BOOK EXTRACT: Wealth and New Zealand – Where, why and how it is held

© 2015 Max Rashbrooke. Wealth and New Zealand is published by BWB Texts (Bridget Williams Books, Wellington). Reprinted by permission

The most recent NBR Rich List revealed the biggest proportional increase in wealth since the list first appeared in 1986. But what do these figures mean and what else do we know about New Zealand’s fortunes? Drawing on previously unpublished data, the author explores what constitutes wealth in New Zealand – where, how and why it is held.

Breaking down wealth
There is clearly considerable inequality of wealth – or rather inequalities, as there are many different ways of breaking down those headline numbers. When it comes to ethnicity, Pākehā (those identified as ‘New Zealand European’ in the survey) have a disproportionately large share: in 2010 they owned 85% of net wealth, while making up 71% of the population. For the other ethnicities, the figures were as follows. People of Asian ethnicity: 7% of net wealth, 10% of population; Māori: 5% of net wealth, 12% of population; and Pacific peoples: 1% of wealth, 5% of population.

Average (median) wealth for Māori in 2010 was about $18,750, far less than the $125,500 for Pākehā. This reflects the historical alienation of Māori land and assets, as well as other factors. Average wealth for Pacific peoples was lower still, at $8,500.

Wealth even within the latter communities is very unequally divided. This can be calculated by looking at the difference between the median, which is the wealth holding of the person in the middle of the distribution, and the mean, the mathematical average of all wealth holdings, which gets substantially ‘pulled up’ if a few people have very large amounts. For Pākehā, the mean is only 2.2 times larger than the median, but for Māori it is 5.2 times larger, and for Pacific peoples 6.6. Within Māori and Pacific communities, wealth inequality is, on this measure, twice and three times as high (respectively) as it is in Pākehā communities.

When it comes to gender, in 2010 women made up 51% of the population, but had 46% of net wealth. Their mean net worth was around $216,000, significantly less than the $268,000 for men. The median net worth for women was $90,000, for men $100,000. Meanwhile, different family types had strikingly different levels of wealth. An individual in a couple without children had a median net wealth of $202,000. In contrast, an individual in a couple with children had a median net wealth of just $73,000 and single people had $60,000. Solo parents, who are overwhelmingly female, had a median net wealth of just $15,000.

In regional terms, some interesting patterns emerge. Auckland and the Waikato both had low median wealth, around $73,000 and $81,000 respectively, but also the greatest within-region inequalities, with mean wealth figures more than three times higher: $230,000 for Auckland, $274,000 for Waikato. Auckland’s inequality is probably explained by the well-known concentrations of both wealth, in the central and northern suburbs, and poverty, in the south and west. Waikato’s skewed distribution may reflect significant farming wealth.

In contrast, Canterbury, Wellington and the rest of the North Island had higher median wealth, in the $100,000-110,000 bracket, but less skewed distributions, with the mean around twice the median. Finally, the rest of the South Island had both the highest median wealth, at $122,000, and the highest mean wealth, at nearly $280,000, but with a relatively low level of inequality, as in Canterbury.

There is also significant inequality of wealth by age bracket: wealth increases steeply until people reach retirement age, before declining again. People under 35 have a negligible share of net wealth, while the 45-and-over age groups all have large shares of wealth compared with their share of the population. However, this is what one would expect, given the accepted lifecycle process of starting out with limited wealth (and, increasingly, student debt), accumulating wealth through working life (especially once any children have left home), then drawing down savings in retirement.

Since this cycle has operated for many generations, the above figures do not by themselves show that today’s younger generations are being particularly disadvantaged. To prove that, we would need either data showing that the equivalent cohort of young people 30 years ago were in a better position than today’s young people, or modelling showing that today’s young people will end up with lower net worth in later life than the baby-boomers have now.

Admittedly, it does seem highly likely that both those things were or will come to be true, given the much lower rates of home ownership among today’s young people and their much higher student debt, among other factors. But that judgment cannot be made based on these numbers. And there are other possible interpretations – for instance, that today’s young people will be wealthier than their parents on average, but only some of them will benefit from that trend. New Zealand economist Simon Chapple argues that Thomas Piketty’s work predicts that

“average wealth grows faster than average income over time. We know that average income has grown significantly between generations boomer and Y, and will likely continue to do so. So Piketty’s model predicts that the average wealth of the generations must be rising even faster. The coming generation will, on average, be much wealthier than the previous generation, but, partly via growing unequal inheritance, it will be more unequal in wealth.”

In addition, recent research from the Dunedin longitudinal study shows wealth inequality among late-30-somethings is just as great as in the wider population: the wealthiest 10% of 30-somethings have over half of all the wealth of that group, while the poorest 50% of their counterparts have just 5%. This finding has led Chapple, one of the study’s researchers, to conclude that the most significant wealth inequality is not ‘between generations or over the lifecycle’ but within each generation. This does not imply that inequality between generations is unimportant, far from it – but it is a reminder that wealth inequality is present everywhere, including within age cohorts.

Trusts: An important way to hold wealth
The widespread use of family trusts as a vehicle for holding wealth is often contested. Even Martin Hawes, the author of the bestselling guide to setting up trusts, says they were originally used by Roman senators ‘to circumvent laws they found inconvenient. In some ways the reasons for forming a family trust are still much the same.’ By transferring ownership of an asset – such as a house – to designated trustees, for the eventual use of others (often family members), an individual may continue to benefit from an asset – for example by living in the house – without actually owning it.

This means creditors cannot demand the asset be sold to pay them, if the individual’s business fails, nor can the government deny the individual means-tested benefits, even if they are still enjoying the use of an asset. Assets in trusts may be placed out of the reach of an individual’s spouse, in case of a divorce.

Individuals can also divert income into trusts so that when it is paid out to the beneficiaries, they may pay a relatively low rate of tax, whereas the individual might have had to pay the top rate of tax if they had declared it directly. Trusts are believed to be one of the ways by which more than half of New Zealand’s wealthiest individuals avoid paying the top rate of income tax. In recent years, Inland Revenue has estimated that it loses $300 million in revenue because of incomes being channelled through trusts, although some of the opportunities for this may since have been closed.

Attitudes to these uses of trusts vary. Hawes argues that while the public may disapprove of some uses, many are ‘legitimate.’ People who have worked hard all their lives and acquired assets should not be penalised by having means-tested benefits withheld from them, and a trust allows them to avoid that situation. Trusts also operate as an extension of limited liability rules for companies, ensuring that people do not have to lose everything if an entrepreneurial business decision does not work out.

More generally, Hawes argues, it is natural that ‘people will always try to avoid laws that they perceive to be unfair.' Others, such as the former Labour leader David Cunliffe, argue that such uses show that ‘the most privileged sector of society use their position to avoid paying a fair share of tax … That is morally wrong and should be illegal.’

Either way, a lot of New Zealand’s household wealth is held in trusts. There are, according to one recent estimate, anywhere between 300,000 and 500,000 trusts, though not all are the family trusts used to hold typical household assets. In 2001, the Household Savings Survey found that assets held in trusts were worth $93 billion, equal to about a quarter of households’ total assets at the time, and 3% of single people and 12% of couples reported having assets in a trust.

The typical amount of wealth in these trusts ranged from $180,000 for single people aged 64-75, to $730,000 for couples aged 45-54. Since wealth held in trusts is often hard to estimate, and many people in the survey could not give it an accurate value, the above figures should, however, be treated with caution.

Women and wealth
The New Zealand data showing that women typically have less wealth than men are in line with the international pattern. Both American and German studies have found significant gender wealth gaps. This can have many explanations, including biases in reporting: in surveys, women may claim a smaller share of jointly owned assets than their male partners. But international research suggests that the biggest driver is simply women’s lower earnings.

In New Zealand, over the second half of the 20th century, the average income for all women (including those not in paid work) as a percentage of men’s rose from about 20% in 1951 to 60% in 1991 – but has remained at that level ever since. Even just comparing men and women in work, the gap in average hourly earnings is now about 13%. 

Women are often employed in industries, such as aged care, that pay less on average than those dominated by men. Caring for children and other family responsibilities can take women – more often than men – out of the paid workforce for long periods. The constraints of childcare and interruptions to their career also force some women to accept part-time, low-paid or low-status work. In short, New Zealand research suggests that much of the gender pay gap is shaped by ‘discriminatory or gender-biased elements.'

This lifetime of lower earnings translates into much lower savings and wealth accumulation. In the words of American researchers Erin Ruel and Robert Hauser, ‘We can attribute a good portion of the gender wealth gap … to a lifetime of living with a gender income gap.’ This is seen most obviously in retirement: modelling by ANZ Bank indicates that New Zealand women are likely to retire with $60,000 less than their male counterparts – despite typically spending 20 years in retirement, as opposed to 14 years for men. In ANZ’s KiwiSaver accounts, the average balance for women, $8918, is almost 28% lower than the $11,396 for men.

The past five years – inequality on the rise again?
We do not have detailed data on wealth inequality since 2010, but we can make some informed guesses based on the information we do have. The NBR Rich List has increased sharply in the past five years, hinting at a growing concentration of wealth. Trends in the housing market point in the same direction. Reserve Bank data show that, of the $170 billion increase in household wealth between June 2011 and June 2014, two-thirds, or $133 billion, was in housing.45 In that time, investment in new houses was just $32 billion, so $100 billion of our increased wealth was due simply to rises in the value of existing houses.

As Salvation Army Social Policy and Parliamentary Unit analyst Alan Johnson points out:
“The bonanza of increasing house values is, of course, not evenly shared – neither in terms of geography nor income. To be the beneficiary of this bonanza clearly you had to have been able to afford to buy a house or to have owned housing in regions where there was this value appreciation. This has only been a small proportion of the population.”

Johnson argues that Auckland has accounted for roughly half the increase in the value of the housing market over the last decade, but Auckland property owners represent no more than one-fifth of the population. In addition, the number of people who own their own home is lower, and falling faster, in Auckland than anywhere else in the country.

This implies that ‘nearly half the benefits of this house price appreciation have gone to just a small proportion of New Zealanders, whom it seems likely were already amongst the wealthiest 25% of New Zealanders.' Overall, Johnson argues, ‘The house price boom has benefited a minority of New Zealanders and it would appear that this minority is becoming smaller by the month.’

This analysis points to widening wealth inequality in recent years. On top of that, the value of shares, which are much more often held by the wealthy, has risen sharply since 2010 as the stock market recovers from its GFC-induced fall. There has also been a strong increase in cash assets – deposits and interest-bearing investments – in recent years. This does not seem to be driven by a large shift in wealth from other kinds of assets, where investment has remained steady. Instead, Johnson argues, the increased saving seems to be coming out of surplus income for certain groups.

© 2015 Max Rashbrooke. Wealth and New Zealand is published by BWB Texts (Bridget Williams Books, Wellington). Reprinted by permission