By Amanda Morrall
Do free-spending New Zealanders need saving from themselves and is compulsory superannuation outside of the NZ Super the way to do it?
A debate meant to stimulate national debate - and to kick off Financial Awareness Week - ended in a tie (ostensibly) but the victory on the strength of numbers and arguments fell to the yes camp in Wellington this week.
Whilst the debating teams were equally weighted (three on each side) a defection by absentee dissenter NXZ chair Andrew Harmos tipped the argument in favour of compulsion.
While Harmos (unable to make the debate in person due to an air travel snafu), was asked to argue against compulsion, so strong was his conviction in favour of it, he refused. And thus former Institute of Financial Advisors president Lynn McMoran (a last minute stand-in, reading directly from his notes) gave the pro-compulsion side the added ammunition it needed to win the debate, at least by this journalist's count.
Harmos and the others in the pro camp conceded that compulsory superannuation (KiwiSaver by another name) may not be the only game in town "but was a damn good one'' in the absence of any other clear ways of getting New Zealanders saving more seriously for retirement.
David Beattie, head of investment and co-chair for Grosvenor Financial Services, said experience has taught him that most consumers lacked the discpline to make the right choices particularly in the face of powerful consumer pressures. Further, the very real risk that the New Zealand's pension was not sustainable drove home the necessity of private savings, he added.
"It (compulsory savings) may not be good for everyone, but it's good for the vast majority of people.''
- The distinct possibility that a diminishing New Zealand Super would be insufficient to support people in old age.
- That increasing life expectancy could see years in retirement exceed time in paid labour therefore exhausting savings before death.
- The relatively large private savings of Australians, 8 million of whom have private nest eggs to see them through old age.
- The increased pool of capital that mandatory superannuation creates and the residual affects for the domestic economy.
- The reduced burden on the state pension system (re taxpayers) that comes as a result of compulsory superannuation.
- Improved financial literacy as a result of individuals taking greater control of and interest in their retirement security.
- Built-in protection from consumer pressures and other spending threats that undermine financial well-being.
Harmos, drawing on an article from May 26th, 2001 article in the The Economist magazine entitled "Super duper supers), underscored the effectiveness of compulsory superannuation in Australia. (To read highlights of the article click here.)
The article, which refers to Australian super schemes as the financial equivalent of a Swiss Army knife with its 'multiplicity of benefits' extols the virtues of compulsion for a number of reasons, least of all because of the liquidity it creates for business.
"The supers have not pushed up the savings rate, but nor have they increased unit labour costs. Instead, they have created a pool of capital in Australia that might not otherwise have existed. Collectively worth about A$1.3 trillion—much the same as GDP—they have made Australia the world’s fourth-largest market for pension savings. ''
Harmos suggested a similar, albeit more modest outcome, was possible for New Zealand, which would nurture and protect Kiwi businesses as well as stem the brain drain that was currently plaguing the country.
The case against compulsion
MP Lianne Dalziel, arguing against compulsion, challenged the idea that an alternative savings vehicle was both practical and advantageous for all New Zealanders and defended the existing New Zealander Super as a retirement scheme that was egalitarian in its treatment of men and women.
She said a more heightened focus on private savings schemes would inherently advantage men because they tended to be in paid employment longer than women and could therefore afford to save more and built up their nest eggs faster. One of NZ Superannuations greatest's features, argued Dalziel, was its equal treatment of Kiwis, regardless of gender.
"The introduction of compulsion savings could be used to threaten the future of New Zealand Superannuation which would be the end of one of the most women-friendly models of pension provisions in the world. First because there are no earnings related contributions; women receive the same payments as men even though their average incomes are lower and they have fewer years in the labour force. This contrasts with the gender neutrality of payments made by New Zealand Superannuation."
Dalziel said the New Zealand Super was also favourable to women because it did not punish them financially if their status changed.
"Each individual receives a pension in their own right, changes in their martial status do not effect the level of access to pension except for adjustment in cost of two person households to one, never is no difference for what married and single women recieve.
"And finally higher rates for those living alone mean older women are not economically disavantaged that due to the younger age of marriage and higher life expectancy they are more likely to face higher housing costs due to living alone, than men.
Additionally, Dalziel suggested that compulsion would not have the intended effect of improving financial literacy but lowering it, as people deferred responsibility for it to fund managers.
"Making superannuation compulsion would hold us back in our mission to improve this nation's financial literacy and that in fact is the most important game in town. Not just for the sake of superannuation choices we want to make but also where people invest their money generally; finance companies who underprice the level of risk we face so the investment looks a lot more secure than it is," she said.
Ed Schuck, former head of Russell Investments, said a vote for compulsion was effectively a vote against choice. He said forcing New Zealanders to use KiwiSaver as their primary means of retirement savings assumed that Kiwis did not know how to handle their finances and further that they didn't deserve the luxury of choice.
He also rejected the argument that compulsion led to increased savings.
"At no point and nowhere have I seen any research that says if we save more we'll be more prosperous economically. All we need to do is look at a place like Italy, which has very high personal savings.''
Schuck already rebuked the notion that everybody needed to save for retirement. New Zealanders already were, he argued, through New Zealand Super.
Schuck also cited the statistic of 250,000 opt-outs in KiwiSaver as evidence that many people simply could not afford to put anything into savings.
Given the choice, he said most New Zealanders intuively knew when and how best to save, maintaining that paying down debt was one of the most effective ways to do it.
"There some who want to save for retirement but they don't want to do it in KiwiSaver, and I'm one of those people out there who is investing in my retirement by paying down the mortgage.''
"Choice should be left in the hands of the consumer particularly financially literate consumer.''
(Story updated with link to the debate)