How to make New Zealanders better savers
In uncertain times, people tend to save more. In 2020, with the pandemic raging and people concerned about both their health and their jobs, it’s not surprising that people spent less and saved more.
In Australia, the household savings to income ratio increased to a whopping 19.8 percent in the June 2020 quarter — up from 6 percent over the previous quarter. Even by March 2020 that saving ratio was starting to increase (up 2.4 percent from December 2019):
By contrast, according to Stats NZ, by March 2020 NZ households were saving less than the previous year, with Kiwis spending all but 0.4 percent of their disposable incomes. A 2019 analysis by finder based on OECD data showed that New Zealand was in the bottom five countries for saving. It ranked number four, just ahead of Lithuania (-4.74 percent), Finland (-2.58 percent) and Spain (-1.94 percent). Switzerland took the top spot, with a household savings rate of 17.64 percent, followed by Sweden (16.43 percent) and Luxembourg (13.41 percent). New Zealand’s poor showing is not a recent development, as in 1998 it ranked in the bottom three of OECD countries, just ahead of Denmark and Latvia.
Too much saving is not regarded as a good thing since consumption is such a big driver of economic growth. However, our persistently poor savings record puts New Zealanders in a very vulnerable position should they lose their job (or if interest rates were to rise). Another recent survey by finder revealed that four in 10 New Zealanders have no emergency savings to fall back on. And only one in five Kiwis would be able to cover their living expenses for just one week or less if they lost their job.
The OECD data shows that households in the most-thrifty countries save on average 10 percent or more of their disposable income. While exact comparisons between countries can be problematic there do seem to be countries that are consistent “savers” while others tend to be “spenders”. Global Finance magazine points out “These ratios are important in a larger sense: how much people tend to save also affects a country’s tax planning strategy, its welfare provisions and social policies.”
Unsurprisingly, given the county’s focus on housing, New Zealanders are great borrowers. According to Stats NZ households borrowed $10.2 billion in the March 2020 year, amounting to approximately $2,000 for every person in New Zealand.
Net borrowing represents the difference between saving and investment and New Zealand households have been in a net borrowing position since 2013. However high levels of debt do not by themselves explain the poor saving rates as debt servicing rates have trended down over the same period.
According to a Reserve Bank report from 2007 (just as Kiwisaver was introduced)
New Zealanders spend similar proportions of their disposable income on housing as households in Australia, Canada, the UK and the US. However, they invest less in terms of financial assets.
Investment in property has traditionally been preferred over other financial assets. However, this doesn’t account for the lack of saving for many groups. According to Stats NZ homeownership rates for younger people have fallen significantly since the 1990s and declined slightly for those aged 60 years and over. Overall homeownership rates are lower than they had been in 70 years according to the 2018 Census.
Are our incomes too low for us to save?
Low income, or low disposable income, does not seem to be a predictor of saving. Some of the lowest-income countries have the highest rates of saving. New Zealand’s incomes sit in the middle of OECD countries (17 out of 34 countries) when adjusted for purchasing power. In terms of disposable income growth, we rank equal with Australia. According to Stats NZ, our net disposable income increased 4.6 percent in 2020.
So why don’t we save more?
The RBNZ report suggests that for people on lower incomes, being able to access universal superannuation at aged 65 years is probably a factor.
Although debt servicing costs have fallen significantly, debt has also been easier to accumulate through mortgages, credit cards, and “buy now, pay later” facilities. All of which may have made it easier for us not to save.
Other than that, the RBNZ article pointed to a variety of other reasons which may account for New Zealanders reluctance to save:
- Student debt creating a culture of “debt acceptance”
- Lack of a saving culture in NZ and the lack of investor role models
- Low levels of financial literacy about products other than property
- Reluctance to seek external financial advice
- Pressures to consume.
Tax Incentives for Saving
As Milford Asset noted in 2017, many New Zealand households believe they will achieve a comfortable retirement based on their savings plus NZ super. However, they may not reach this goal without significantly increasing their contributions. They proposed allowing people to make tax-deductible contributions (or contributions out of pre-taxed income) up to a certain amount each year. This has been the approach taken in Australia, the US, the UK and Canada — all of whom have a higher savings rate than New Zealand.
In 2018 the OECD reviewed the literature on the impact of financial incentives on retirement savings. They found tax incentives had been effective tools to promote savings for retirement, particularly for middle to high-income earners. While less effective for low-income earners, they do seem to increase their overall savings.
The publication also noted that while Kiwisaver (at that stage) had been a success in terms of participation across all income groups it has had a negligible effect on national saving.
Tax Advantage provided to an average earner
Having sufficient financial savings to meet lifestyle goals is not only objectively a good idea, it is also linked to improved mental health and wellbeing. Given that New Zealanders are currently not saving enough to achieve day-to-day financial resilience, let alone for their retirement the time may be right (if not overdue) for the government to consider using tax incentives to boost household savings. Doing so may be the only way Kiwis will be able to achieve the lifestyle they aspire to in the future.