Kiwi(non)saver (updated)

This article, KiwiSaver costs could result in national savings loss, by Tamsyn Parker in the New Zealand Hearld covers an important point about Kiwisaver. The article states

KiwiSaver has increased the household savings of New Zealanders but the cost of the tax incentives and administration may mean New Zealand as a whole is making a national savings loss, warn economists.

Speaking at the Retirement Policy Symposium, New Zealand Institute of Economic Research economist Trinh Le said much of the money going into KiwiSaver was being reshuffled from other forms of saving, and with the high cost of the taxpayer-funded incentives KiwiSaver was likely to have a neutral or negative effect on our savings level as a nation.

Later the article says

But research undertaken by Le and Waikato University economics professor John Gibson at the end of 2007 suggests only 19 per cent of the total may actually be new savings.

Le said the 19 per cent assessment was at the higher end of what the pair believed was new savings as some of the money people were putting into KiwiSaver should be used to pay off debts like mortgages.

They estimated the lower end to be around 9 per cent - which Le said was not enough to cover the administration and compliance costs of KiwiSaver, let alone the Government's contribution.

This bit about "let alone the Government's contribution" is wrong, what Trinh actually said was "deadweight loss".

The article ends with comments by Michael Cullen,

But Finance Minister Michael Cullen said it was a "heroic" view to say New Zealand did not have a savings problem.

"While there is disagreement on what indicators we should use when quantifying our problem, I have no real doubt that the problem is real and very significant.

How does he know this when the research says otherwise?

"By one measure, our national savings rate ranks 108 out of 130 nations while evidence from Statistics New Zealand is clear that we spend more than we earn."

And my question would be, So what? Having a national savings rate ranking 108 out of 130 is a problem why? What does this ranking tell us? I guess by "we spend more than we earn" he means we have a current account deficit. So why should we worry? This just means people from overseas are investing in New Zealand. Why is investing in New Zealand wrong? The use of overseas savings to finance higher investment in New Zealand means that investment would be higher than it might otherwise have been. New Zealanders benefit as long as that investment is profitable. And what effect would extra savings have on the current account deficit. As I have noted before

Wilkinson and Le note, with regard to research by the NZIER, that

... there is no reliable association between household savings and the balance of payments through time or across the 21 countries for which such statistics are readily available.

They then go on

[t]o illustrate the point by two opposite cases, Canada’s measured household saving ratio dropped from 13 percent of GDP in 1990 to 2 percent in 2007 while the same ratio in the USA fell from 7 percent to minus 1 percent.

Yet Canada’s current account balance ‘improved’ from a deficit of 4 percent of GDP to a surplus of 2 percent whereas the US current account deficit ‘deteriorated’ by 5 percent of GDP.

The graph below is of the household savings rate and the current account balance as a % of GDP for the USA.

The savings rate is falling and the current account deficit is getting bigger.

This graph is of the household savings rate and the current account balance as a % of GDP for Australia.

The savings rate is falling and the current account deficit is roughly constant, at least post-1980.

The savings rate is falling in both countries but the current account balance behaviour is very different. Note also that the introduction of workplace saving schemes like 401k and Super Guarantee didn't help the household savings rate.

So I would say Trinh makes an important point, Kiwisaver just isn't generating much in the way of extra national saving. So even if we do have "a savings problem", Kiwisaver isn't helping. And its not clear that we do have "a savings problem". The implied assumption here is that New Zealand's saving is below optimal but no one has worked out what the "optimal" is for New Zealand! How does Cullen know what the optimal savings rate is? No one else does.

Update: Kiwiblog asks Does KiwiSaver increase savings?. In particular note the comments by VT.