Dr Michael Cullen’s speech notes for Auckland Chamber of Commerce Business Breakfast, Rendezvous Hotel, Auckland.
Press Release
It’s a pleasure to be back here with the Auckland Chamber again and to take this opportunity to talk to you about KiwiSaver ahead of its introduction next week.
I was last here at the Chamber in early February. At the time, although I didn’t talk about it here, I was beginning to think about how we could use KiwiSaver to confront some of the economic challenges New Zealand is grappling with. I knew there was more KiwiSaver could do to help consolidate the gains we have made over the last seven years of steady growth.
In talking to you today it’s worth recapping some of the issues we identified when I came here in February and the way KiwiSaver positions New Zealand to deal with them.
I started out, then, by saying our economy had proved resilient and there were encouraging signs. Indeed, subsequently we have seen the economy bouncing back quite strongly from the slower part of the economic cycle. But our ongoing strength is causing imbalances that highlight more emphatically the need to change the mix of our growth.
I said to the Auckland Chamber in February, “Our firms and farms need to move into higher value goods and services, through greater innovation and exporting. We need to be saving more and investing more. To set the economy up for the future, we need to start making these changes now.”
KiwiSaver deals with these issues directly.
It helps businesses, and particularly exporting businesses because it takes pressure off monetary policy. If we save more, over time interest rates will be lower and we can expect a more stable and competitive exchange rate.
KiwiSaver helps business because it deepens capital markets � the markets that provide the oil for a well-functioning business sector. Growing the wealth of New Zealanders also helps build the pool of assets needed for business investment.
And KiwiSaver helps business to provide superannuation options to attract and retain skilled staff – small businesses especially can rarely hope to provide a portable, simple superannuation scheme that employees are likely to consider when the job market is as strong as it is today.
The backdrop to KiwiSaver is an economy that has considerable underlying strength.
Since 2000, economic activity has increased by a quarter. Over the economic cycle we have been growing faster than the average of developed countries. Our public finances are sound and counting the New Zealand Superannuation Fund we no longer carry any net debt at all. Our business sector has particularly prospered. Profit growth has averaged over twenty per cent a year in recent years. And that’s been good for business investment.
It’s not often that we take the time to reflect that New Zealand is making steady progress. For once, the progress is under our belt and not wishfully ahead if we tighten our belts.
But growing demand and growing incomes have clearly created inflationary pressure. The economy is growing unsustainably fast. The March quarter GDP figures out tomorrow will probably again show the economy rattling ahead in the first part of the year. But much will be driven by the strength of the domestic economy � consumption. Another grim statistic out this morning will shed more light on that. The March quarter balance of payments figures may show some small improvement in the deficit, but they will once again show we are relying too heavily on foreign savings to finance consumption and investment at home.
When the Reserve Bank is hiking interest rates because of the pressure on the domestic economy – and exporters are feeling pressure from a higher dollar – the challenge posed to the government is: What are we going to do about it?
It is clear that we need to save more and invest more. And I challenge anyone to dispute the urgency of our saving and investing challenge. The government took historic measures in the budget to encourage New Zealanders to switch from spending to saving so that we would see less pressure on the domestic economy – and at the same time deal with the demographic pressures we know are ahead.
Now is the time to deal with these pressures. We know that too many of our households don’t save enough to enjoy a standard of living in retirement comparable to their standard of living during their working lives. Most people think they will get by because they are saving by paying off their own home. But when Treasury looked at this situation its conclusion was clear: Your house should not be relied upon to replace other saving. It found the effect of selling down your house is “modest; it is only noticeable when households halve the size of their home.” Treasury’s advice is that equity withdrawals once retired “should not be viewed as a substitute for adequate levels of retirement saving.”
Yet three quarters of household wealth is tied up in housing and less than t10% in life, superannuation and managed funds. Household net assets have tripled since 1990, while the household saving rate has been decreasing.
We know the problem of savings is particularly serious among low and middle-income households. A survey of household savings in 2001 showed only a low proportion of kiwis in the low and middle earning ranges ($15,000-$50,000 then) had any financial assets at all — Just 15% of individuals and 17% of couples in that earning bracket.
And we know that when New Zealand households are spending as much as $1.15 for every dollar earned (by one measure) the problems are not getting better.
The prudent thing to do is to start addressing these issues now.
And if you accept these are serious issues we have to deal with – you have to also put forward solutions. I am yet to see another policy proposal for dealing with New Zealand’s savings and investment challenge without making our domestic demand pressures dangerously worse.
KiwiSaver is not the only measure the government took in the budget to increase saving and investing.
The business tax package was the most significant overhaul of business tax in twenty years and included the first cut in the corporate tax rate since the eighties. I announced a substantial investment in the tertiary sector. It will address our skills shortage and produce more of the highly skilled New Zealanders our knowledge economy needs. These are important measures for our businesses, for our economy and for lifting our productivity. But it’s KiwiSaver I want to focus on today.
It is our household sector that needs to increase savings. The government is doing its bit. As I mentioned earlier, the government has significantly increased the level of public sector savings in recent years. Taking into account the NZ Superannuation Fund, we no longer have any net debt at all.
I have been repeatedly criticised for running substantial surpluses. But we are not hearing so much about that at the moment – you could imagine the pressure on interest rates and on the exchange rate today if I had followed the advice of my critics and run a far more expansionary fiscal policy in recent years.
Let’s put that in context: Everyone who calls on me to cut taxes without a corresponding cut in spending – or who calls for more spending without a corresponding source of revenue – is calling for a looser fiscal policy. The Opposition at the moment seems to be arguing for both � tax cuts, more spending and borrowing to finance it all. We are used to politicians trying to bribe voters with their own money. We now have an Opposition trying to bribe voters with our children’s money.
What a looser fiscal policy would mean is higher inflation, higher interest rates and a higher exchange rate. Put your hand up if you want that.
We don’t need more debt. We need more savings.
If we want to make sure we own more of our own businesses, we need to save more. If we want to have a better standard of living in retirement than NZ Superannuation alone, we need to save more. If we want the current account deficit to shrink we need to save more. We will rely less on foreign savings to finance our lifestyle and therefore pay less interest and dividends to overseas investors.
KiwiSaver will help launch a fresh savings habit. It is a simple, voluntary workplace savings scheme.
We are making it easy for workers to save for their future. To kickstart the scheme, everyone who signs up will immediately receive a $1000 up-front, locked in, contribution from the government.
Everyone who signs up to KiwiSaver will be supported with up to $40 a week in tax credits – $20 a week for each KiwiSaver and another $20 a week via a tax credit for employer contributions.
This is a very substantial investment in the future for everyone who joins. New Zealanders should join KiwiSaver.
One of the biggest problems we have with getting people to save is getting people interested. Most of us put off the job of saving because we tell ourselves we have higher priorities. Retirement seems a long, long way in the future – until one day suddenly it isn’t. (Although, in my case, there are quite a few years to go yet)
The way to get people engaged is to get them started in a regular programme of saving.
Not everyone will sign up to KiwiSaver on day one, next week. I would be surprised if people didn’t look at their current commitments and wonder where they are going to find 4% or 8% of their gross salary.
But we know that around seven hundred thousand Kiwis change jobs every year, and they will be automatically enrolled then (with the option to opt out within eight weeks). Most often, people expect their salaries to increase as they change jobs, so there will be more room to put something aside.
Others might decide to join as they pay off HP liabilities and so on, instead of taking on more debt.
Others will join the scheme as they receive their normal wage increases.
I’ve been encouraged since the budget that many employers and most unions are making positive noises about supporting working people into KiwiSaver.
The Stock Exchange welcomed the scheme immediately.
Major employers are indicating KiwiSaver works for them – employers like innovative international kiwi company Gallagher Animal Management Systems, and our biggest tourism company, Tourism Holdings. Later this morning I will be visiting Fletcher Building’s Pacific Steel division � it too is actively encouraging its workers to embrace KiwiSaver.
I think we’re already beginning to see a change in New Zealanders’ attitudes. People are already talking more about providing for their retirement. They’re giving serious consideration to the benefits of joining and I welcome that. We are seeing a sea change in thinking.
It happened in Australia some 20 years ago and its active savings policy has not only survived changes of government, it has become an accepted part of the corporate landscape. I was indeed encouraged by the recent Herald Mood of the Boardroom survey, which showed the majority of surveyed CEOs backing matching employer contributions.
From next year, matching employer contributions will be phased in, starting at 1%of an employee’s gross salary and rising to 4% in four years’ time.
Because of the government contribution, the net cost to employers when the full matching contribution is made will be barely 1% of the total wage bill.
I know employer responses to their role in the scheme will vary. I believe employers should welcome the scheme for a number of reasons. Most obviously, as I’ve mentioned, it helps to attract and retain high quality staff in a competitive international environment at a very reduced cost for employers.
KiwiSaver makes compliance easier too. Contributions will be collected through PAYE and paid by IRD into KiwiSaver accounts with the scheme’s private providers. It doesn’t add a demanding new load of administrative work.
KiwiSaver is a landmark in our social and economic history.
It will help New Zealanders build up more financial assets more quickly. It will help more New Zealanders feel wealthier and more secure. It is one of the most significant savings measures ever introduced in this country.
Greater saving, coupled with increasing investment in innovation and productivity, will help make the economy much more resilient so we can better deal with the long term game.
The launch of KiwiSaver on 1 July shows this government has grasped the economic challenges we face and is looking with optimism to the future. Greater saving and investing will be good for workers, good for businesses, good for our future prosperity.
Thank you.