By BRIAN FALLOW
New Zealanders are getting older but they are not getting any richer.
New Zealand households have the lowest savings rate of those in any developed country.
In this, as in many other economic statistics, New Zealand finds itself at the relegation end of the league table of the Organisation for Economic Cooperation and Development, the rich nations' club.
In 1982, New Zealand households saved 9 per cent of their disposable (after-tax) income; the OECD reckons that last year it was 0.3 per cent.
And the Reserve Bank estimates that since 1997 the net wealth of New Zealand households (assets minus debt) has been falling.
On the face of it, with an ageing population, it is a worrying trend.
Is our savings performance really that bad?
Saving is a slippery thing to measure. One approach is to take what households collectively earn, then subtract what they spend, and call the difference savings.
Statistics New Zealand's household income and outlay account shows that households have been spending more than they earn for the past seven years. For the past three years the difference has been more than $2 billion a year.
But because it is the difference between two very large numbers, and there is a fair amount of guesswork in those numbers, there is a large margin of error.
For example, statistical revisions, to bring New Zealand into line with international practice, lopped 2.6 per cent off our savings rate for 1999.
Some of the definitions used are debatable too. The statisticians treat spending on education as consumption, but most people would think it is more like investment. So using a measure like this probably understates saving.
There is also an argument that because capital gains are not counted, it understates income and therefore saving.
So is the concern that savings are too low misplaced?
Not really. Whatever the measurement difficulties, the trend is clear and it is all downhill.
But the same trend is evident in other "Anglo" economies.
The OECD says the United States' household saving rate has declined from 10.9 per cent in 1982 to 1.1 per cent last year, Australia's from 12.3 to 1.7 per cent, Canada's from 19 to 1 per cent and Britain's from 10.8 to 6.1 per cent.
But in those countries, the drop in the proportion of their income that households save has been offset by a rise in their net wealth.
Indeed, the increase in their net wealth is probably one of the main reasons they are saving less.
You can afford to spend more than you earn if you are getting richer anyway.
One of the things that kept the United States economy powering ahead in the latter half of the 1990s was this "wealth effect" - the willingness of households to borrow and spend on the strength of paper gains in their investments, especially in the stockmarket.
Economists estimate Americans spent something like 3c or 5c in every dollar of increased wealth, even though the assets themselves have not been cashed in.
But now that the United States sharemarkets have taken a dive, the worry is that this effect is going into reverse - that as American consumers spend less and save more the locomotive of the world economy will slow.
Is it the same story in New Zealand?
Not really. Over the past twenty years, New Zealanders' net wealth (assets minus liabilities), compared with their incomes, has only crept up. Over the past three years it has been slipping back.
In 1982, households' net wealth was 3.13 times income. In 1999, it was 3.64 times.
Unlike Americans or Britons, New Zealanders have more of their wealth in housing than in financial assets like shares or bank deposits.
How smart this is is debatable.
Reserve Bank figures show the value of housing assets increasing from 2.31 times income in 1982 to 2.83 times in 1999.
It is not as though incomes have been increasing in leaps and bounds over that period either.
The most dramatic change in households' balance sheets has been the steep increase in debt over the 1990s. It has nearly doubled from 61 per cent of disposable income in 1990 to 110 per cent in 1999.
"An optimistic view," say Reserve Bank economists Clive Thorp and Bun Ung, "might be that having lifted borrowing-to-income ratios to levels comparable with the more indebted OECD household sectors, New Zealanders may now turn their attention to increasing their net financial wealth."
But they point out that what has driven the increase in financial assets in other countries is saving by baby boomers in their prime earning years.
New Zealand, with similar demographics, has been going sideways and may not catch up.
Australian households, for example, in 1998 could boast net wealth 5.25 times their (significantly higher) disposable incomes; in New Zealand it was 3.7 times.
But other countries finance retirement incomes in different ways. Doesn't that make a difference?
As a general proposition, the more generous state pensions and benefits are, the less incentive people have to save. Also the less opportunity to save, because taxes tend to be higher.
New Zealand is unusual in the extent to which it relies on a universal pension funded straight from taxation.
Where earnings-related contributory schemes are used instead of, or as well as, a universal pension (as in Australia), that could push up household savings rates.
If you look at NZ's national savings rate, which includes saving by the business sector and the Government as well as households, the picture is not so bleak.
That is because the Government has for seven years been running surpluses and reducing its debt, making a major contribution to national savings and offsetting the decline in household saving.
The Office of the Retirement Commissioner says that in 1992, the household sector accounted for 93 per cent of national savings but that had fallen to 1 per cent by 1998.
By contrast, the Government, whose deficit made a negative contribution of 59 per cent to national savings in 1992, had turned around to a positive 80 per cent contribution by 1998.
Overall national savings (households, business and Government) have been decreasing, however, from 10.7 per cent of gross domestic product in 1987 to 5.1 per cent in 1998. And again New Zealand brings up the rear in the OECD league table.
So why is our savings performance so low?
The first thing is that New Zealanders' incomes (or most of them) are low and increasing at a snail's pace. That reflects our poor productivity record.
Over the past decade New Zealand's output of goods and services per head has increased only 1.2 per cent a year, compared with Ireland's 6.4 per cent and Finland's 4 per cent.
Citing these figures last month, Finance Minister Michael Cullen said: "New Zealand's per capita GDP [gross domestic product] is barely higher now than when it was when I first became a member of Parliament 19 years ago.
"Projections now show that countries like Slovenia will have a higher standard of living than we will have in 10 years."
So for many households, savings are in the category of "a chance would be a fine thing."
The increased availability of credit cards and other forms of consumer credit has reduced the need for precautionary savings as a cashflow buffer.
Another factor has been memories of two decades of high inflation. In such times savers suffer and borrowers are rewarded.
It made sense to borrow heavily, buy bricks and mortar, and wait for inflation to pay off the mortgage.
But that was then, this is now.
It has been a low inflation environment for 10 years and it is Don Brash's job to keep it that way.
The immigration that helped to underpin a surge in house prices, at least in Auckland, in the mid-1990s has turned into net emigration.
Last year, the number of building permits issued for new dwellings exceeded the growth in the population.
And the incomes out of which mortgages and rents have to be paid are growing only slowly.
The habit of saving in real rather than financial assets dies hard.
Real estate agents still advertise housing as "the investment you can live in."
But the WestpacTrust household savings indicators, which track such things, record that households are holding a growing proportion of their assets in managed funds and bank deposits.
Would tax breaks for saving help?
The purist view, traditionally associated with the Treasury, is that tax incentives address a problem that doesn't exist with an instrument that won't work.
On this view it is muddle-headed to say that savings are "too low." They are what they are, and just reflect grown-ups making decisions about whether to defer consumption from now to later. They know best.
The claim that tax breaks would not work rests on the hard-to-disprove proposition that they would encourage people only to switch their saving into the tax-favoured forms, but not increase the overall amount saved.
It is also argued that incentives would favour those on higher incomes, because they do most of the saving.
Finally, and crucially, there is the cost.
Dr Cullen favours a system in which private superannuation savings are sheltered from tax so long as they remain in the hands of a fund manager, but are taxed when they are paid out.
(At present the income which savings generate while they are accumulating is taxed, but when they are paid out they are tax-free).
Dr Cullen said on Friday that, official estimates showed adopting that model would cost the Government about $500 million a year in revenue initially.
In other words, it would swallow most of the money the Government expects to have for new spending plans in each of the next two Budgets.
New Zealand: A nation of terrible savers
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