Between the lines: Questions of saving and super

Credit rating agency Moody's has reaffirmed New Zealand's Aa2 rating.

But it sounded a warning note about the country's "heavy reliance on foreign capital, which stems from a structural imbalance between national saving and investment."

Concern about the balance of payments and the country's accumulated external debt led Moody's to drop the credit rating a notch in 1998.

The need to tackle the underlying problem of inadequate national savings is cited by Finance Minister Michael Cullen when advocating his prefunding plan for New Zealand Superannuation.

Economists argue that Dr Cullen's plan to stash away tax dollars in a fund would have no greater effect on national savings than using the money to repay debt.

Moody's noted that New Zealand's 'impressive" record of running fiscal surpluses averaging 2 per cent of gross domestic product a year over the past six years.

That is a little more than the projected contribution rates for the Cullen scheme.

But Dr Cullen doubts that future governments would run surpluses and repay public debt to the same extent that his scheme would build financial assets.

As the debt gets lower, reducing it further becomes less of a priority, and the more tempting it is to cut taxes instead.

Even total debt repayment would only partly address the problem: net crown debt is around 21 per cent of gross domestic product, whereas the superannuation fund will need to reach around 50 per cent of GDP at its peak.

Critics of the scheme often take it as axiomatic that the money would be better left in taxpayers' hands.

Infometrics economist Dr Adolf Stroombergen, for example, argues that economic growth is likely to be higher if people are left to use the money as they see fit, perhaps building up small businesses or investing in their children's education.

But why would people invest less in their own or their children's future livelihoods rather than spending less on, say, imported DVD players or holidays abroad?

Moody's says that improved private savings as well as continued fiscal prudence will be needed if New Zealand is to retain the confidence of the markets and increase the pace of economic growth.

Partly prefunding the state pension is likely to have two opposing effects on private savings.

If it is seen as making NZ Superannuation more secure, it may lead people to save less than they otherwise would.

On the other hand, by reducing the demoralising uncertainty that has long plagued public superannuation, it may encourage more private saving.

Which effect will prove stronger? At this stage it is impossible to tell.