Simon Collins: Saving basis of a healthy society

Bobbie Walker supports four children on a domestic purposes benefit and a low-paid, part-time job as a caregiver.

Interviewed for last week's Herald series on family support changes, she said she could not afford to let her children take part in sports, hobbies or hip-hop dancing.

"I'm only just getting by," she said. "The children don't do anything apart from school."

Yet out of her meagre budget, Bobbie Walker pays $10 a week on automatic payment into a savings account for her children's future.

Even on the lowest incomes, saving seems to be an almost universal human aspiration. It has probably been so at least since human beings developed agriculture - saving seed from one harvest to yield a bigger and more secure harvest next year.

Yet in New Zealand, we borrowed more than we saved last year to the tune of 8.1 per cent of our net income, the worst savings record of any developed country.
As the New Zealand Institute think-tank pointed out in an initial report last October, rising debt has social consequences. People like Bobbie Walker and her children lose a financial buffer against illness and other misfortunes, and are more likely to suffer poor health, relationship stress and lower educational outcomes.

"Asset ownership, by allowing people to access opportunity and manage risks, matters profoundly in terms of giving people a much greater sense of independence, control and security over their lives," the institute said.

Today, after three reports on the problem of low savings, it finally publishes its ideas on what to do about it.

As in any savings scheme, what you get out of it depends on what you put in. Take Bobbie Walker's youngest son, Starford, who turns 5 in June. If the recommended Kiwi Savings Accounts scheme had been operating since he was born, and assuming 5 per cent interest, the $500 deposited into his account five years ago would have grown by now to $638.

Add another $500 in June, and a final $500 when he turns 10, and by the time he turns 18 in 2018 he would have $2885 in the bank purely from the taxpayers' donations of $1500 plus interest.

Allowing for inflation at say 2 per cent a year, that $2885 in 2018 will be only the equivalent of $2230 today. But that would still pay most of the fees for a three-year carpentry apprenticeship at the present rates of $967 a year.

If Bobbie Walker, or perhaps Starford's father or grandparents, could deposit an extra $200 a year into his account and get the matching taxpayer donation of $200 annually from his birth to his 18th birthday, he would have $14,300 in the account when he turns 18.

Once again, allowing for inflation, that's the equivalent of just $11,700 in the costs of the year he was born. But it would almost pay for a three-year National Certificate in Light Fabrication for sheetmetal work at Manukau Institute of Technology, costing $4164 a year, or a three-year Bachelor of Arts at Auckland University at $3785-$4153 a year.

The scheme has no limit on the amounts that could be saved. But the tax exemption and taxpayer donations would be limited to $200 a year to avoid giving the most help to the rich, who can save more.

"That's $4 a week," says NZ Institute chief executive David Skilling. "Most people should be able to get a reasonable qualification for that."

Skilling, 33, is the institute's sole paid researcher, although he is advertising for a research associate. He studied economics at Auckland University, joined the Treasury in 1993, did a doctorate at Harvard and returned to New Zealand briefly in 1998 to help Andrew Grant set up a local branch of management consulting firm McKinsey.

He says the institute sprang out of the Catching the Knowledge Wave conference organised in 2001 by Auckland University's then-vice-chancellor John Hood and a group of Auckland business leaders, including Andrew Grant, Warehouse founder Stephen Tindall, Chris Liddell of Carter Holt Harvey, Scott Perkins of Deutsche Bank and Gavin Ellis of the Herald.

They picked the "ownership society" as their opening project because it is a popular theme with both US President George W. Bush's Republicans and Tony Blair's British Labour Party, but had been almost invisible here.

In Skilling's new report, he places the proposed savings scheme in the context of a worldwide shift away from cash welfare benefits towards "asset-based welfare".

Kiwi Savings Accounts are inspired by Blair's Child Trust Fund, which started paying 500 ($1328) this month into accounts for all British babies born since September 2002.

More than 40 US states have created "matched savings" schemes, which donate taxpayers' funds to match savings by low-income families to pay for education, buy a home or start a business.

US researchers Robert Friedman and Michael Sherraden predict "asset accounts will have replaced social insurance as the dominant social policy strategy" in most developed countries in the next few years.

But New Zealand's focus on "social insurance" instead of savings has not come about by accident. On Treasury advice, former Finance Minister Roger Douglas deliberately scrapped the tax rebate for mortgage interest payments in the 1980s because it gave most help to the rich, who could afford to buy houses.

He aimed to eliminate all tax concessions that favoured one activity (such as savings) over another (such as spending), so that overall tax rates could be cut and people could spend their money on the things that gave them most value.

Naturally, many took advantage of a liberated banking system and borrowed heavily to spend more.

Household savings dropped, and fell even further after the Employment Contracts Act and benefit cuts of 1991 helped to lower wages from 55 per cent of the national income in 1983 to 43 per cent today.

But the corollary was a steep rise in business profits, which made up for the loss of household saving. New Zealand's total savings rate, including businesses and Government as well as households, is still about the OECD average.

And it is still true that, as Britain's Child Poverty Action Group says, subsidies for saving do not help the poorest families who cannot afford to save at all.

Bobbie Walker is not one of the poorest; she earns $178.50 a week as a caregiver on top of her benefit. None of the other eight families in the Herald series could afford to save anything.

Several of the families say they cannot afford to give their children healthy food. If they had an extra dollar, they might be better to spend it on vegetables and fruit, rather than save it. Skilling says, in effect, that they should do both.

"Given that New Zealand spends 100 per cent [of the welfare budget] on cash transfers and zero on assets, we think there is scope for a bit of rebalancing," he says.

Yes, helping people to save will assist "middle New Zealand" as well as the poor, he says. But that is good for "social cohesion". And it should be backed up by rent-to-buy and shared-equity schemes to help the poorest people buy homes.

"Then we can get to a situation in which yes, you are benefiting middle New Zealand and also paying attention to the needs of people on low incomes, and the cash transfer system will continue to be important.

"It's important that there is also a focus on savings and asset ownership for the low-income people as well."

Proposals

* All New Zealanders should save 2 per cent of their gross taxable incomes into personalised "Kiwi Savings Accounts".

* Taxpayers would match extra savings above that dollar-for-dollar up to $1000 a year for people earning up to $38,000, and by 50c for each dollar saved for people earning above that.

* Tax rates would be cut 2 per cent so that people could pay into the new savings scheme without any loss of take-home pay.

* Savings accounts for children would be kickstarted with $500 donations from the taxpayers for every baby at birth, and again when they turn 5 and 10, plus matching dollar-for-dollar subsidies on all money deposited in a child's account up to $200 a year.

* Interest earned on the $500 donations, other deposits up to $200 a year and the matching taxpayer contributions would be tax-free until the child turns 18.

* Money could be withdrawn from Kiwi Savings Accounts only to pay for tertiary education fees, a deposit on a first home, donations to your children's Kiwi Savings Accounts, or at age 55-65, to set yourself up for retirement.