The Reserve Bank’s Tightrope Walk: Unemployment and Inflation
The Reserve Bank of New Zealand (RBNZ) is walking a tightrope, deliberately attempting to slow the economy to curb inflation. This strategy, as RNZ’s Susan Edmunds explains, inevitably leads to a rise in unemployment – a side effect, not the primary goal. The question arises: is this the best approach, and what alternatives are being considered?
Why Engineer a Slowdown?
The RBNZ’s core objective is price stability. To achieve this, they’ve been actively trying to engineer a slowdown, potentially even a recession. When unemployment rises, there’s less competition for jobs, reducing pressure on employers to increase wages. Slower wage growth, in turn, helps to contain inflation. As Craig Renney, an economist at the Council of Trade Unions (and former RBNZ employee), describes the bank, it operates like a “robot” focused solely on hitting its inflation target.
The KiwiSaver Debate: A Potential Alternative?
A recurring question posed to Susan Edmunds is whether increasing KiwiSaver contributions could be a more targeted way to combat inflation than raising mortgage rates. The logic is that increasing contributions would reduce disposable income, dampening demand, without directly impacting homeowners. But, this idea isn’t without its drawbacks.
While a temporary increase in KiwiSaver contributions could boost national savings, it could disproportionately affect lower-income renters who don’t benefit from mortgage rate reductions and may not currently contribute to KiwiSaver. There are also concerns about the long-term impact on individual retirement savings if contributions are adjusted based on economic conditions rather than personal goals.
Former Revenue Minister David Parker has previously suggested this approach, but it hasn’t gained traction. The debate highlights a fundamental tension: balancing macroeconomic goals with individual financial well-being.
Employer Contributions and Retirement Age
A reader shared an experience illustrating a potential inequity: stopping KiwiSaver contributions upon reaching retirement age while continuing to work. Despite offering to accept a 3% wage increase in lieu of employer contributions, the request was denied. Currently, employers are not obligated to continue contributions for those over 65, potentially creating a situation where individuals performing the same job are effectively paid less.
The government contribution also ceases at retirement age, which is considered more reasonable given the receipt of NZ Superannuation.
Safely Growing Inherited Funds
Managing inherited funds responsibly is a common concern. Low-risk options like term deposits and conservative managed funds are suitable for preserving capital. Kiwi Bonds, which involve lending money to the government, offer another secure investment avenue. The Depositor Compensation Scheme provides a safety net, guaranteeing up to $100,000 in the event of a financial institution failure.
Seeking professional financial advice is strongly recommended to determine the most appropriate investment strategy based on individual circumstances.
What Happens to Bank Accounts After Death?
According to Public Trust principal trustee Michelle Pope, the fate of a bank account depends on its structure. Joint accounts pass directly to the surviving joint accountholder(s) and are not part of the deceased’s estate. Accounts with authorized signatories, however, become part of the estate upon the account holder’s death.
Frequently Asked Questions
- Does the Reserve Bank intentionally seek people to lose their jobs? No, rising unemployment is a side effect of the RBNZ’s efforts to control inflation, not the primary objective.
- Could increasing KiwiSaver contributions replace raising interest rates? It’s a potential alternative, but it could disproportionately impact lower-income individuals.
- Are my savings protected if a bank fails? Yes, the Depositor Compensation Scheme guarantees up to $100,000.
- What happens to a bank account when someone dies? It depends on whether the account is jointly held or has authorized signatories.
Pro Tip: Regularly review your KiwiSaver contributions and investment strategy to ensure they align with your financial goals and risk tolerance.
Have questions about your finances? Email Susan Edmunds at [email protected] or listen to RNZ’s podcast, No Stupid Questions.
Want to learn more about managing your money? Explore our other articles on personal finance and investment strategies here.
