Liam Dann: Cuts to KiwiSaver could return to haunt us

Robert Muldoon's axing of our compulsory savings scheme was one of the worst political decisions made in this country. File photo / NZ Herald

The business community has been quick to call for cuts to state spending, so it is not surprising that no one from within the investment industry or employers' groups was prepared to publicly slam proposed KiwiSaver changes this week.

There is no doubt that a cut to the tax credit for the scheme will deliver a decent saving - probably close to half a billion dollars a year if they cut the credit by half. That would equate to about $10 a week out of the pockets of KiwiSavers, and that looks like a trade-off that Prime Minister John Key would back himself to sell.

But it might not be so easy to convince those in the industry, despite the lack of on-the-record complaints.

In private discussions there is disappointment about the changes among a number of senior figures in the investment industry.

The Infinz Awards on Wednesday night, with 700 attendees, represents the biggest gathering of investment-industry leaders in the country.

Among the assortment of bankers and fund managers there were plenty feeling less than enamoured with Key's KiwiSaver plans.

The Prime Minister is selling the need for a cut by arguing that we are borrowing to fund our savings.

In other words, that we are using public debt to bolster private wealth.

It sounds illogical when you put it in such basic terms. But it is overly simplistic and slightly disingenuous.

You could equally argue that we are borrowing to maintain our health and education systems and are using tax revenue to incentivise KiwiSaver.

Or, more realistically, that we are borrowing to cover the cost of the earthquake and finance-company bailouts.

To make a political point, you can split the difference between government spending that uses tax revenue and spending that uses borrowings any way you want.

It still comes down to a choice about which spending is most valuable for the future good of the nation.

Government spending on KiwiSaver incentives - at $1.1 billion a year - looks big now compared with funds invested at $8 billion.

But the tax credit is capped and so, as savings grow and compound interest works its magic, the government contribution will dwindle as a percentage of funds in the scheme.

A cynic (or a politician) will say that fund managers would be upset because government incentives drive business their way.

That's true but a little unfair. Most of those unhappy about the cut are doing just fine already but have a strong belief in the power of a savings culture to transform an economy.

The National Party is supposed to believe that, too.

It is not just the $10 to $20 a week disincentive that has the industry worried. It is the messing about with KiwiSaver and the damage that does to public confidence in the scheme.

The New Zealand public is already pretty jaded about government savings schemes.

Some of that dates back to 1975 and the compulsory savings scheme that was scrapped by Robert Muldoon. It has been pointed out many times before that this was one of the worst political decisions made in this country.

In a 2008 column, Brian Gaynor estimated that scheme would have been worth about $240 billion if it had stayed in place. That's more than enough to cover the nation's net debt position at about $152 billion (taking into account New Zealand assets held overseas) and would probably now be going close to covering the country's gross liabilities at $312 billion.

In other words, if we had stuck to our guns back then we wouldn't have international ratings agencies on our back and we would have more scope to borrow when we do have disasters such as finance-company collapses and earthquakes, without the need to deliver grim Budgets.

To be fair, Key and Bill English have had to make some hard calls precisely because we don't have that buffer. They have to ensure we don't get a ratings downgrade or our interest bill will rise, and then we will be on the downward spiral to a place next to Greece and Portugal.

But it is ironic that the lever they have opted to pull is one that may see future governments looking back in dismay at the choices of 2011.

Let's hope not.

Let's hope the changes that have been mooted won't discourage young people from entering KiwiSaver and that funds continue to grow at a steady rate.

It is not just the financial security of a buffer that makes a savings culture so important. It is the fact that the money in KiwiSaver accounts can be used as capital to fund vital investment in New Zealand business and infrastructure.

In this way, KiwiSaver has the potential to create jobs. It is a shame to see the Government undermining it just as it is hitting the kind of critical mass where it can have that effect.