The Limits of Monetary Policy: A Case for Rethinking Inflation Control
The Reserve Bank of New Zealand’s (RBNZ) reliance on mortgage interest rates as its primary tool to combat inflation is facing renewed scrutiny. While conventional wisdom holds that increasing borrowing costs cools demand and curbs price increases, questions are being raised about the fairness and effectiveness of this approach, particularly given changing demographics and economic realities. The debate, highlighted by questions submitted to RNZ’s ‘No Stupid Questions’ podcast with financial correspondent Susan Edmunds, centers on whether alternative mechanisms, such as adjustments to KiwiSaver contributions, might offer a more equitable and impactful solution.
The current strategy disproportionately affects homeowners with mortgages, while leaving renters and those with no debt largely untouched. Younger generations and higher-income earners are less likely to be burdened by mortgage payments, further skewing the impact. This raises concerns about the distributional effects of monetary policy, with the burden of inflation control falling more heavily on those least able to absorb it.
The suggestion of leveraging KiwiSaver, initially proposed by former Revenue Minister David Parker, involves temporarily increasing mandatory contribution rates during periods of high inflation and then reducing them when price stability is restored. Proponents argue this would broaden the base of those contributing to inflation control and potentially shield savings from erosion. However, the idea is not without its challenges. A key concern is the potential impact on lower-income individuals, many of whom are not currently enrolled in KiwiSaver and could face hardship if compulsory contributions were increased.
As Edmunds explains, there are worries that adjusting contributions based on economic needs could disrupt long-term savings goals. The ideal scenario, according to this line of thinking, is for individuals to save an amount sufficient to achieve their desired retirement income, rather than an amount dictated by short-term inflationary pressures. The risk of constantly shifting contribution rates could undermine the predictability and long-term planning that KiwiSaver is designed to facilitate.
The debate also touches on the profitability of banks during periods of rising interest rates. Critics point out that increasing mortgage rates effectively transfers wealth to the banking sector, as evidenced by significant profit increases observed during the recent interest rate cycle. A KiwiSaver-based approach, in contrast, would channel funds directly into individual savings, rather than into bank coffers.
KiwiSaver and Employer Contributions: A Retirement Equity Issue
Beyond the broader question of inflation control, questions are also being raised about the fairness of KiwiSaver rules for those continuing to work past retirement age. Currently, employers are not required to continue contributing to the KiwiSaver accounts of employees over 65. This creates a situation where individuals performing the same job can be effectively paid less simply because they have reached a certain age. While the government contribution also ceases at 65 – a provision considered more reasonable given the availability of New Zealand Superannuation – the lack of employer contributions raises concerns about age-related pay equity.
Protecting Inherited Funds: Navigating Investment Options
Another area of concern revolves around the responsible management of inherited funds. Individuals tasked with managing inherited assets, even as signatories to bank accounts, often lack investment expertise and seek guidance on how to preserve and grow the funds safely. Conservative options like term deposits and cash-based managed funds are often favored due to their low-risk profile. Kiwi Bonds, which involve lending money directly to the government, also offer a secure investment avenue, currently yielding 2.5% for a one-year maturity .
The New Zealand government’s Depositor Compensation Scheme provides an additional layer of security, guaranteeing up to $100,000 in the event of a bank or finance company failure. However, experts strongly recommend seeking professional financial advice to determine the most appropriate investment strategy based on individual circumstances and risk tolerance.
Estate Administration: Understanding Account Ownership and Wills
Finally, questions regarding the fate of funds upon the account holder’s death highlight the importance of clear estate planning. According to Public Trust principal trustee Michelle Pope, funds held in a joint account will pass directly to the surviving joint account holder and will not be subject to estate administration. However, if there is no joint account holder, the funds will become part of the deceased’s estate and will be distributed according to the terms of their will. We see crucial to ensure that wills are up-to-date and that legal counsel is consulted to navigate the complexities of estate administration.
The ongoing discussion surrounding these issues underscores the need for a comprehensive review of New Zealand’s financial policies, with a focus on fairness, equity, and long-term economic stability. While the RBNZ’s reliance on interest rates may remain a central component of inflation control, exploring alternative mechanisms and addressing systemic inequities within the KiwiSaver system are essential steps towards building a more resilient and inclusive financial future.
