Could this be the end of home loan interest rate increases?

This article originally featured on Stuff and was written by Rob Stock. 

ANALYSIS: Retiring MP Trevor Mallard has suggested the Reserve Bank Te Pūtea Matua be given the power to use KiwiSaver as a monetary policy tool in its efforts to tackle inflation.

His “left field” idea was that the Reserve Bank could be allowed to increase the proportion of workers’ salaries going into KiwiSaver, for example from 2% to 4%, when it wanted to slow the economy.

Conversely, it could decrease people’s contributions when it wanted people to spend more to boost the economy.

The suggestion is prompting laughter amongst KiwiSaver watchers: Some of it nervous. Some disbelieving.

Katrina Shanks, a former National MP, and now chief executive of Finance Advice New Zealand, doesn’t think there’d be public support for Mallard’s idea, which would have to be studied, and consulted on before it was introduced.

Mallard posited his idea as being an alternative to the Reserve Bank cooling or stimulating the economy by raising or dropping the official cash rate (OCR).

The results of OCR increases, or decreases, were both slow and unpredictable, he said, largely because most home loans were on fixed rates that did not change until the term came to an end.

Allowing a change to KiwiSaver contribution rates would be a quicker solution, he said.

“They could increase, or decrease net pay almost immediately, and that way boost, or tighten the economy,” he said in his farewell speech.

Hands off people’s savings

“It’s quite a unique perspective on growing people’s wealth,” Shanks says.

KiwiSaver was designed to give people control over their retirement saving decisions, she says.

“If you allow government greater control over that, it’s very dangerous territory.”

She worries confidence in KiwiSaver would be damaged, if it became a tool of monetary policy.

Mallard’s left field suggestion is actually a dusting off of previous Labour Party policy.

Reserve Bank watcher Michael Reddell calls the idea “daft”.

It would undermine retirement saving, and was unlikely to work, he says, as it wouldn’t make people feel any less wealthy. It would have the effect of shuffling their money from one place to another.

But Reddell says the policy was one Labour took into the 2014 election, in which it took a mere 25% of the party vote.

At the time it proposed to make KiwiSaver compulsory, and proposed to ask the Reserve Bank and Treasury to develop the “variable contribution rate” proposal as a tool of monetary policy.

Susan St John, Michael Littlewood and Claire Dale from the University of Auckland’s Retirement Policy and Research Centre were critical of the idea.

The government could not control “offsetting” behaviour, they said.

This was people compensating in other areas of their money lives, such as saving less into non-KiwiSaver retirement schemes, or bank accounts, or extending their borrowing.

They warned the policy would also be unfair to the poor.

“The burden of this policy will fall on those who can’t offset any increased contributions by saving less elsewhere,” they said.

“Dampening demand by taking spending power from the low-paid while leaving those with income from capital unaffected will have negative effects amongst the least-advantaged,” they said.

Unfair to savers?

KiwiSaver expert David Boyle from Mint Asset Management says while there were more than three million people with KiwiSaver accounts, just 1.2 million were regularly saving.

That would limit the impact of manipulating KiwiSaver contributions as a monetary policy tool.

That was not only because KiwiSaver was not compulsory, but also because many people were employed as “contractors”.

“Some employers are not really acting in the spirit of the KiwiSaver legislation,” he said.

Barry Coates, a former Green Party MP, and the founder of the Mindful Money ethical investment charity, said there were obvious equity concerns with the plan.

Richer, better-paid people would periodically have larger dollar sums forcibly saved, or left in their pay packets as a result of such a policy.

But poorer households, including many renters, who were just making ends meet would be hard-pressed to cope with sudden increases in forced saving, he says.

That could result in them having to stop saving into KiwiSaver, and building long-term wealth.

The ‘volatility’ question

KiwiSaver watchers also point out that KiwiSaver funds invest in volatile assets like company shares, and assets that can sometimes do badly when interest rates are rising, like interest-paying bonds.

The Reserve Bank is battling inflation, and people’s KiwiSaver accounts have been falling in value.

It’s a long-term savings scheme, so periods of declining markets are tolerable for most savers.

But whether the public would accept being required to save more into assets that were losing value, while their mortgages were costing them more, was a big unknown.