Green Party policy paper

Green Party policy paper

Preface by Metiria Turei...3 Summary: Kids KiwiSaver...5 Rising inequality the biggest social challenge of our time...6 The Solution: Building wealth through Kids KiwiSaver...8 The spill-over benefits for the wider economy... 12 Authorised by Metiria Tūrei Written by Robert Ashe 2

We don t save enough. And this lack of savings is hurting our children. Middle and low-income New Zealanders are struggling under National and barely have enough to get by, let alone save for their children s future. In contrast, those who already have the most wealth and income are saving the most. Since National came to power in 2008, the incomes and wealth of those at the top have increased, while the bottom half of all earners have had no real rise in their incomes at all. We want to create opportunities for all our children. So we will give parents a hand by establishing a national savings scheme Kids KiwiSaver to give all our children a better shot at life when they turn 18. Our savings plan will enable our children to build a nest egg so, by age 18, they ll have a fund to help them get a good education, put a deposit on their first home, or carry on saving for their retirement. The Green Party is committed to taking steps to reduce our high levels of inequality by making our savings scheme progressive, helping those who are least able to save with higher government-matching contributions. At the last election, the Green Party set out a $1 billion dollar suite of measures to raise our most vulnerable children out of poverty. We pledged to extend a child payment to the poorest children, introduce a school lunch programme, deliver healthy and warm houses, and much, much more. To build on this investment in our children, we are going to help their families save for their futures, delivering hope and opportunity. 3

It is time to get serious about creating wealth for our children, helping them build a nest egg where many would have once had none. The Green Party says it s time to make our kids futures better. He waka eke noa A canoe that we are all in, without exception Metiria Turei GREEN PARTY CO-LEADER Contact: Metiria.Turei@parliament.govt.nz 4

The Green Party has a suite of measures to address child poverty and lift 100,000 kids out of poverty. 1 To build on this and help give our kids the best chance in life, we will introduce a national savings scheme for all New Zealand children. Currently, those on the highest incomes can save the most while many middle and low-income New Zealanders do not have enough income to save for themselves, let alone save for their children. While income inequality is a problem in New Zealand, wealth inequality is significantly worse. 2 Our Kids KiwiSaver policy will offer all newborns a kick-start deposit and matching savings contributions to help families give their kids a great start when they turn 18. With careful saving, most children could reasonably build a nest egg of $12,900 by the age of 18 that they can then use to help fund a good education, put a deposit on their first home, or carry on saving for their retirement. Kids KiwiSaver will: 1. Be universal: The Government will put $1,000 into a Kids KiwiSaver account for every child at birth. 2. Be progressive, helping to address inequality: Families living below the poverty line will get a government top-up of $200 each year. Any contributions they make up to $100 will be matched that year. 3. Encourage saving: For all other families, annual contributions up to $200 will be matched by government. 4. Empower choices: At age 18, the savings can be used to buy a first home, pay for education 3, or be shifted into an adult KiwiSaver account. 5. Cost: $224 million over the first three years. 5

Too many families do not have enough income to give their children the start in life they need, or to shield them from the damaging effects of poverty. They lack the income to meet basic, day-to-day needs, let alone build up savings to help their children break out of poverty with a good education and money to buy a home. The Green Party has announced a comprehensive range of measures to address poverty directly, lifting the incomes of the very poorest, and delivering enhanced health and education outcomes for them. 4 Kids KiwiSaver is designed to complement these measures by building wealth and enabling our children to take the next steps in life with the best start possible. While levels of income inequality are high and rising in New Zealand, levels of wealth inequality are even higher. Recent Treasury and Ministry of Social Development research finds that while the Gini coefficient for New Zealand s income inequality sits at record high levels, the same measure for wealth inequality is more than double this. 5 Wealth in New Zealand mimics the same global phenomena economist Thomas Picketty documented in his ground-breaking work Capital in the Twenty-First Century wealth and power have become concentrated in the hands of a privileged few over time. 6 In New Zealand, the top 10 percent of people own around 52 percent of all wealth. 7 Wealth acts as a critical pool of resources, beyond income, that families and individuals can use to support themselves in a sustained way. Wealth provides the economic security to invest in education, take economic risks like starting a new business, and act as a shield against financial loss and emergencies. If wealth is not inherited or gifted, it must be built up the hard way by saving and investing income. In New Zealand, a very large share of overall household saving comes from a small number of high-income households. 8 Unsurprisingly, families with low incomes are unable to save and build wealth, 6

undermining the long-term opportunities they and their children have to break out of the poverty cycle. To help address entrenched inequality, particularly wealth inequality, the Green Party will introduce a universal savings scheme for all newborn children called Kids KiwiSaver. - Louis Brandeis, U.S. Supreme Court Justice 7

To help all families build a firmer foundation for their children, the Green Party will create a universal savings scheme for children called the Kids KiwiSaver. Our scheme modifies KiwiSaver by providing greater incentives for children to save and introducing greater flexibility to how KiwiSaver funds can be used at age 18. Under the scheme, every newborn child will get a Kids KiwiSaver account with a $1,000 initial government deposit. Low income families 9 will get a top-up of $200 each year, and any contributions they make up to $100 will be matched by government. For all other families, there will be no ongoing government top ups, but contributions up to $200 will be matched. Figure 1: Flowchart of who qualifies for what savings incentives The money in a Kids KiwiSaver account will be invested by default into a government-run investment fund. 10 Naturally, parents have the option of transferring their child s savings fund into a qualifying private provider s fund or opting out completely Kids KiwiSaver will not be compulsory. Either way, all fund providers will need to provide a savings plan for the child to ensure funds are managed in the child s best interests. 8

Money in a Kids KiwiSaver account will earn investment returns and compound over time. The money will not be accessible until the child turns 18, unless needed for a life-threatening medical emergency. At age 18, the young adult will have access to their savings in their Kids KiwiSaver account to invest in their education 11 or to help buy a first home. The savings may, at this point, also be transferred to an adult KiwiSaver account to build upon for their retirement. - Michael Sherraden, George Warren Brown Distinguished University Professor The key to the scheme is that it encourages parents, grandparents, and the wider family to actively start saving for their children early, so that their funds attract interest and compound more rapidly. To complement Kids KiwiSaver, we will update the financial literacy material in the school curriculum to include Kids KiwiSaver. This will help children improve their financial literacy and encourage their participation in the scheme. 12 The benefits Kids KiwiSaver is progressive, giving more support to low-income families while encouraging savings and financial literacy more generally. This scheme will help transform the life chances of disadvantaged children, while helping all families save for their children s future. It will give low-income children an asset base from which they can invest in education to generate higher levels of income and build the future they want. We can make the power of compounding interest work for all children. For low income families, the government kick-start and ongoing top ups will ensure that when children reach 18, they will have at least $7,600 in 9

their account. If parents set aside $2 a week for their children, the investment could be worth $12,900 by the child s eighteenth birthday. 13 Families doing better will have less government support, but if they save at the rate of $4 a week, their children will also reach 18 with $12,900. 14 For all children, this financial asset, which can only be used for investment purposes, will act as a springboard to help them reach their aspirations. For example, an 18-year-old who started work earning a Living Wage and who converted their Kids KiwiSaver into an adult KiwiSaver account making regular contributions, would turn an initial sum of $12,900 into $110,000 by age 35 a significant deposit on a first home. 15 Overseas examples of universal child savings programmes Policies that promote children saving to help them develop a strong social and economic footing are in operation throughout the world. Known as child development accounts (CDAs), they are in place in every state in the USA, Canada, Singapore, South Korea, and the United Kingdom. They are also in use in the developing world in Colombia, Ghana, Kenya, and Nepal. 1 US research into the early impact of CDAs shows that: Participating families, many who live below the poverty line, manage to save by making sacrifices and implementing creative strategies to save; CDAs increased parents security about their children s future and increased their expectations for their education; CDAs generate positive aspirational effects for the children and families alike beyond the immediate economic benefits provided from the savings, including improved self-esteem, increased fiscal prudence, and greater hope for the future. 1 David White, spokesperson for Children s Mutual, a private UK child savings provider, said, In terms of changing behaviour, this is the most successful [savings] product there s ever been. 10

The costs Infometrics costed the Green Party s proposal to modify KiwiSaver for children. Their full report can be found attached as an appendix. 16 The first year of the scheme will cost close to $60 million and then increase by around $14 million per year until it reaches a maximum annual cost of $248 million by 2037 when all New Zealand children will have Kids KiwiSaver accounts. According to Infometrics, the total cost of the scheme when fully operational would be equivalent to one thousandth of total government expenditure. The fiscal cost for the first three years of operation will be $224 million. The additional costs of administering Kids KiwiSaver, while not immaterial, are well within the margin built into the estimates modelled independently by Infometrics. The Green Party will announce its full fiscal plan for paying for this programme and others closer to the election. 17 11

As well as its obvious individual impacts, Kids KiwiSaver will have positive flow-on effects, building stronger social inclusion, boosting financial literacy, and deepening the nation's savings pool in a way that is far fairer than any currently proposed alternative. 18 Owning assets changes your whole way of thinking. In 2010, the National Government commissioned the Savings Working Group to advise on measures to boost savings and reduce our large exposure to overseas debt. The Group found that: 1. New Zealand s level of foreign debt is too high, similar to the troubled nations of Europe. 2. This debt makes the New Zealand economy vulnerable. 3. New Zealand has inadequate savings rates. Increasing domestic savings is essential to reduce this vulnerability. Put another way, New Zealand s low savings rate has meant New Zealand s investment needs have to be largely financed from overseas, pushing up interest and exchange rates. A greater pool of local savings would help create a more resilient, productive economy. 19 12

Figure 2: Household savings as a percentage of net disposable income. Source: Stats New Zealand New Zealand s savings rate remains low by international standards. 20 Last year, we ranked 22 nd out of 24 OECD countries for household savings rates. 21 Low savings rates have contributed to the relative underdevelopment of New Zealand s capital markets having a likely negative impact on business investment, business productivity, and economic prosperity more generally. The Savings Working Group highlighted the following reasons why people struggle to save: 1. Low incomes: Real average household incomes have not increased much over the last 25 years. 2. Demographics: Our aging population and smaller households have led to lower savings. 3. Tax incentives: The lack of a capital gains tax encourages people to accumulate wealth in housing rather than other financial assets. Low incomes constrain our ability to save so it s therefore unsurprising that a very large share of total household saving comes from a small number of high income households. 13

Figure 3: Household gross saving (LHS) and saving rate (RHS). Source: Statistics New Zealand 22 In fact, positive saving is concentrated in the top fifth of income earners with the lowest two-fifths showing very large dis-saving. In another study, Trinh Le et al. found that the poorest 30 percent of the population had almost no wealth at all, while the top 20 percent owned around 70 percent of all total wealth. 23 Figure 4: Average Net Worth across deciles (2006) 14

The incentives for Kids KiwiSaver will be progressive, most targeted towards those in the lowest quintile of income earners, but will help lift savings levels more generally through all income levels. The New Zealand Institute of Economic Research (NZIER) modelled higher savings rates in the New Zealand economy for the Savings Working Group. 24 They found that higher savings rates would lead to: 1. Reduced costs of capital for New Zealand businesses to finance new investment in plant, equipment, buildings, research and development, and business expansion; 2. Lower exchange rates leading to increased exports; 3. An improving current account deficit; and, 4. A lift in New Zealand s real income and living standards over time. Likewise, the Treasury finds that a higher structural level of national saving over the long term would see a reduced long-term current account deficit and a lower exchange rate. 25 Kids KiwiSaver will not only give our children a better shot at life when they turn 18, it will also help them become savers and investors for the rest of their lives. These habits, and their collective savings, will have positive flow-on benefits for our economy generally, creating jobs, raising incomes, and enhancing our overall economic resilience. 15

Sources 1 See: https://www.greens.org.nz/policy 2 Trinh Le et al. (2012) Wealth and saving in New Zealand: evidence from the longitudinal survey of family, income and employment, pp 93-118 & Brian Perry (2014), Household Incomes in New Zealand: trends in indicators of inequality and hardship 1982 to 2013, p 195. The level of income inequality, as measured by the Gini co-efficient is 33/32 compared to a level of 70/69 for wealth inequality. 3 Any income from a Kids KiwiSaver account would be exempted from student allowance means testing, where applicable. 4 See: https://www.greens.org.nz/policy 5 Perry (2014), p 195 6 Thomas Piketty (2014), Capital in the Twenty-First Century 7 Perry (2014), p 195 8 Treasury (2001), Household Saving Behaviour: A Cohort Analysis 9 Families living below the poverty line, defined as those families earning less than 60 percent of the median income. 10 For more information: https://www.greens.org.nz/policy/fairer-society/kids-kiwisaver 11 The option to invest in education will remain open until the age of 25. 12 Commission for Financial Literacy & Retirement Income executive director David Kneebone said that only 8 percent of schools were using the financial literacy material on offer from the Government. Source: http://www.stuff.co.nz/national/education/7197130/childrens-financialliteracy-overlooked-expert 13 Infometrics (2015), Fiscal Costs of the Kids KiwiSaver. Infometrics model an after-tax (and fee) return of 5 percent per annum over the life of the investment. 14 A child of parents that don t qualify as a low income family and contribute nothing to their Kids KiwiSaver account will have $2,200 at age 18. 15 Or $78,600 in real terms. Calculations are based on the following assumptions: a Living Wage job earning $19.25 an hour or $40,040 a year fulltime, an annual employee contribution of 3 percent of wages, an annual employer contribution of 3 percent less tax, an unadjusted annual tax credit of $521, an annual after-tax return of 5 percent, and an average annual inflation rate of 2 percent. 16 Also available here: https://www.greens.org.nz/policy/fairer-society/kids-kiwisaver 17 See our 2014 fiscal costings: https://www.greens.org.nz/policy/smarter-economy/fiscals 18 Removing the tax from savings, for example, as is being advocated by the savings industry, is regressive, providing most benefits to those who currently save and are disproportionately better off. 19 Savings Working Group (2011), Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity, p 40. Source: http://www.treasury.govt.nz/publications/reviewsconsultation/savingsworkinggroup/pdfs/swg-report-jan11.pdf 20 Ibid, p 28 21 OECD (2014), Economic Outlook 96 database, Annex Table 23, Household saving rates 22 Jeff Cope (2013), Measuring household distributions within a national accounts framework, quoted in Geoff Bertram (2015), A New Zealand Perspective on Thomas Piketty s Capital in the Twenty first Century, p 45 23 Trinh Le et al. (2012), p 96 24 Savings Working Group (2011), pp 60-64 25 Treasury (2007), A Synopsis of Theory, Evidence and Recent Treasury Analysis on Saving 16