Retirement. It's not a concept people of my age frequently identify with, but over the next few years that may change, with the government introducing a subsidized super plan. People of my generation more frequently identify with debt, be that personal (credit card, overdraft, hire purchase), property mortgage, and for many: student loans. Why is this generation so indebted compared to its predecessors? Is it simply that we spend more money, or is there some other contributing factors? And, most importantly, how do we turn back the tide toward a culture of saving?
In my opinion, there are several explanations for our outrageous level of debt:
1/. Insufficent renumeration: Whether this is because of low productivity, or employer stinginess, New Zealand's real median wage has fallen far behind those paid in other OECD countries, especially Australia. This is one of the primary reasons why we have a brain drain, and a skills shortage in many sectors. In the 1950s and 60s, a whole family could exist on a median father's wage, comfortably paying off the mortgage, while the mother performed domestic duties, and yet now with both partners working, people on an average wage cannot afford to pay off a mortgage.
2/. Student debt: Students study for an tertiary education right, so they should pay for the priviledge.... However, this argument can be broken down, because it is in the interest of all New Zealander's to have better educated citizens. The government through the TEAC already invests significant resources in all students (50-66% of the cost of a university education), and yet because of the loan scheme, it does not reap the full benefit of its investment in students, because many leave to pursue debt repayment options overseas.
3/. An investment regime whereby most of NZ'ers savings outside of their own domiciles ends up in rental properties. This, along with DIY speculators has driven up the price in main centres over 50% in the last 5 years. This type of investment is not good for the economy as a whole, as it relies on imported debt to finance, making money for foreign-owned banks and investor groups, and robbing investors of their deserved returns, hence the drive to speculation.
4/. Fear - a fear that one day, a neo-liberal government could return to power in New Zealand, reintroducing policies such as means-tested pensions, and even eradication of pension entitlements except where it is a benefit for the deserving poor. So Kiwis have to build up their own investments in competition with each other, rather than in co-operation.
Posited Solutions:
1a/. Continue boosting the legal minimum wage and abolish youth rates. This would transfer more money to our youngest and most needy workers, and in the process making a job or career more attractive than a benefit. It would also allow these people to be less reliant on loans, and when in fact they were sought, would be paid off more quickly. It would also have a positive effect across the entire economy. Perhaps, also a compulsory tax-free contribution by employers of 1% of an employee's wage into the Kiwisaver scheme. The Working for Families Scheme should also be retained, as it is important that people continue to chose to have a family, as children are future workers and taxpayers.
2a/. By increasing funds to universities so that they can reduce student fees to a level whereby they become nominal, and it becomes possible again for students to work summer jobs in order to pay fees. Remove the means-testing of students that do not live at home for the student allowance. Universities should be viewed as an asset rather than a burden to the state, and funding their various programs should be their own choice, rather than by cutting costs, allowing for better planning and less wasted resources than the current approach.
3a/. Impose a capital gains tax on residential properties other than those owned or jointly owned by their occupants, including trusts and companies set up for the purposes of tax avoidance. New Zealand should become a nation of shareholders rather than landlords, as continued 'landlord'ism will return society to an era of a few "have lots", and a great many "have nones". For example, Australian private equity investors have just purchased, among other things, a controlling stake in Qantas.
4a/. Contribution to private equity groups which are prohibited from investing in residential properties is a cooperative form of investment. Middle-aged people must realise that continued property speculation is a mutually destructive battle in which all of their offspring will lose. Young people don't want to be reliant on handouts from their parents, and/or wait for proceeds from their estate.
They are a just a few ideas... Post more if you have them...
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17 comments:
Oh, FFS. You are descending already into "puerile nonsense" territory. When did you ever make money from the capital markets?
None of your proposals will have any direct affect on the liquidity levels of the capital markets.
Increasing spending on universities will have no effect on savings levels. Nor will increasing minimum wage or youth rate entitlements. That is an absurdly naive view.
Yes, we need a higher wage economy. Yes, we need a better educated workforce. But you don't do that *because* you want to encourage savings. The concepts are so indirectly related that you're bound to spend vast amounts of money without achieving the intended consequences.
You also don't encourage investment in capital markets by making it more punitive to invest in other asset classes. If you impose a capital gains tax, the first thing that will happen is that the housing market will collapse. Most small and medium sized businesses are funded through equity in private residential housing. If the housing market collapses, those SMEs will go under, with recession an immediate consequence.
New Zealand's capital markets are simply too small. A major part of that is because the public sector constitutes an inordinately high number of New Zealand's largest organisations. By my count, 66 of New Zealand's largest organisations are in the public sector.
So, back to the point. How to encourage investment in capital markets: transfer all SOEs into the Super Fund, and give super fund managers the right to decide which assets to retain on purely economic, rather than political considerations. Create contestability in the Super Fund: it should be managed by four or five competing fund managers.
Kiwisaver is a good start, but it's nowhere near good enough. It's the beginning of compulsory super, through individualised accounts. The Super Fund needs to be individualised as well. Ten years of compulsory saving will give enough money into the Super Fund to make voluntary saving a matter of habit for most New Zealanders.
And once the Super Fund is big enough, and individualised, it is politically untouchable by your so-called "neo-liberal" politicians.
By the way, it was Muldoon, hardly a "neo-liberal", who raided the superannuation scheme in 1975 for political purposes.
Parro, "3/. An investment regime whereby most of NZ'ers savings outside of their own domiciles ends up in rental properties. This, along with DIY speculators has driven up the price in main centres over 50% in the last 5 years."
Surely the value of a property transaction is set by the purchaser. There must be alot of purchasers out there to push the price up. No purchasers would see the housing bubble burst.
The answer lies with the purchasers to go where pricing is affordable (and yes you may have to change jobs but with the unemployment at 3.7% this is not an issue)
To reduce the price of new housing is easy. Free up more land for residential housing. This tightly control resource stops competion in the housing industry. Try buying a section only to build your own house in a land development project, you cant.
This is exactly the situation I am talking about - small businesses relying too heavily on financing rather than through the limited distribution of owner's equity.
That is true admittedly, the housing may collapse, however, this may be inevitable in any case, and secondly this has not even gone towards any proposed capital gains tax regime other than an outline.
Current owners who will hold onto their houses, and who also have a handsome income will be well set for retirement, but many people heading towards retirement are not on handsome salaries and may need to be issued a reverse mortgage in order to sustain their lifestyle.
This has a generational effect, where the more highly paid become an owner class, and the less well paid become a rental class. I am sure this is something that most people want to avoid. Trapping families in cycles of poverty is not the way to boost economic growth.
"This has a generational effect, where the more highly paid become an owner class, and the less well paid become a rental class. I am sure this is something that most people want to avoid."
What you are now talking about is distribution of wealth. How then do we let the wealthy keep their trappings and bring the poor up to the wealthy class?
I guess the socialists would suggest removing the wealth from the well healed and giving to the poor.
Unfortunately this has a negative effect as all become poor.
would be worth exploring answers on how to improve the wealth of the poor without taking from the wealthy.
You said: "This is exactly the situation I am talking about - small businesses relying too heavily on financing rather than through the limited distribution of owner's equity.
I don't know what the "limited distribution of owner's equity" means.
Let's take a practical example. You own a small IT company providing network infrastructure to your clients. You have 10 employees. You also have a home worth $600,000, of which you have a mortgage of $200,000.
Now, you have regular customers producing revenue of $100,000 per month. Your business costs--staffing, rent, motor vehicles, etc, are $80,000 per month.
Now, what happens in business, is that often the outgoings take place before the revenue arrives. You have two choices: either you can go to the bank and increase the mortgage facility at 9% interest to cover you until customers pay their bills, or you can go to the bank and get a business loan at 13%, and still be personally liable, providing your home as security against the debt.
Of course you're going to increase your mortgage to provide cashflow for the business, because it makes economic sense to do that.
Now, what happens if you introduce a capital gains tax? The housing market will collapse, and the $600,000 home is suddenly only worth $500,000. No longer can you use that extra $100,000 equity in your home to fund the cashflow of your business. When expenses come in, and you can't pay your bills, your business collapses.
Residential property is the most common form of security for business cashflow. If you dramatically affect the housing market, by introducing a capital gains tax, you will dramatically affect the lifeblood of cashflow for SMEs--which overwhelmingly happen to be the largest form of employment in New Zealand.
The Auckland housing market has doubled in value, on average, every ten years. Housing price increases are a direct function of population growth, and the availability of land for development. Significant housing corrections are extremely rare, and short-lived, through normal market processes. All of the projections for Auckland over the next 50 years are for consistent population increases.
There is nothing to say that a long-term house price correction will happen in Auckland. Quite to the contrary, with population growth, and no new land available for development, the market itself dictates that house prices must increase. To suggest that a significant correction is "inevitable" defies basic economics.
A CGT will lead to an inevitable loss of confidence in the housing market, with dramatic, detrimental effects on SMEs in particular.
Like I say, if you want to encourage investmentn in other asset classes, you make those other asset classes more attractive. You don't simply punish one investment form, because you end up destroying far more than you will ever achieve.
Redistribution of owners equity implies a partial sale of an incorporated company to shareholders. It doesn't have to be a publically listed company to do so.
The attitude towards borrowing from banks is wrong - this is the whole point. If you are running a successful business and seek upgrades to infrastructure and other fixed assets, it would often be better to fund them through issuing of shares rather than borrowing.
If your business is still in the margins of profitability, it is unlikely that you be granted a loan except at a high interest rate. The problem lies with good successful businesses falsely concerned with loss of control borrowing money to retain total ownership, when in many instances, the problem is a lack of oversight/criticism of the owner's plan.
Compulsory saving for retirement has got to be a good thing and a start in the right direction. When I lived in NZ, I had heard about retirement but had never thought about how I would actually save for it beyond buying a house, getting a mortgage and following the tried and 'true' road. In Switzerland I'm required to save 5% of my annual salary and my employer is required to pay franc for franc what I save. It is tax free I believe. And it is saving without even realising I'm saving. Kiwi saver sounds like a small step in the right direction ate least.
Oh, Jesus. Where do you get this crap from? How old are you, 12? Have you ever actually lived in the real world?
Take my example again. You are a small businessman owning an IT services company, employing 10 people. You do not have major plant or infrastructure. Your assets are your sales people, and your engineers. You have cashflow issues.
There isn't some magic group of investors who are going to buy shares in the business.
Likewise for a courier driver. Where is this group of shareholders prepared to invest capital in a courier driver's business?
You seem to have this mystical idea that there is a great swathe of passive investors who are prepared to invest in small business.
1)NZ dropped down the OECD together with the other English speaking countries - basically they were propped up artificially by being in the empire loosing that was like an oil producing country running out of oil and having no idea what to do. Also NZ is a country that culturally approves of OE's and has had most of the nationalism sucked out of it (yes we have some pride in the country, but not much loyalty to it and economically not a lot of faith either) this effectively creates a brain drain.
> In the 1950s and 60s, a whole family could exist on a median father's wage
Bottom like is in the 50's and 60's we were a rich country. We could pay more for our resources than other countries. Now we are much poorer and so WE are the ones getting priced off the market.
> Continue boosting the legal minimum wage
Still - we have miles to go before that effects the big picture. Those making much more than minimum wage still struggle with housing prices and debt etc.
> Perhaps, also a compulsory tax-free contribution.
Now that might help.
> The Working for Families Scheme should also be retained.
indeed - but my main argument would be that otherwise working families and families in general tend to be impoverished communities - that’s just stupid from societies point of view.
> By increasing funds to universities
Problem is that universities can be hugely wasteful and poorly directed to students needs. I would not want to just throw money at them.
> Impose a capital gains tax on residential properties other than those owned or jointly owned by their occupants
Does this not unfairly advantage home owners over non homeowners? There will always be non home owners - probably about 50% of the population - the poorer 50%. If you allow them a tax free source of income (home investment) you systematically disadvantage them. Meanwhile for the richer people you systematically discourage them from working productively and encourage them to speculate their capital on houses as opposed to job creating activities.
The last problem is the con that rich investors will pull where homes have ownership structures designed as tax dodges. It will be VERY difficult to fish these out - much easier to just have a simple tax system.
I say have a capital gains tax regardless of who owns the property.
Remember that a capital gains tax doesn’t 'hurt you' it just reduces your gain from doing nothing.
Also gerrit is right that restrictions on how and where houses can be built props up housing prices.
IP,
> Significant housing corrections are extremely rare, and short-lived, through normal market processes.
In theory home prices would be a function of various factors like inflation, population to land ratios, home ownership rates and income and increase at the rate that ratio increases. Over hundreds of years they do increase that that sort of rate. so you coulddraw a line through the graph to show an expected price by time. Few doubt that the graph is significantly above that line at present.
If our businesses are all using home loans to finance themselves we are “screwed” housing price drops are not actually all that rare – if you take a hundred year time frame you will have quiet a number of very significant drops in that period – each of which is able to cripple a good portion of the businesses you describe.
Also we may have an example of how markets undervalue the impact of rare events here. If in a disaster we loose all our businesses and NZ finds it very hard to recover then AND we know that significant housing price corrections occur every 20 years or so lets say (depending on the market etc) NZ’s tendency to borrow huge amounts on housing is something that MUST be stopped unless we want to be a poor performing economy over the next hundred years constantly having cash flow based booms followed by crushing blows to our productivity.
(ie inconistant incentives for productive investment)
> There isn't some magic group of investors who are going to buy shares in the business.
the problem, it would seem, is that NZ doesn't have a efficient private equity market. Which is a bit self fufilling because our companies arent seeking it and our systems arent set up properly. The market for prvate equity would be more efficient in the US for example.
Some effort could be put into setting up such a market - labour mentioned that in their economic development policy but maybe a more concerted effort is required
GNZ
One thing we do have to face up to is that New Zealand is no longer a first world country. We think we are but we are not. Our resources have been depleted, as Anon says, and we (as a nation) havent managed to generate any real, value added export alternative.
Take a real hard look at the public infastructure New Zealand owns. It is in a very poor state of repair. Be it the rickity train sets/track in Auckland and Wellington, the disgrace that is the Kopu bridge, the lack of power generation capacity, our poor health system, etc.,etc.,etc.
So we need to start by improving our productivity to increase our earnings. Simply raising wages without improving the value of the goods and services provided by the workers is not a sustainable long term answer.
That should be the first priority to get New Zealand back up as a first world country. Check out Botswana to see how it is done.
No we cannot save for our retirement as much of our income is going to have to go into infastructure replacement that should have been implemented for the last 40 years.
Why are we sitting on a 9-12 Billion surplus by the way? Most overseas debt is by private individuals and companies not the State. So why does the State not spend on infastructure and resources required to lift us up to first world standard and increase workers ability to earn more by proper education and training,
We should be encouraging overseas owners to reinvest their profits here in New Zealand. Why not add a hefty levy on money being exported? It is after all just a commodity.
Private equity market sounds like one good investment vehicle to keep the money here. And as a consequence it may stem the tide of New Zealands biggest export, her educated people.
Once the money has been invested and reinvested can we build a better future.
Jeez sounding like a socialist now!
The New Zealand people have started down the track of telling private companies how to function (the state ordered breakup of the privately owned Telecom is one starter) so telling them to retain profits in New Zealand (for a long term bigger gain) should not be to difficult.
Releasing some of that surplus (worlds second biggest) into the pockets of every day New Zealanders would do a hell of a lot for increasing our wealth.
Absolutely Heine,
No government should tax more then is required to run the services we (the people) decide are require. Be it health, education, roading, defence, foreign aid, whatever.
The current government has plundered the earning power of this generation (who are trying to plan and save for retirement) for what purpose again?
How much more is required to be squirreled away?
And for what rainy day? Hopefully for when this generation retires and requires taking care off!
Then we dont have to plan for our retirement savings.
But I agree dont take it from the people in the first place!!
It is going to be an interesting day if (and it is a big if) this government retains the treasury benches in 2008. What will they do with all this extra income they are, through taxation, plundering?
I guess more unproductive civil servant, that should soak it up.
Instead of promoting productive, wages boosting export sectors.
All those wealth taxes the parrot proposes, do nothing to create more productive wealth. More productive wealth means higher wages and a lift in our standard of living.
But that is considered trickle down theory so by cannot be entertained as acceptable.
Instead this government is taking wealth from the wealthy and storing it for a rainy day. It is not doing nothing with it to make the poor wealthy.
It just kills the economy.
The point when we start making record surpluses should be more than enough evidence that we are being taxed too much. Imagine if every single Kiwi had a part of that multi billion dollar surplus in their back pockets?
Tax cuts led by President Bush has led to the creation of 9 million new jobs from 137.4 million to 146 million up to Jan 07.
Sounds to me like putting more money back to the workers seems like a brilliant idea.
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Productively and encourage them to speculate their capital on houses as opposed to job creating activities.
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