Perils in compulsory saving plan

17:00, May 10 2014

Labour's proposal to make KiwiSaver compulsory for wage-earners, and use it to stimulate and dampen the economy by lifting and dropping contribution rates, would result in a different-looking New Zealand.

But what would be the likely outcomes of such a move and would politicians be able to resist further changes to KiwiSaver and find ways to use the increasing pensions pot to cut back on NZ Super payments?

The size of the savings pot

This would rise dramatically. At the end of December, there was just short of $20 billion invested in KiwiSaver, but Labour's proposal that workers be forced to save 9 per cent of before-tax salary into KiwiSaver (including employer contributions) would rapidly increase the funds under management.

Infometrics did a report last year assuming compulsory saving for wage-earners aged 25 to 65 with a savings rate rising to 10 per cent of pre-tax over roughly ten years.

Under that scenario, by 2046, there should be north of $460b in KiwiSaver, compared to just over $210b if the current non-compulsory policy settings were kept.


Employer versus employee

Labour's proposal does not specify who will have to cough up with the additional salary contributions. The current minimum contribution rate of 6 per cent is split 3 per cent from the employee and 3 per cent from the employer.

Labour said if KiwiSaver was compulsory everyone would start contributing 6 per cent increasing at 0.5 per cent or 1 per cent per annum towards 9 per cent.

Employers and Manufacturers Association chief executive Kim Campbell said the increased contributions should fall solely on the employee, so as not to damage business, but added:

"The policy is not sufficiently clear on whether employers' Kiwisaver contributions would be increased, which would not be helpful, and employers will be seeking reassurances that the variable savings rate would apply only to the employee contribution."

New Zealand Council of Trade Unions (CTU) economist Bill Rosenberg said instead of employees absorbing the increase, it would like to see 6 per cent contribution from the employer, and 2 per cent from both employees and the Government.

Compulsory savings would spark other arguments over fairness. Workers, for example, might argue that compulsory super is discriminatory as it does not force the self-employed or well-advised wealthy to save portions of their "incomes".

KiwiSavers' attitudes and behaviours

The argument goes that the population would become more financially and economically literate as their Kiwisaver accounts grew.

Peter Neilson, chief executive of the Financial Services Council, says there would be a profound shift in people's relationship with the economy. People would become more interested in the way our listed companies were managed and more demanding of fund managers in terms of the major holdings in the funds they were invested in and how they use their voting rights in the investors' best interests.

Michael Littlewood, from the University of Auckland's Retirement Policy and Research Centre, said much of the saving into KiwiSaver under compulsion would simply be the result of shifting existing saving from other areas into KiwiSaver.

In Australia, he said, people are arriving at retirement with more debt, so why would we believe the same won't happen here, with people living with mortgages longer, and then paying them off out of their retirement savings?

The shape of KiwiSaver

If KiwiSaver is compulsory, Littlewood would expect to see tax credits removed. "Their only purpose is to influence people. There would be no justification at all for them if saving was compulsory."

Neilson argued the opposite. Compared to investing in property, or a business, KiwiSaver is massively over-taxed, he said. If KiwiSaver was made compulsory, people would start lobbying for taxation fairness. Littlewood warned compelling people to save might well morph into compelling them to spend a portion of their retirement savings on a product like an annuity to turn their nest eggs into retirement income. That pattern has happened worldwide and led to people being forced to invest in high-cost, poor quality annuities.

Neilson said as people's balances grew, pressure would mount for self-managed KiwiSaver options to emerge as has happened in Australia.

The more assets there are, the more fund managers will compete to manage them, which should bring down fund fees, Neilson said.

But Littlewood scoffs at that idea. "Super fund fees are a national disgrace in Australia." He said the lobbying power of the super industry had meant legislating fees hasn't happened.

How it affects low income households Compulsory KiwiSaver forces income-poor households to save on already squeezed budgets. In 2013 New Zealand's median weekly income from wages and salaries was $844, and at a 9 per cent savings rate, weekly contributions would be $76 or $3950 yearly. Some of the claimed benefits of lifting savings rates don't benefit the poor.

Victoria University public finance chair Norman Gemmell said: "Think of all the people, many of whom are relatively low income, who don't have a mortgage."

The policy would take more income away from these people without providing any direct benefit, he said.

Rosenberg said the CTU had been advocating for compulsory KiwiSaver and Labour's proposal was a step in the right direction, but for it to be effective, the Government would need to make contributions and the minimum wage would have to increase to support low income workers.

The economy

It would increase the share of GDP controlled by financial services companies and increase their lobbying power. Littlewood said there was concern in academic circles that bloated financial services industries act as a drag on economic growth. He said New Zealanders are too often damned as bad savers, which ignores that they are investing for their retirements through paying down their mortgages and building up businesses. Suck money into managed funds and it'll be harder for people to launch, invest in, and buy businesses, so expect a less entrepreneurial small business sector, he warned.

"Which would produce the best long-term outcomes for the country? I know which I would put my money on," Littlewood said.

Neilson said compulsory super would boost the New Zealand sharemarket, as well as increasing New Zealanders' ownership of shares of foreign companies on overseas exchanges.

He also argued giant KiwiSaver funds would start investing a portion of their money in unlisted rapid-growth companies. "That would rewrite the game in terms of the pipeline to the NZX," he said.

But BNZ chief economist Tony Alexander, warned Labour's proposal to alter contribution rates to manage the economic cycle would result in a more volatile NZX.

"The policy would boost Kiwisaver contributions when the economy was booming and presumably asset prices like shares rising firmly and at high levels. The tightening of monetary policy would lead to more asset buying out of the contributions and this would amplify the equity price cycle while forcing people to buy more when equity prices are high."

Other benefits touted in improving savings rates are lower interest rates for mortgages, though some doubt the difference would be large.

Australia versus New Zealand Since 1992 superannuation has been compulsory in Australia. Contributions have been about 10 per cent of salaries but will gradually increase to 12 per cent.

Victoria University's Gemmell said compulsory KiwiSaver would bring New Zealand's scheme closer in line with Australia, and said the Australian experience showed politicians could eventually decide to lift the contributions rate even higher.

"We have a very good pension scheme in place, it seems to work very effectively and there doesn't seem to be a great call to increase that," he said. "The evidence on savings by household in New Zealand is not that we under-save at all."

One thing we could learn from Australia was not to try to use super savings as a monetary policy tool when adjusting interest rates was more effective, he said. "It would be potentially quite damaging to use KiwiSaver to try and control an overheated economy."

Westpac New Zealand chief executive Peter Clare said: "As a former Australian who has lived through compulsory superannuation for some decades I do think that it would be a good outcome nationally for New Zealand to have some compulsion to contribute to their personal retirement.

"That also provides a pool of capital which becomes investible by the professional fund management industry."

But Labour's policy had been described at a " philosophical level" only and the "practical operability" remained to be seen, he said.

NZ Super

The multi-billion dollar question is would future politicians, eyeing a massive pot of money, be able to resist raiding it to reduce the burdensome cost of NZ Super?

When New Zealand rejected compulsion in the 1997 referendum, it was because personal savings were to be used to replace the state pension.

Neilson said future politicians wouldn't dare mess with people's personal savings, but Littlewood wasn't so certain.

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