We are a nation of borrowers; we borrow to spend, with little or no savings. The Government borrows $300 million a week to ‘sustain the country,’ while we as individuals borrow 60 cents to every dollar that we earn.
We are a nation of spendthrifts, according to a Westpac Survey.
New Zealand ranks 23rd in the OECD list of 29 countries in savings; we have the dubious distinction of saving more than the US, Greece, the Slovak Republic, Hungary, Iceland and Portugal. Apart from our usual ‘over-the-limit’ spending habit, we incur about $1.6 million on impulsive expenditure- seemingly of little or low value. In other words, we never think, not even after spending scarce money on useless things.
It may be a virtue, but in much of the rich world, thrift has become unfashionable. Household saving rates in many OECD countries have fallen sharply in recent years. America, Canada, Britain, Australia and New Zealand have the lowest rates of household saving. Americans on average, save less than 1% of their after-tax income today compared with 7% at the beginning of the 1990s. In Australia and New Zealand, personal saving rates are negative as people borrow to consume more than they earn.
Other countries with rapidly graying populations, especially Japan and Italy, have also seen their personal saving rates plummet, though from a higher level. The Japanese today save 5% of their household income, compared with 15% in the early 1990s. A few rich countries, notably France and Germany, have bucked the trend away from thrift. Germans save around 11% of their after-tax income.
What are the consequences of falling saving rates? Should governments encourage people to save more, and if so, how?
According to some economists, declining thrift is a sign of economic vigour.
Thanks to high returns from shares and, more recently, from house prices, people can achieve their financial goals with less discretionary saving. The sophistication of financial markets in many economies allows people to tap their wealth more easily, by refinancing their mortgages, for example.
For people who live in bank-dominated systems, such as Germany, that is much harder. Higher saving rates in Germany, according to this logic, are the result of poor returns and underdeveloped financial markets.
Some say that shift away from thrift is dangerous. The demographic profile of Japan or Italy may explain their falling saving rates, but other rich countries, including America, should have been saving more as the baby-boomers entered their peak earning years.
Instead, people are putting aside far too little money to pay for their retirement, relying on unfulfillable promises from bankrupt government pension plans and absurdly rosy assumptions about capital gains from their shares and houses.
This myopia greatly reduces the pool of capital available for investment and worsens existing imbalances in the global economy.
The truth is more complicated. For a start, both the right measure of saving and the appropriate rate of saving depend on whether you are looking at individuals or economies.
Another approach is simply to force people to save more, for instance by introducing compulsory contributions to new pension accounts. Australia and Switzerland have both done so. While compulsion may be an important possibility for extreme low-savers, it is decidedly illiberal and most countries have tried to encourage rather than compel more saving.
People must consider saving as a part of their domestic and national responsibility. A spendthrift society is one that will generate a future of no-good citizens.
