Hard News: A Big Idea
92 Responses
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Kiwisaver isn't going to give most peoples much of a retirement income: if you put in 4% for 30 years, then you'll have a fund (in real terms, with returns matching inflation) of 120% of your average (not final) salary.
At an annuity rate of 7%, you'd get an income of less than 9% of average salary. Which might be ok, if there's still national super and you've paid your mortgage off.
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Andrew C, in reply to
they also tend to increase the exchange rate.
I did a quick chart of NZ/US exchange rate vs OCR since 1999 and I am not convinced they are highly correlated. As an example, the last 5 or so years has seen an increase in the x rate but the OCR has remained almost flat.
Data here
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Andrew C, in reply to
I’d just compensate by reducing the principal repayments on the mortgage.
Or perhaps borrow more, figuring you will pay it back when your kiwisaver matures.
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Andrew C, in reply to
Our lax overseas investment rules allow vendors to sell their assets to foreign owners at higher prices but the repatriation of profits abroad tends to weaken our economy
This is the bit that prompted my previous question WH, can you explain why? I'm not arguing the opposite side, I just don't understand.
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Bart Janssen, in reply to
the OCR also is ... a tax whose revenue collection lands disproportionately in the overseas accounts of large global financial firms. I don't buy it.
This!
The exciting thing about this policy is that it actually seems to be trying to address problems in our economy rather than trivially grabbing for votes. It is very exciting to see a political party attempting to do something other than play political games.
As for whether it will work - I really don't know. I actually can't see how it can do much harm long term. More money into the investment pool as opposed to into the overseas banks can't be a bad thing can it?
I still want to see someone deal with the tax free capital gains that are a fundamental issue for our economy. But one step at a time.
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Most of the people who currently opt out of KS probably come in two types: young, poorer people who can't afford it, and richer, older people who are already heavily invested in non KS schemes.
I'm not entirely sure it's any worse for a government to force poor people to save than to force rich people to (although a progressive structure wouldn't be out of the question). But if they already have a mature scheme ex KS? What then?
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Bart Janssen, in reply to
Bad enough with these Australian banks profiting from household debt.
The banks take a couple of billion dollars out of the NZ economy every year! That is the real cost of the housing market, every mortgage with those banks is money that disappears from New Zealand.
That's not to say that overseas investment in NZ is always a bad thing, when it build assets and businesses it is very good, but to simply fund a churn in the housing market it's very difficult to see the value for NZ.
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cathy holloway, in reply to
yes, national has a policy of stealing policies.
i guess that's a reasonable thing if you have no constructive policies of your own and can't think of any.
gives labour a dilemma, either don't announce any policies until the last minute and risk being seen as having nothing to offer, or announce policies early and risk national stealing and implementing them, leaving labour with nothing new.
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Kumara Republic, in reply to
I wish I had asked this question when Rod Oram made his initial post – yes the profit etc now does go overseas, but then again didn’t the overseas buyer also just deposit a massive chunk of money into NZ to the seller? Surely that is a good thing, and so overseas ownership is not a black and white “it is bad” thing?
NZ seems to have seen a lot more brownfields FDI (buying up existing assets) than greenfields FDI (someone arrives from overseas and builds an asset).
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Couple of other musings, in no particular order.
While mortgage profits go to banks' coffers, so do KS profits.
Carter's scheme (which seems like a good idea) will give banks more KS revenue. So banks aren't necessarily the bad guys (even if they are in other ways). Maybe some more locally owned KS schemes will benefit still more.
Meanwhile, people with KS will enjoy the benefits of forced savings (if not the pain of creating them). But mortgagors (home owners) also enjoy the benefits of their investment.
Carter's scheme extends that benefit to people who can't afford mortgages.
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cathy holloway, in reply to
i may be just dumb, but i thought taxes were when your money was taken away and you never saw it again.
when your money is taken away and put into your own account, still belongs to you but you can't spend it until later, how is that a tax?
sorry to be so stupid
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Paul Campbell, in reply to
There is also a huge lag in effects from the OCR. Changes take years to settle in, because people have huge chunks of mortgage on fixed terms. I have most of mine that way.
I think that applies to raising the kiwisaver rate too, but for different reasons - just like a change in the tax rates changing the kiwisaver rules means that EVERY employer will need to change their payroll system - you just can't practically do this overnight - I'd give it 3 months at a minimum, and making it compulsory would likely take 6 months or more as HR people go and chase everyone down who just doesn't understand and and doesn't want to deal with it.
While this is not 'years' it will mean that the RB can announce "the OCR goes up today" and it has an immediate effect in some areas (like exchange rates), saying "kiwisaver will go up in 2 months" just wont have the same immediate effect as raising the OCR.
I kind of expect the RB to trade the two off - announce something like "we're raising the OCR for 3 months and kiwisaver in 2 months then reviewing the OCR" - long term the fixed portion of the OCR changes would get pushed into kiwisaver (to a point where it would hurt).
Remember they are likely going to twiddle the minimum kiwisaver contribution - people like me who already put 10% (8+2) in are likely not going to be effected - company HR IT systems are going to have to handle cases like the person who has opted say "6%" when the RB mandated minimum contribution goes from less than what they have opted for to more (and back again)
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Just as a side observation, it's amazing to see so many people, here, there and everywhere, talking about the economy, and how it works, and who it should serve.
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Bart Janssen, in reply to
Just as a side observation, it’s amazing to see so many people, here, there and everywhere, talking about the economy, and how it works, and who it should serve.
Which again is such a refreshing thing to see as a result of a political party releasing a policy.
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Bart Janssen, in reply to
While mortgage profits go to banks’ coffers, so do KS profits.
The difference is in what the money is doing. For mortgages most of the money is going into raising the price (not value) of houses in NZ. For KS most of the money is invested in businesses which have a chance of improving the economy.
I agree there is nothing inherently evil about banks - they serve an incredibly valuable function in economies. It's not the banks fault that NZ has so much of it's internal economy tied up in land and housing with very little return on the investment. But there is a cost to that in that a couple of billion dollars flows out of NZ each year for very little return on the investment. The house or farm is still the same but the price of the asset has gone up and the mortgage has gone up and the interest payments have gone up, and the banks benefit.
By shunting the money into KS the banks will still take a cut but there is a chance that the return on the investments from KS will be greater.
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WH, in reply to
This is the bit that prompted my previous question WH, can you explain why? I'm not arguing the opposite side, I just don't understand.
When a New Zealand resident earns a profit - whether from their own business or from the receipt of dividends - they are likely to spend a proportion of that income on goods and services within New Zealand. Whatever amounts are spent become the revenues of other businesses, boosting the domestic economy.
You can imagine a simple example of a New Zealand resident using dividends from shares in ASB Bank to buy a yacht from a New Zealand based boat builder. The purchase of the yacht provides income to the boat builder, provides work for his staff and helps the New Zealand economy. As a result of the purchase, the boat builder and his staff have more money to spend and the cycle begins again.
When profits are repatriated overseas, another country's boat builder gets the order and the cycle of profits to spending to income to profits within New Zealand stops.
You can get a sense of the "circular flow" model of economic activity here (I found this by doing a Google search for "circular flow with repatriation of profits", so it may not be authoritative). It's more than you need but you'll notice that "The Overseas Sector" section states that overseas investments by Australians will tend to boost Australian national income in the long run, and that the repatriation of profits out of Australia is a kind of "leakage" from the economy.
There's more to it but that's the basic argument.
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Idiot Savant, in reply to
Maybe high house prices are a result of secular stagnation. If so, those other articles might hint at approached to reconfigure the incentives to make capital investment more attractive.
Because stock market bubbles are so much better than property market bubbles.
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It’s a great idea, and great to see a strong new initiative.
How effective this is at controlling the confluence of inflation, house prices, and the exchange rate is something only implementation will show. Suggestion on Morning Report that raising Kiwisaver 1% would be the same as raising the OCR .1% is probably a stab in the dark, but it’s reasonable to think it’s going to have an smaller effect in some proportion.
But it’s absolutely worth trying. Decent upside (better NZ savings and a lower exchange and interest rate than we’d otherwise have) and minor downside (implementation will take work; people who need every dollar immediately will need to compensated.)
And Ben: I agree with cathy – it’s silly to call compulsory retirement savings a tax.
ETA: but the vital thing is: can Labour sell the idea? This plus a CGT could (over time) put NZ on much stronger economic footing. But we need a change of govt first. (And calling this a 'tax' isn't going to help that ... ) -
WH,
In broad terms, while I'm sure it's not perfect, this proposal has a lot of good things going for it.
I don't think the items that concern Kiwisaver should be allowed to distract people from how good the change would be.
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Kumara Republic, in reply to
When profits are repatriated overseas, another country’s boat builder gets the order and the cycle of profits to spending to income to profits within New Zealand stops.
You can get a sense of the “circular flow” model of economic activity here (I found this by doing a Google search for “circular flow with repatriation of profits”, so it may not be authoritative). It’s more than you need but you’ll notice that “The Overseas Sector” section states that overseas investments by Australians will tend to boost Australian national income in the long run, and that the repatriation of profits out of Australia is a kind of “leakage” from the economy.
There’s more to it but that’s the basic argument.
Bart J:
That’s not to say that overseas investment in NZ is always a bad thing, when it build assets and businesses it is very good, but to simply fund a churn in the housing market it’s very difficult to see the value for NZ.
Ramp it up to 11, and you basically have a banana republic.
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Kumara Republic, in reply to
ETA: but the vital thing is: can Labour sell the idea? This plus a CGT could (over time) put NZ on much stronger economic footing. But we need a change of govt first. (And calling this a ‘tax’ isn’t going to help that … )
And in the long run, a financial transactions tax (FTT). But I've mentioned previously that it needs the G7 to take it up first for it to be meaningful.
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Bart Janssen, in reply to
you basically have a banana republic.
milk-powder republic
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WH, in reply to
I did a quick chart of NZ/US exchange rate vs OCR since 1999 and I am not convinced they are highly correlated. As an example, the last 5 or so years has seen an increase in the x rate but the OCR has remained almost flat.
This is a bit above my pay grade unfortunately.
The New Zealand dollar is a well known carry trade currency, and it follows that some proportion of the demand for NZD is driven by ROI differentials. I'm not sure that a plot of the OCR vs the NZD/USD rate would capture the complexities of this.
Bear in mind that it's a multi-factor relationship. For instance, page 7 of the paper Russell linked to has the relationship between the terms of trade and the TWI.
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Andrew C, in reply to
When a New Zealand resident earns a profit – whether from their own business or from the receipt of dividends – they are likely to spend a proportion of that income on goods and services within New Zealand.
This is the bit that confuses me, as surely that applies to the injected purchase price of the asset (farm, bank, whatever) as well? i.e. we got money in from overseas for the initial purchase, hopefully at some future expected profit multiplier.
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Richard Aston, in reply to
More money into the investment pool as opposed to into the overseas banks can’t be a bad thing can it?
Yeah I had been thinking another benefit of increasing savings via increase savings rates in Kiwisaver would benefit our economy by providing more money for investment in NZ business etc which we need right?
But among all those Kiwisaver schemes how much is actually invested back into NZ ? How much is plugged into more inflationary property investments ?
As you can tell I am no economist but it seems important to track where all those kiwisaver deposits are being invested.
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