Kiwis being scared into saving as they watch developments overseas and realise there is no more free lunch, English says

New Zealanders have got the message that debt is a bad thing, and are starting to understand the need to save more as economic events around the world scare them into putting more of their income aside for retirement, Finance Minister Bill English says.

Meanwhile growth in Kiwisaver funds was being accompanied by the depletion of other managed funds, throwing up questions of how the scheme was contributing to New Zealand's savings rate. While Kiwisaver appeared to be a better vehicle for New Zealanders to save through, the only way to improve the nation's savings rate was to stash more away, he said.

Speaking at the launch of a new Westpac/Massey University/Workplace Savings NZ retirement expenditure survey, English said New Zealand would hopefully be an "island of calm in that sea of confusion" in terms of certainty of savings around the world.

New Zealanders were realising there was no more "free lunch" when it came to funding their retirements, English said. People often hadn't needed to save as the government would fund or subsidise their education, healthcare, childcare, and retirement.

“So if people haven’t been saving, it’s because, in a rational way, they’ve thought they didn’t have to. And actually, they’ve been right," English told a group of representatives from the financial services and savings industry.

“Now they’re scared, and fear is a good thing in the right place," he said.

Things have changed

The context for the debate on savings would be different from that over the last 20-30 years, English said.

“You’re seeing across the developed world the end of the debt funded model - the end of the free-lunch – just at the time when a lot of people were looking at cashing up that free lunch," he said.

Tensions were going to arisein these various societies "where there’s been high expectations built on economic growth rates and asset growth rates which have been significantly debt funded – expectations which now will certainly not be met because there is now no one willing to fund those expectations with more and more debt".

The problems in those economies were going to take quite some time to work their way through.

"In Europe they’re spending the first five years of this difficult period pumping up their debt to make sure that it’s going to take at least another ten or fifteen to get on top of it, and then 20 years to start getting it down. You’re talking now about a generational change in the way retirement income is perceived," English said.

"Fortunately in New Zealand we have better choices than that, and I think we’re going to feel more and more fortunate as we watch the implications of these changes across Europe, the US and the UK wind out,” he said.

No more free lunch

There was no such thing as a free lunch any more, English said before bringing up the government's role in contributing to Kiwisaver balances.

Kiwisaver deposits had grown about NZ$2 billion to around NZ$11 billion over the last year, while there were now 1.8 million Kiwisavers.

“That’s at a time where some people were saying there’s too much uncertainty about the scheme – it may be less attractive. That’s clearly not the case," English said.

"However, of the NZ$2 billion that had gone in over the last 12 months, NZ$1.2 billion of it came from employers and employees, while NZ$950 million of it was still coming from the government," he said.

“And the total growth in funds, pretty much offset the depletion of other managed funds. So it is a better vehicle for people, and they’re responding to that, but actually you only get more savings when you save more."

When the government was effectively borrowing money to put into Kiwisaver accounts, it was hoping fund managers were able to exceed the government’s cost of borrowing. 

"Otherwise New Zealand is worse off for the KiwiSaver subsidy," English said.

"Of course if funds are moving from other managed vehicles into this one, we may or may not be better off, depending on the performance of the funds. The good news is New Zealanders now know there is no free lunch," he said.

'People aren't silly. If you offer free lunch they'll take it'

English said if there was one recommendation he would make to the financial literacy industry, it was that people were not silly.

"I stand here representing the biggest competitor of the savings industry. Because when you’re out there trying to make people save, we’re out there telling them that there’s lots of free stuff," he said.

“You can get pretty cheap child care, your education is free, your tertiary education is heavily subsidised, particularly your debt, then we’ll make sure you’ve got significant tax credits in case you have children, and when you retire you get 67% of the average wage. And along the way your healthcare’s largely free as well.

“So if people haven’t been saving, it’s because in a rational way, they’ve thought they didn’t have to. And actually, they’ve been right. Now they’re scared, and fear is a good thing in the right place," English said.

Household debt as a percentage of GDP had dropped from 154% - one of the highest in the world – three years ago, to 144% today, "and I think it’s going to keep dropping," English said.

"But that is the first decrease in household debt related to GDP for a long, long time. It’s been rising consistently now for more than two decades," he said.

"So Kiwis have got the message, at least that debt is a bad thing. They’re not quite so convinced about saving per say, yet – our savings rate has gone from in 2007 we were spending $1.11 for every $1 that we earned, today we’re spending $1 for every $1 that we’ve earned, or 99 cents probably, as we get into the middle of this year.

“So that’s a context where there’s going to be an awful lot of uncertainty about retirement savings around the world. Hopefully we will be an island of calm in that sea of confusion," English said.