour wants me to believe that the interest I will get from kiwi saver minus tax will be higher than the interest that I will be paying on the mortgage. This seems really good business! Why aren't the banks doing this now. Increase interest on saving accounts so that after tax and paying the mortgage I can still make money. It sounds so simple!