Opinion: Compulsory super is not what it seems

Opinion: Compulsory super is not what it seems

By Michael Littlewood*

If New Zealand introduces compulsory superannuation, for example by making KiwiSaver compulsory, one thing is certain, the changes will be significant.

How things change will depend on the detail and there will be short-term and long-term changes and effects. Not all changes are good.

It is not as simple as ‘everybody starts saving, has a better retirement and lives happily ever after’.

Very few people would argue with the concept that individuals should save for their retirement and take personal responsibility. However, it is a separate issue to force those that are not saving at all, and those who are saving but in a different way, to save via a superannuation scheme like Kiwisaver.

For many and therefore, for the country as a whole, it may be better for them to pay off their mortgage, invest in a business or buy a rental property.

For many New Zealanders, NZ Superannuation is more than adequate to meet their retirement income needs.

If we force people to save, for example to Kiwisaver, everyone will have to choose how they will respond.

There are four immediate responses available to them; substitution, increased debt, noncompliance and increased savings. People will fall in to one or a combination of these groups.

Substitution
An individual may shift money being saved elsewhere, to the compulsory scheme. The net effect may be no change to the total savings and could shift current savings to a less efficient form of savings. It also means less flexibility - not a great outcome for the individual or the country.

Increased debt
An investor may borrow money and save it in the compulsory scheme. In practice, an investor may choose to fund their compulsory saving requirements by reducing their current debt repayments (e.g. their mortgage payments).

Effectively therefore, they are borrowing to invest and their debt and risks will be above what they would otherwise have been. Borrowing to invest is probably not something that should be encouraged for the general population.

Non-compliance
Some people will choose to ignore the law and simply not save. We will create a new class of tax avoiders (compulsory super contributions are after all just another form of taxation).

Increased savings
Some people will choose to save extra. They will reduce their current spending and save instead.

The consequence is that reduced spending will mean fewer goods bought and therefore manufactured. Producing fewer goods will mean reduced staff levels for retailers and manufacturers and the social consequences of higher unemployment.

If the reduced spending is on tobacco and alcohol, this may be positive for the country and its health expenditure but it is more likely to be on other things.
 

How many people will substitute, borrow, become tax avoiders or choose to save extra is unknown. In practice, many will adopt a combination.

Overseas evidence favours the first three. (Australians saved an average $6 a week over the four years to 2009 despite compulsion. In Chile, 60% of Chileans do not contribute to its compulsory scheme.)

Even though there will be some new savings, the question has to be whether the cost of the compulsory scheme imposed on everyone justifies the increased savings that flow from just a few.

It is quite possible also, that these extra institutionalised savings may not create a greater NZ based investment pool. Much of it may be invested overseas!

Given that the best evidence New Zealand has is that most New Zealanders are currently saving adequately for their retirement needs, above what is provided by New Zealand Super, the conclusion has to be that making Kiwisaver compulsory is a political solution looking for a problem.

Making Kiwisaver compulsory also raises a number of issues:

1. Role of the government
It is important that there is a clear objective for all government policies. Is it to alleviate poverty or subsidise a financial services industry?

Few would disagree that the government has a role to play in the provision of a state benefit to alleviate poverty of the elderly. The question is whether the government also has a role to play which forces its citizens to save above this level and through a particular vehicle. Is there international evidence that compulsion might help to resolve that policy objective?

2. Default providers
The default providers i.e. the providers who would benefit most from such a decision, are not the best providers. Why should taxpayers subsidise, in an increased way, a section of the industry that is mostly overseas owned and which, in our view, is less than optimal. A shift to compulsory Kiwisaver must involve a rethink of the default providers.

3. Government guarantee
If the government forces people to save, should it mean that the government needs to provide a guarantee particularly to those that end up in a default scheme. The behaviour of some finance companies that were given a guarantee raises concerns about the potential behaviour of scheme providers who are given guarantees.

4. Government subsidies
If people have no choice but to save, should the current incentives to save (the $1,000 kick-start and the $1 for $1 MTC subsidy) no longer be provided? It does not make economic sense to force someone to save and then reward them with government borrowed money. It’s what happens in Australia but Australia seems not to notice that policy flaw.

Removing the current incentives will save the government money or redirecting the Kiwisaver tax incentives into increasing the level of New Zealand Superannuation will be more optimal in reducing poverty in retirement, if this is the objective.

5. What will happen to NZ Superannuation: is Australia a precedent?
Will the age be put back as is happening in Australia? Will the government introduce an income or asset test as applies in Australia? Will the level be reduced? Australia’s pension is a bit lower than New Zealand’s! It is important that the rules around NZ Superannuation are clearly known and the community has confidence that they will not change over the medium term (15 to 25 years). The government has said that a review of NZ Superannuation is off the agenda on the current prime minister’s term. This position is unhelpful as there needs to be long term certainty and sustainability with NZ Superannuation, for further compulsion to work.

6. Retirement more expensive
Forcing people to save will actually increase the economic cost of paying for the retirement of the Baby Boomers unless the government decides to introduce an income and/or asset test for NZ Superannuation. Increasing the amount of retirement savings will just add to the amounts that future retirees will want to be paid once they stop working. Because the government has said that it will not touch NZ Superannuation, compulsion will actually make things worse in that regard.

7. Coverage
Will the compulsory scheme apply to employees only, or include beneficiaries, children, students and stay-home parents? Do those with student loans also have to save through the compulsory scheme? How does one’s earnings-based savings scheme help close the retirement wealth gap between people moving in and out of the workforce and those who work for most of their working lifetime? Will this create a higher maximum NZ Super benefit to bridge this gap? That is, will the "poverty" test move up?

8. Hardship
Inevitably some of those who are required to save will not be able to afford to save. The hardship caused will have other immediate social implications.

Also, the impact that compulsion would have on employers in terms of the increased employer contribution costs as suddenly all employees are covered and the compliance, system change and process change costs should not be underestimated.

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Michael Littlewood is the Co-director of the Retirement Policy and Research Centre (RPRC) at the University of Auckland and a director of Kiwisaver provider, SuperLife.

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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22 Comments

"...or buy a rental property."  I got this far, and turned off. Grade ?: Fail, Michael.

"....for many NZers,  NZ superannuation is more than adequate  to meet  their retirement income needs"

Oh really?  A 2 bedroom unit  a modest suburb in Auckland is costing more in rent weekly than  the retirement income.

If someone has not saved during his/her working life and has something on the side, they go hungry.

The research I've read suggests the retirees who don't own their own home outright at retirement are the ones that struggle to make ends meet on the present level super is at.  Therefore, the first thing all NZers should do is buy their own home and ensure the mortgage is paid off prior to retirement... meaning the mortgage level must be at a level that can be realistically paid off someday!

I think alot of 30/40-somethings think that they will be able to sell the house with the mortgage and buy down to outright ownership at retirement.  Not a good strategy - as everyone will be doing that in 10-20 years time and we aren't growing the young ones as potential buyers at this stage.

That just substitutes 'house ownership' with 'other assets ( cash?) ownership" at retirement. If you've got nothing, be it a house or cash , whatever, then, sure one will be in strife. But it doesn't have to be a house! Have the equivalent to whatever house you aspire to, in cash, in the bank etc, and the dwelling cost comes out of the yield! If you need a house at that stage, for whatever reason, then just buy it......... 

Problem with cash in the bank is the interest earnings from which you pay for your accomodation - is taxed - whereas home (capital asset) ownership (at this stage!) isn't.

"Therefore, the first thing all NZers should do is buy their own home and ensure the mortgage is paid off prior to retirement..."

 

Who are YOU to tell us we must all buy and pay off a house? Many of us see owning a house as just another materialistic blood sucking bank driven device to make you live a life of poverty!

I have savings, I have family and I claim NO benefits or entitlements now! I owe YOU and Government nothing! So don't even think of imposing your will on me and others who already take care of ourselves without YOUR input!

Calm down, Justice. 

good points there , KATE.

if you take rent or mortgage out of the equation it's amazing how cheaply you can live.

the issue about super is giving current middle- agers some sense of predictability for future planning.

seems unfair to suddenly spring income testing on them after they've structured their future affairs on that not being the case.

the ultimate irony of all this is that asian countries where they don't have social welfare and the pension, are all "forced" to value the nuclear family unit whereby the parents look after everything for the children's welfare and then when they get old, the children return the favour..and they all seem happy with negligible suicide rates.

weas a socirty on the other hand, face the retirement thing with fear and gloom mixed with false jollity and most of our kids look upon us as interferences in their egocentric fantasies.

btw..i figured out the other day why youngies talk so loudly to each other..'cos they're already half deaf from their Ipod buds.

when we were kids we lived in hole in the ground..wot?

you had hole in the ground?

lucky!..we only had etc etc

What no luck chasing girls PB!

half-time at the movies, Casual,me ole mate...just got back in for a change of after-shave and coed chip implant ...waiitng for my childish mate to come round and pick me up and we're into the night.. part two.

doncha just love this new Bernardian world?

make that coded chip implant ( with source?)

"For many New Zealanders, NZ Superannuation is more than adequate to meet their retirement income needs. "

If this guy is our one of our most qualified and expert advisers on retirement, and has the ear of Govt, then this absolutely scary.

Does anyone in the real world actually believe that with the ageing population & lack of follow-up generation; plus the ever-increasing cost of health care as people get older, the present superannuation paid by those in the workforce is actually sustainable in its current form???

"Given that the best evidence New Zealand has is that most New Zealanders are currently saving adequately for their retirement needs ". 

This is in a country with a chronic current account deficit for over 30 years, net national debt nearly 100% of GDP, average net debt per person of over 150% of annual income, a tiny sharemarket only a fifth of Oz's in per capita terms.   So where is this "adequate saving"?  There is no where for it to hide!

I'm not actually a great fan of compulsion.  I would rather level the playing field by making capital gains tax compulsory on anything you claim tax deductions from (farms, rentals).  Plus decent regulation of the capital markets so people don't feel they will be ripped off at every turn if they invest.  However, since these are evidently political suicide in this country, maybe compulsion it has to be.

I think this guys has some libertarian ideological agenda, & is doing the country a deal of harm.  Which would be the usual pattern of our national decision making.

Cheers

I happen to personally know the family, and can tell you that they are very decent people. However, he is a career civil servant and academic advisor. While academia has its place, when it is not at all mixed with real world awareness, you end up with the mess that is NZ. And when what you have left is further warped by the banking and business influence, what do you call that???

How soon before the home garden becomes a taxable activity...inviting higher council rates as being 'property improvements'......how funny that the mug punter actually wastes wealth tarting up a property only to raise the 'improvement value' and have the council put the rates up....what a bloody scam....and the peasants are so thick they actually encourage it!

As time passes an increasing number of peasants can see the safety and benefits from being tenants.  When jobs are lost, moving is easy. Pity the poor buggers stuck with property in backwaters.

Warren Buffets best lesson is where he buys a replacement vehicle once in a blue moon and then insists on a hail damaged, but repaired and far cheaper one. Probably explains why he bought insurance stock. Think of the inside information he has.

So, apply these lessons in life fellow Kiwi....don't waste munny.... don't borrow munny.

 

 

 

 

 

Compulsion doesnt work end of story. As stated above this is just another tax and should not be described in any other way. Super should be means tested. At present the wealthy pay most of it back in tax which with bureaucratic waste is a no win game.

The problem in NZ is the welfare safety net now encompasses 75% of the populice and if it is not unwound (which it wont be as there are no gonads in NZ) The country will have to default withen decades.

If you want people to save for their old age you give them an incentive like you will be on a minimal survival benefit if you dont. You also allow them to invest in their own savings plan and at the same time arrest and jail  the rip off merchents who have blatently stolen an elderly generations money.

Whatever happened to the Kiwi spirit of entrepreneurship ? We need to regain the thirst for business ownership , not bloody houses ! The economy grows strong on the back of small businesses ( including family owned farms ) .

Those who build cashflow positive enterprises will not need a retirement pension or compulsory super scheme , as dictated by some plonker of a finance minister in Wellington .

Superannuation / Houses / Pensions : Pbbbbbbssssssssssst ! ( that's a Gummy Bear " raspberry " )

Well, well Rogie good start of thinking !

With education comes culture change and we may see sustainable economic strategies developing.

Didn't you say that you had to drive a truck , to pay the mortgage on your abode ................. Go to a bank for the loan ? ............. If so , more than a tadge  hypocritical to attack the very industry which allowed you to have a roof over your head , don'tcha think ?

Now now Gummy Bear...poor wee Iain aint no different from many others in wanting it all NOW and in not being able to save save save. And if it were not for the created credit..he would not have been able to afford his pooter and modem and so could not attack the very system that provided the credit he so desperately craved....another Stone Cutter success!

Yes, yes they are that stupid, and because the masses are that stupid, all any govt has to go is keep the masses side tracked with trivial matters and divisive emotive and yet irrelevant policy. Those who are in the know are too few to worry the govt of the day because the numbers do not register high enough when voting time comes around.

NZ must be crying out for someone who is not part of the system, some who will do what they can in the best interest of NZ and it's people only. What chace this hapening??? You will see what I mean by not enough numbers, by the few who use this site, who are clued up, being nowhere near what is required to cause a problem. Or is there someway that a co-ordinated effort could be put together? There is no outcome for NZ other than serious default should the status quo be allowed to continue....

Shit LloydM1...don't get so worked up mate...bugger the masses...look after number one...prepare your financial bomb shelter for the promised end.

well, i 've learnt a lot on here but never figured out what Wally/wolly was burbling on about with his reference to "pooters?"

always thought he meant poofters which he obviously is, but i now realise reading his above posts that "pooter" is his cutsey -pie marlboro man way of saying "computer"

do your great- grandkids call you " Ga Ga " also Wally/Wolly?