Andrew Gawith: Fear helping households to save more

Andrew Gawith. Photo / Supplied

Households are still spending more than they can afford, but the degree of over-spending has definitely declined over the past three years. That's bad news for retailers but good news for the economy which has a dearth of savings, or, as is more commonly reported, a debt problem. Statistics New Zealand's household income and outlay accounts show, over the five years ended March 2007, households on average spent 8 per cent more than the disposable income they received. In other words they were living well beyond their means by using the savings of foreigners. While the level of delinquency has declined since then, it hasn't disappeared - data for the year ended March 2010 show households spent over their disposable income by 2.2 per cent.

Let's focus on the improvement in household savings over the past three years. The architects of KiwiSaver would argue that the improvement in household savings has been driven by this wildly successful individual retirement savings scheme, which was put in place in mid-2007. But the growth in KiwiSaver funds under management hasn't discernibly increased the total amount of funds households have in managed funds - although investment performance has stunted growth in funds under management over the past three years. It looks as though people have shifted their savings from superannuation and other retail managed funds to KiwiSaver. Interestingly, KiwiSaver still only accounts for around 12 per cent of all household managed funds.

Incentives such as compulsory employer contributions and matched, but capped, government contributions (member tax credits), or explicit tax incentives may boost household savings but generally it leads to a shift in how, and where, households save. Despite Australia's aggressive personal savings policies (compulsory superannuation) they haven't achieved a significantly higher level of household savings than New Zealand.

The other and perhaps more powerful reason behind the improvement in New Zealanders' savings habits is something far more basic than a Government designed savings scheme - it's called fear. Uncertainty and insecurity encourage people to accumulate savings. The financial crisis, particularly the destruction of savings in finance companies, rising unemployment, falling house prices and now worryingly large Government deficits are all reasons why people want more savings in reserve, or to carry less debt.

To highlight the impact of insecurity or fear on savings habits, consider for a moment why Chinese households have a much higher savings rate despite having much lower incomes than New Zealanders. The main reason is the under-developed social welfare system - a rudimentary public health service, almost non-existent unemployment and pension systems and so on. Given the risks, it's not surprising Chinese families feel compelled to save. Ironically, their savings helped fund consumption in developed economies such as New Zealand and the US.

The Chinese experience is not to suggest we abandon our welfare system to boost savings - that would be an overly dramatic solution. But it does highlight the power of insecurity in convincing people to save.

Another perspective on the role of insecurity in promoting savings is the lack of interest among young people to accumulate savings compared to those reaching retirement. Pretty simple really; young people pay little attention to what will happen when they retire, it's simply so far off it is not a risk they take seriously. That's a rational position given they have an asset far bigger than most retirees - a lifetime of earning an income ahead of them. In contrast, those in their 50s start to think seriously about life after a good job and income. How will they cope with less income, more health expenses and paying the gym membership? These concerns or fears convince most to get serious about saving, even those on low incomes.

Banks have also played a role in forcing households to save more. The financial crisis has forced them to be more conservative when it comes to lending, even down to stricter limits on credit cards. The sagging property market, both residential and rural, have reinforced this neo conservative approach to lending and therefore lifted the importance of saving.

Providing incentives for people to save is fine, but it's expensive and tends to distort how and where people save - more than it increases their willingness to save. But suggesting more financial crises to scare people into saving is clearly not a solution.

A combination of efficient, relatively low cost savings vehicles and imposing greater responsibility on people, especially those on higher incomes, to take more responsibility for their own welfare (education, health and superannuation) will help lift savings over the medium term. In fact, the latter is happening to a degree now; more people are paying for health insurance to ensure they can get the operations they need. Even the state education sector requires parents to front with annual "donations" and clearly many people accumulate personal savings to supplement New Zealand Superannuation.

It's likely this pressure on people to take greater responsibility for their own social and economic needs will slowly convince people to save more. However, improving economic conditions will dilute the immediate fears and insecurity that have played such an important role in lifting the household savings rate over the past three years.

* Andrew Gawith is executive director of Gareth Morgan Investments.