NZers are expected to spend more time retired than working. So what happens if NZ Super runs dry? Your view?

NZers are expected to spend more time retired than working. So what happens if NZ Super runs dry? Your view?

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.

(The debate can be viewed on the IFA's website).

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 case for compulsion
 
In defense of their position, the pro compulsion side offered the following:
  • 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)

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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13 Comments

Schiller wrote about this in the book

Irrational Exuberance, published in 2001

these schemes really have many drawbacks and unintended consequences

I don't buy the argument that compulsory savings will lead to greater financial literacy.  Under compulsion you can just do as you're told, it doesn't require you to think about it or to take an active interest.   Some people will, of course, but then they are the sort of people who would be likely to take an active interest without compulsion anyway. 

What't the point of saving anything when the govt and RBNZ are deliberately debasing the currency?

Those in Kiwisaver are highly likely to be able to afford only a Chocolate fish with their money if they get it at all.

Therein lies the problem facing almost every western government.

"NZers will spend more time retired than working. " Explain, please.

On average, most retirees live another 10 to 15 years at most, after having worked for how long?

Or have I misunderstood the quoted statement?

No, you haven't misunderstood, it was a stupid claim to make

I don't know about you, but I am planning on it.

Singapore, Australia  Chile have all had long running compulsory super.

If you argue against compulsion - you have to explain the success of these economies which I believe is driven by the long term change in attitdes from share cropper to share owner that these schemes bring along with the savings pool that drives investment.

The average Australian is very much more aware of company performance and returns and investments and all the things that drive an economy tha Kiwi's are.

I think we spend far too long debatiing the esoteric instead of simply doing what we know works.

Norm Kirk was years ahead of his time.

Gaynor did the numbers ( NZ Herald article ) and showed if it hadn't been for that terrible little  tyrant Robert Muldoon and stupid voters who could not resist the thought of getting the employers contributions back - we would have now been one of the wealthiest nations on earth with massive external balances per capita.

 

True JB, the Aussie scheme emulated what Norm Kirk put in place (and Muldoom scrapped). Even starting near 2 decades latter the Aussie scheme has massively benefitted individuals and the AU economy.

NZ KS by contrast just runs up debt for the government and dis-empowers KS members

The distinction between KS and the Aussie scheme is the Aussie scheme is tax advantageous and allows self management. It is also in a mature well regulated industry that for the most part is not loosing people’s money (unlike NZ). For Aussie’s putting your money into this is much better than into tax for a Superannuation you will probably never get if you are still young/middle age. In Aus people actually salary sacrifice into the scheme and up until limits were put on many were putting lump sums into it. It is that good and quite different to the NZ (KS your money goodbye) scheme.

It allows self management, that much is true but compiance costs are quite high so it's only realistic for the wealthier end of the community.

Performance is closely linked to the Australian share market, so if that does well it all looks good on paper.  Any time it crashes the super funds post huge losses.  If there is a major Aussie share market crash you'll quickly see how average fund management really is.

It does have some tax advantages but the flip side is total inflexibility until you retire.

Also, this scheme is untested under load.  Meaning it has never lived with an increasing load or retired people drawing down faster than contributions are made.

Ralph, drawdown will be a load issue for the ‘Cullen’ fund, not for the Aussie super scheme. AU super scheme is in individual account holders names owned and managed by the individual. It is already been drawn upon by many having being in place since the early nineties.

Individuals choose exposure to shares (local/international), property (including your own), business (including your own), bonds, term deposits etc etc and the individual can apportion across each asset class using their own assessment and/or fund managers.   

Average Aussies (same for Singapore) have very significant assets now in these schemes. They are a lot different to the NZ KiSs your money goodbye scheme.

 

It would be nice to have a currency that gains in buying power, not decreases in buyer power...

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