Last year, just before Christmas, Prime Minister John Key was quoted in the media as saying, “My Government is focusing hard on increasing New Zealand’s savings level so we can fund more of our growth from the domestic markets.” He also said, “We will incentivise savings and remove the opt out option for KiwiSavers.”
How could this possibly be achieved?
Recently, I had the opportunity to share my thoughts about how this could be done with Prime Minister John Key and some very senior functionaries of the National Party, Members of Parliament as well as eminent businesspeople, accounting and tax professionals.
I would like to share the same thoughts with a wider audience through the readership of Indian Weekender, and I am pleased to present them here:
There are about 1.65 million KiwiSaver accounts that have been opened within three-and-a-half years, against the Treasury’s projection of 680,000 by June 2014. This amply proves that Kiwis are smart savers, going against the popular notion that they are poor savers. But there is a proviso: they must be given a choice of better returns and security on their savings.
There is also the general perception that KiwiSaver is successful mainly due to the government’s contribution. So can it be successful without it?
Yes, it can be, in our opinion. If the following steps are taken:
• $1040.00 tax credit has to be stopped immediately. Instead, $1000 should be contributed at the interval of about five years on every running account.
• Make savings under KiwiSaver compulsory as in Australia (a good point to start achieving parity with the Aussies – something that’s much talked about as regards catching up with our neighbour.)
• Start at the rate of 2% and increase every year at the rate of 1% till it reaches to the level of 5%. (It is better to take a tablet of Panadol than to go in for surgery).
• Employer contribution should be the same as that of employee.
• All the funds will be collected by the government.
• Government will use these funds not only to wipe out its own deficit and to
meet future borrowing cost but also to lend to banks only.
• Government will pay interest on these super funds initially equal to its borrowing cost or equal to the borrowing cost of the banks.
• People can choose private investors also but these private investors have to guarantee continuously their return will be higher than Govt return after deducting all types of fees and expenses and will ensure safety of the funds by minimising risk.
• Performance of all the funds weather wealth management funds, superannuation funds, or any other type of funds should be continuously monitored.
• If any funds fail to deliver return less than the government offered return continuously for 2 years or taking a higher risk, which can jeopardise the safety of the funds, it should not be allowed to take fresh deposits and advised to compulsorily liquidate all investments and pay back to investors or to the government super funds, if the members agree.
• The scheme must be reviewed every year to protect the nation and its people.
• Compulsory financial education at all levels must be begun forthwith, starting at the school level (Kiwis are innovators, inventors and great at sport. The one thing they lack is financial literacy and this must be addressed urgently).
• Rebrand KiwiSaver as a National Savings Scheme and make saving compulsory – to save as superannuation.
What is needed is a system to encourage savings compulsorily, as seen in a range of countries that are both poorer and richer than New Zealand. For instance, when Kiwis hop across the ditch to work in Australia, they seem to have no qualms about saving up to 9% into compulsory super plans. This is so because it is compulsory – no questions asked. We are proposing a similar regime here – not 9% but start small at as low as 2% scaling up to 5% over the next few years.
As well as increasing domestic savings, this will also help reduce sovereign debt?
Here’s how we as a country stand with our foreign debt:
Total offshore Debts as on 30.9.2010 $253Bn
(one of the highest in the OECD countries)
Govt Offshore debts as on 30.9.2010 $32Bn
Private sector foreign debts as on 30.9.2010 $221Bn
Out of $221Bn, banks borrowings $150Bn
Currently NZ superannuation expenses $8.3Bn/year
Govt current borrowings is around $16Bn/year
Is there any silver bullet to improve this bleak situation?
Yes, there is.
Now let’s look at New Zealand savings where no return is guaranteed at all.
By default, these funds or other savings meant for superannuation, are unable to provide any guaranteed return or interest.
Therefore these should be transferred to the government as soon as possible. This will help to reduce government debt. Investors will not only have safety but also get a guaranteed return equal to government borrowing cost or if lent to banks, then equal to bank borrowing cost.
The government can use these funds not only to wipe out completely their borrowings but also can lend these funds to banks through the Reserve bank of New Zealand.
This will reduce dependence of the banks on offshore borrowings.
It is necessary that the banking system must be healthy and strong for the economic development of the country.
We have seen that when banks are not able to lend immediately after Global Financial Crisis how economic growth of New Zealand was under threat.
Incidentally after my presentation before the Prime Minister and the distinguished guests, one prominent citizen expressed the view that if the government borrowed all the savings internally, then it would adversely affect investment in New Zealand based companies.
To overcome this situation, my suggestion is about 70% (or more in some cases) of the savings made by New Zealanders is invested overseas. There is no benefit to the local companies with this 70%. There is no guarantee of return on these 70% funds. There is no guarantee even the principal money will be repaid. International investments are not only risky in the present environment but can be used in a better manner locally by the government.
Why not bring back this 70% of the New Zealand savings and invest in New Zealand government bonds, which will not only help to reduce government debts but also give a guaranteed return to the New Zealanders with minimum risk?
Further, New Zealand investors’ savings is not a charity. If the local companies cannot guarantee at least that much return which they pay on their bank borrowings, then local investors must be given a choice either to invest with the government and get interest equal government borrowing cost or invest their money locally in New Zealand companies or a mix of both.
The above steps will result following:
(1) New Zealand debts will be reduced with New Zealand savings.
(2) New Zealanders’ savings will remain in safe hands in an otherwise uncertain atmosphere.
(3) There will be guaranteed return, which will not be less than the government borrowing cost.
(4) No extra burden on the government.
(5) Interest earned by New Zealanders on their savings will be reinvested in the New Zealand economy.
(6) Interest cost which the government is paying to foreign lenders will be paid to its own people.
(7) Credit ratings of the country will improve.
(8) Morale of the people will be boosted and remain high.
(9) More confidence in the leadership to manage financial affairs in such tough times.
(10) Foreign investments will also increase in the local economy.
I would gladly welcome suggestions from readers and experts. These suggested goals are all achievable and would make New Zealand and New Zealanders winners in the game. While we anticipate the big event of the year – the Rugby World Cup – and fervently hope that we will win it, we could also be big winners in the game of financial independence. Let’s time our kick off to financial freedom as a country with the kick off to our Rugby World Cup win!