By John Curran*
Early in my working life I was sucked into an endowment superannuation policy by a smooth-talking insurance company salesman. I thought it was the responsible thing to do at the time.
However, when I decided to go to university after several years of working, I realised the money I had in the scheme would be more useful in helping me fund my studies.
Even though I ended up losing around a third of what I put into the policy, I withdrew what I was entitled to and closed the scheme. At that stage of my life I figured I'd get a better return investing the amount I'd saved so far in my education than if I left it in a super scheme.
The National Party says it will proceed with automatic KiwiSaver enrolment in 2015 if public finances allow.
Some prominent media, political and financial industry people want the Government to go further and make KiwiSaver compulsory. If this happens the type of decision I made at an early stage of my working life would be restricted for most people.
A working person who wished to study full time, invest in a business, or pay off a mortgage more quickly would have those choices curtailed.
Anyone who already has a nest egg or is content to rely solely on NZ Super in retirement would be forced to save when they have no need or desire to do so.
Lower living standards
By forcing people who do not wish to save to contribute to KiwiSaver the government lowers their living standards over their working lives and detracts from their lifetime wellbeing. It does not matter that they will have higher savings in retirement or would otherwise have bought non-essential items, such as an extra bottle or two of wine each week.
The fact is they would have freely chosen not to save while working and forgone the extra purchasing power in their non-working years. Individuals, not governments, are best placed to decide how they should split their incomes over the working and retired parts of their lives.
Proponents of KiwiSaver compulsion will argue that many people are already enrolled in the scheme and so the shift from the current opt-out approach will not be that significant. It is true that a high share of the total workforce is enrolled in KiwiSaver - currently around 75%.
KiwiSaver subsidies are generous and many people now see the benefits of saving for their retirement. However, over half a million people in the workforce are not yet enrolled. Many of these people have chosen to opt out of KiwiSaver despite generous government subsidies because it does not suit their circumstances.
Raising national savings?
But, as proponents will ask, won't the sacrifice be worth it?
It is claimed that compulsory saving will raise our national savings and this does all sorts of amazing things; it boosts our capital markets, makes us less dependent on overseas borrowing, reduces vulnerability to economic shocks and increases long-run investment and growth.
The problem is that hard evidence for these effects is thin on the ground.
Evidence does suggest that a compulsory saving scheme can boost household and national saving. But, the boost is likely to be quite small, a fact highlighted by the Treasury in a working paper it prepared in 2010 for the Savings Working Group.
Studies have found that many people who contribute to compulsory schemes divert savings from other vehicles or increase their borrowing to maintain their purchasing power. This in fact is Australia's experience with its compulsory superannuation scheme.
The biggest contributors to the increase in net savings after the establishment of a compulsory regime are those people who were not saving beforehand and who have limited ability to borrow to offset the compulsory contributions. In other words, mostly low income people who are forced to reduce their living standards over their working lives.
Much is made of the big pool of KiwiSaver funds that would be available for investment in local enterprises. There is some evidence from emerging countries that a compulsory saving scheme can help develop capital markets. This is because markets were substantially undeveloped to begin with and extra funds pumped into the system provided them a kick-start. Chile is an example of where this happened.
But New Zealand is a developed country with open and sophisticated capital markets.
Taskforce did not recommend compulsion
The 2009 Capital Market Development Taskforce identified a number of specific issues with New Zealand markets. Most of the taskforce's proposed solutions involve better regulation, improved transparency, financial literacy education, and alternative taxation arrangements.
It is notable that it did not mention compulsory saving as a potential solution to capital market deficiencies. With good reason - it is a blunt and costly policy to address specific problems.
There is no evidence that higher levels of national saving can improve countries' economic performance over time. In fact, in the immediate period forcing higher saving can detract from economic performance because it removes spending power from the economy. What is more important for economic performance in the longer run is the ability of countries to mobilise domestic and overseas savings efficiently and get the best investment returns. This is more about the investment environment created by the tax system, financial regulations, and control over inflation than direct efforts to boost national savings.
The inclination in some quarters to see compulsory KiwiSaver as the country's economic salvation is without basis. Compulsion would hamstring those who do not want to save because they have other priorities.
The benefits of compulsion are highly uncertain, relatively small and a long way off even if they do arrive.
John Curran is a senior economist at Gareth Morgan Investments.
This article first appeared in the NZ Herald.