House prices a symptom of something much bigger

John Banks and Len Brown are short-run: excitable politics. Houses and superannuation are long-run: serious policy. In serious-land fiscal and monetary moguls are under fire for a tax structure and low interest rate settings that favour investing in houses, not economy-building vehicles.

The Commission for Financial Literacy and Retirement Savings (CFLRS — was the Retirement Commission) and the insurance and finance firms’ Financial Services Council (FSC) upped the debate this month. Add that to the Treasury’s long-term fiscal projections in July. Political pressure is building.

Both came at the time the Mighty River Power board — a majority-state-owned company — conveniently decided to buy back some of the company’s newly issued shares, which have languished below the issue price since the float.

That float was not quite the poster-kid ministers needed to demonstrate their mastery of asset management. The share price slide was not an ideal introduction to neophyte share investors. Result: Meridian is priced less ambitiously.

Are taxpayer-owner-sellers getting value for their assets?

Politicians, as those of them on the right like to say, are not the finest business or finance gurus. Bill English stopped funding the Cullen Fund in 2009 and since then the fund has earned far more than would have been the cost of borrowing to keep funding it. He and Nick Smith talked up a “crisis” at the Accident Compensation Commission: its stunning investment results since suggest all that was needed was to tighten processes.

These incidents highlight a far longer-term issue: your retirement income.

The CFLRS put out a report two weeks back. The FSC held a conference last week.

The CFLRS’s recommendations covered a minimum 32 per cent proportion of over-20s on publicly funded national superannuation (implying also attention to the upper limit and so the qualifying age), changes to indexation of the amount, making KiwiSaver compulsory and reviving the Tax Working Group’s suggestion not to tax the inflation element in interest earnings.

The FSC proposed raising the age of eligibility as longevity grows (for many decades it has grown by two years a decade), making KiwiSaver compulsory and raising the minimum contribution, with the default regime for younger age groups being in higher-earning investment mixes. (English last week left the default unchanged.)

But tax was the FSC’s main focus. A swag of tables showed investing in houses — to live in and to rent out — way outguns financial investments. Capital gain is not taxed and borrowing can be set against rent. Financial investment returns are fully taxed. The effective tax rates are wildly different.

The message: buy houses. A result: house prices far above their historical relationship to wages. A solution: level the tax playing field — and incidentally, thereby cut the minimum KiwiSaver contributions needed for a decent modest retirement income from 10 to 7 per cent.

The fact that houses are unaffordable to all but the well-off or those who got their foot on the ladder before the bubble is politically problematic for National, evident in Nick Smith’s frenetic hunt for state houses to sell at subsidised rates and land to get new houses built on. Housing costs are a large part of household finances, which are a major determinant of election results.

Moreover, if tax changes encouraged some investment for retirement out of houses and into the financial and share markets, that would provide more funds to grow the economy and lessen the heavy dependence on foreigners for capital and credit.

There is very little surface sign of cabinet interest. But I understand there is some subterranean movement. When John Key steps aside as leader, that might rise nearer the surface. Labour began to shift in 2011.

Some very big policy decisions are involved — decisions that will need public consensus, not just agreement among pointy-headed conference-goers.

These involve the balance between PAYGO — public payment of retirement income out of current taxes — and SAYGO — saving upfront by the public (the Cullen fund) and by private individuals (KiwiSaver and private investments) to fund future public and individual retirement incomes.

This balance involves equity issues — and not just between the well off and poorly off.

First: intergenerational equity at a point of time. Should a younger generation have pay tax to fund an older generation and in addition have to fund more of their own pension through individual saving?

Second: transgenerational equity, that is, across generations over time. If the PAYGO/SAYGO mix is to change, should it be smooth, starting now and spread over time to avoid suddenly lumbering a generation with a big catchup?

These are among the biggest issues on the policy table now and through the next couple of decades, going to the core of how we want our society to run. House prices are just a symptom. But, then, most politics is about symptoms.