Mary Holm: Steps to make savings stronger

If there was a bigger agricultural or horticultural crisis than Psa, foreign investors might be reluctant to lend to our iffy economy. Photo / Supplied

I must admit that until I heard a recent presentation by a member of the Savings Working Group I did not appreciate that the focus of the SWG was virtually on everything but KiwiSaver.

As someone in the financial industry I had read the terms of reference and the other information and incorrectly assumed that the SWG was about what could we do to KiwiSaver (to make our savings rate higher and reduce our dependency on overseas money).

But the implication at the presentation was that the focus was simply what could we do to reduce the dependence on foreign capital, and if part of the solution involved KiwiSaver it was not meant to cost more.

I suspect that the public (particularly the industry) have expectations of the SWG that will be disappointed, and you may want to work out how you manage the expectations.

Now that the initial euphoria has died down, could you tell me what the purpose of the SWG is?

I suspect that there are a lot of people who want the SWG to recommend compulsory KiwiSaver, and there is nothing you can do in your column about this other than explain that one man's expenditure is another man's income and so compulsion is not something that will necessarily lead to more savings.

The problem is that if you answer questions in your column about these sort of things it may compromise you if the SWG ends up doing the unthinkable.

I appreciate your concern. But, as a member of the Savings Working Group, I haven't been gagged. I don't know yet what the group will recommend. We're still gathering information and views. But I'm happy to explain the situation, as I see it, at this stage.

You're quite right, it's not all - or even largely - about KiwiSaver. The Government put together the SWG because officials are alarmed about what might happen if the flow of overseas money into New Zealand stopped.

We need the money because, increasingly, New Zealanders - the Government, and particularly households - aren't saving as much as we are borrowing. When somebody gets a mortgage, some of that money will typically be New Zealanders' savings but some will be deposits from foreigners attracted by our relatively high interest rates.

True, in the recent financial crisis we have been borrowing less and repaying more debt. The rise in GST may have also increased the tendency to save rather than spend.

But the changes haven't been big enough, and in any case they might be only short-term. Once things look rosier, we're quite likely to go back to borrowing up large - foreign as well as local money.

This might not matter much if the overseas money kept coming in. But the tap could be turned off - possibly quite suddenly. What might cause that?

Strangely enough, we've had a bit of a dress rehearsal this year. If there were a bigger earthquake than the Canterbury one, or a bigger agricultural or horticultural crisis than Psa, foreign investors might be reluctant to lend to our iffy economy.

There are also other scenarios in which confidence in New Zealand could be shaken. And the list of probable consequences is alarming: lower pay, higher unemployment, difficulties getting loans and soaring interest rates, a plunging kiwi dollar, slumping house prices and slower economic growth.

While some of these might appeal to some people - higher interest for retirees, cheaper houses for first-home buyers - the package as a whole probably wouldn't make anyone better off.

The job of the SWG, therefore, is to come up with ideas that would reduce New Zealand's vulnerability to a "sudden stop" - or even a more gradual decline - in the inflow of overseas money.

Clearly, this is largely about raising the savings rate in this country. But that doesn't necessarily mean making KiwiSaver compulsory. While compulsion would swell KiwiSaver savings, it might not make much difference to total savings - by the government, businesses and individuals.

For one thing, compulsion could raise government costs - depending on whether the KiwiSaver kick-start and tax credits were reduced. And many people would simply switch their savings from elsewhere into KiwiSaver - often moving money from a more efficient to a less efficient use.

Overall, research suggests compulsory savings is not as beneficial as it might seem - even in Australia. Having said that, we are still gathering information about this.

What about other ways to boost savings? At an individual level, we need better financial education, and changes that would increase people's confidence in financial institutions - making them more willing to venture beyond bank term deposits. I expect the SWG will make some recommendations along those lines.

There are also possible changes to KiwiSaver - apart from compulsion - and to the tax system. We're looking at several alternatives.

Then there's government saving. The SWG is looking hard at how the Government might spend less - preferably without cutting back services too much. One promising area is productivity - how efficiently work is done. Apparently, there's lots of room for the Government to improve productivity - which could lead to more government services rather than fewer.

We're also looking at ways to grow the whole economy, particularly exports, where growth has stagnated in recent years. With more growth, there would be more money to save.

There are all sorts of economic ramifications, which I won't go into here. Suffice to say the economists in the group are busy.

We need to keep in mind that if anyone - the Government, businesses or individuals - saves more, at least in the short term they spend less. This affects economic recovery. So a slow and steady change is easier to cope with than anything radical. In the longer run, though, higher saving should be good for growth.

When the SWG publishes its report, in late January, don't look for many recommendations that will have immediate appeal to the public. What we're aiming at is preventing bad future developments, and making fundamental changes that in the medium term will make New Zealand economically stronger.

As one SWG paper says, "Many New Zealanders have unrealistic economic expectations, seeing Government as a limitless source of money to cover emergencies and most other expectations ... The reality is that New Zealand's credit card is now maxed out, and it must start living within its means."

It's a bit like healthy living. In the short term, exercising, cutting back on the wine and eating only good food might be unappealing, but in the longer run it makes life much better.

Aussie banks

Your comment of sympathy to last week's contributor who vents his (her) spleen about the banks is not warranted. Why did you hope he (she) felt better now?

Informed people in the financial world have commented that the strength and sound management of the Australian-owned banks have shielded New Zealand from the worst aspects of the world-wide recession. Do you agree?

New Zealanders who have been easily brainwashed into hating the overseas-owned banks are always reluctant to put their money where their mouths are. If the banks are creaming it, why don't they buy a few shares in a bank?

A little bit of knowledge about how banks work and a big chip on the shoulder can cause a vented spleen. But that should not be a reason for you to spread the poison in your column.

The Australian-owned banks seem to be envied by much of the rest of the world banking system. The Australian banks have not had to seek government help to stay afloat. Nor have they collapsed like the New Zealand finance company industry. How about some credit where it is due?

Great! Last week's correspondent was unhappy because I was "far too easy on the banks". Now you say the opposite. I must be doing something right.

Let's start with your first question. Why did I hope the spleen-venter felt better now? Well, I don't like to see anyone suffer, regardless of whether I agree with them. And SV was clearly in pain.

I do agree that it seems that the practices of both the Australian and New Zealand-owned banks helped us through the global financial crisis. So, yes, they can take credit for that - and it's no small thing.

"Brainwashing" is over the top, but banks do seem to cop a fair bit of flak. It's not clear why - although iffy financial advice, rising mortgagee sales and revelations about high pay for the bosses probably don't help.

I don't agree, though, that my publishing the letter spreads poison. SV is far from the only one with these views - as you acknowledge. Far better, I think, to air the views and point out flaws in them - which I did - than to try to suppress them.

Your point about bank-haters buying shares in banks has some validity. The only trouble is that it goes against my advice to invest in single companies only if you have enough money to buy into at least 20 companies.

It's wiser to diversify by investing in a low-fee share fund. But maybe a few bank shares would do the trick - along the lines of "if you can't beat them, join them".

Okay, are we balanced now?

Looking after pennies

Let's acknowledge and accept that I'm a pedantic old bastard, but I was jarred by reading in your column recently the phrase, "But who cares anyway?", after a calculation that the sum of the interest under discussion was $8.

It mildly annoys me when a family member or others - and particularly my wife - says it. My reply is always the question, "at what point or sum does it become a matter of care?"

I believe as a basic principle one should husband every dollar.

Another piece of advice (freely dispensed) is that few people go broke spending $1000. They go broke spending $5 here and $4 there without thought.

You sound like my mum, who used to say, "Look after the pennies and the pounds will look after themselves". And there's wisdom there. But you ignore two factors, time and hassle.

Surely it's best to spend our limited time and energy on whatever brings the best rewards - which might be financial but might be about family and friends, health, the environment and so on. It's not hard to think of other rewards that are better chased than $8.

I suspect you might also be one who says, "If a job's worth doing, it's worth doing well".

It's a terrible proverb for perfectionists, who can spend all day doing one task beautifully while not even starting on other tasks.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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