Savings plan aimed at boosting local investment - Key

The main driver of the government’s push toward compulsory savings is pretty clearly boosting funds for investment rather than ensuring adequate retirement savings.

The distinction is an important one: a savings strategy aimed primarily at maximising retirement savings would invest most of its funds offshore – a fact Prime Minister John Key acknowledged at yesterdays’ post-cabinet press conference.

The government is to set up a working group, along the lines of last year’s Tax Working Group, to look at ways to improve New Zealanders’ savings.

Although the official line is they group will have “a blank sheet of paper,” an emerging tilt in favour of a compulsory scheme along the lines of Australia is now clear.

Mr Key said that whatever the group comes up with, the government wants any increase in savings to be invested locally rather than offshore.

“International evidence shows domestic savings tend to be invested in the domestic market,” he said.

A normal non-home biased profile would see about 1% of any fund going into New Zealand firms – “if that,” he said.

But the overall aim is to reduce New Zealanders’ reliance on other people’ savings – an issue highlighted by the global financial crisis of 2007-08.

That reliance has been there since 1973, when the country’s current account first slipped into deficit and has stayed in the red ever since.

That long-running current account deficit – which approached 9% in the middle of the decade and only improved when the country slipped into recession – is one reason New Zealanders pay higher interest rates than many other countries.

There has long been a debate over whether New Zealanders have a “savings problem” with many arguing – including a group within the Treasury – that there is not a savings deficit as such.

But, again, that argument confuses the two issues of an individual’s preparation for retirement and the issue of adequate national savings to fund economic growth.

Mr Key has long held the view that there is a savings problem in New Zealand – something he acknowledged when he was the party’s finance spokesman in 2006.