Saving us from super suffering

ELOISE GIBSON

Workplace Savings New Zealand head Bruce Kerr calls the day all workers join KiwiSaver "miracle day".

Not because it will be a miracle if the exercise goes smoothly.

It's a wry reference to the television series Torchwood: Miracle Day, a Doctor Who spin-off in which the population soars and problems abound because no-one can die.

Evidence this election is that New Zealanders remain as mortal as ever, apart from a few seemingly indestructible politicians.

But, as a bubble of increasingly long-lived and active baby boomers turn 65, mass KiwiSaver registration could be seen as a miracle cure for poverty in old age, says Kerr.

His not-for-profit organisation represents the savings industry and Kerr doesn't think workers should necessarily be made to join – 1.8 million people have joined voluntarily anyway. But a push, or a nudge, is coming.

If National wins this election, all workers will be registered and given the choice to opt out. At present workers are enrolled when they change jobs. Labour would make joining and paying 2 per cent of wages compulsory, and gradually raise employers' contributions from 2 to 7 per cent.

That would put Kiwis' total savings rate on par with Australia, though not for long – Aussies' employer contributions will soon head to 12 per cent. But with petrol, insurance and GST going up, many workers are more concerned about their current rather than future funds.

For someone earning $50,000 and struggling with a high mortgage or credit card debt, saving an extra $20 (at Labour's 2 per cent employee contribution rate) or $30 a week (at National's 3 per cent) might not feel like the best use of their money.

Perhaps they would be better off saving to start a business or for a higher education. And maybe their boss would give them a bigger pay rise if the company wasn't also paying into their retirement fund. Those kind of arguments convinced the Government-appointed Savings Working Group and the Retirement Commission (in its 2010 report) to recommend that KiwiSaver stay voluntary.

On the other hand, a good retirement does not come cheaply.

"All the evidence is that most people don't think about their retirement until their late 40s," says Investment Savings and Insurance Association chief Peter Neilson.

"We [baby boomers] are not going to want to spend 35 years playing lawn bowls ... We want to be bungy jumping in the Andes."

Neilson estimates the state can afford about 20 years of basic superannuation for everyone. Beyond that, longer retirements and better lifestyles will need to be paid for by savings.

KiwiSaver is viewed as trustworthy when it comes to investing savings. The latest ASB Investor Confidence Survey found people ranked it second equal with rental property (and behind term deposits) as the best-returning investment.

A post-Budget poll commissioned by Neilson's ISI found a majority of New Zealanders in every age and political group favoured workers being required to save.

"When it [KiwiSaver] first launched there was a lot of scepticism but that has all gone away," said ASB head of private banking and wealth management Jonathan Beale.

Others point out Kiwis, left to their own devices, have a tradition of falling for mad, fad investments.

"We may have a savings challenge but, boy, we have made some dumb investment decisions over the last 20 years," says Martin Lewington, New Zealand head of default KiwiSaver provider Mercer.

Does he mean the property obsession?

"I'm thinking property, I'm thinking finance companies, I'm thinking tax-driven farming goat/film partnerships," he says.

"Those of us who've been in the market more than 10 years have seen two waves of property collapses. It seems to be that every five to seven years there's a wave of New Zealanders' savings that's just destroyed."

Paying into KiwiSaver might not be the best choice for everyone. For example, those with large credit card debt would be hard pressed to find an investment returning more than the 22 per cent interest paid on that debt, Neilson says. But in his view, most workers are better off in KiwiSaver than not.

To others, though, KiwiSaver is an expensive fix for a problem that doesn't exist. The conventional wisdom – that household debt is dragging the country backward – is questioned by some in Treasury and by Michael Littlewood, co-director of the Retirement Policy and Research Centre at Auckland University.

A typical view of the problem is summed up by a Savings Working Group graph showing the household saving rate as a percentage of disposable income in negative territory since the 1990s.

The SWG said the private-saving decline since 2003 had overwhelmed government saving and contributed to a current account deficit, leading in turn to the downgrade by credit rating agencies Fitch and Standard & Poor's this year.

But Littlewood says the household saving rate underestimates saving because it misses non-cash income such as capital gains – no small matter since New Zealanders invest heavily in property and have benefited from major rises in capital value in the past.

"The evidence we have suggests New Zealanders are saving enough for retirement and, in fact, were saving enough for retirement even before KiwiSaver started," says Littlewood.

A 2008 working paper from the New Zealand Institute of Economic Research questioned whether poor savings were behind the current account deficit, something the Business Roundtable has also doubted.

Despite Australia's mammoth savings scheme, the Retirement Commission found evidence that Aussie households had a similar-sized pot of assets to households in New Zealand, counting money invested in second properties, businesses, and other places.

The big difference was that Australians were more likely to hold money in retirement funds, while New Zealanders tended to invest directly in businesses, says Littlewood.

Although the SWG suggested beefing up KiwiSaver, its estimates of the savings effect were modest – about 60 per cent of KiwiSaver contributions by members would have been saved anyway, it said. Still, it recommended urgently paying down Government debt while staging a one-off auto-enrolment (National's policy).

It also suggested boosting returns by creating a public, low-fees default KiwiSaver fund (Green Party policy) offering a mix of age-appropriate risk levels (something that no party has yet adopted). The SWG also warned future contributions needed a big boost if KiwiSaver was going to be a major source of retirement spending (an issue that Labour picked up).

At the moment, it said, an average working male paying in 2 per cent of his salary for 40 years, with his employer paying the same, would get just 17 per cent of his final year's wages every year upon retirement.

Which leads to the most common concern about growing KiwiSaver. What will happen to people who do not retire with enough to live on?

Critics fear super-sizing the scheme will undermine New Zealand Superannuation, the current safety net for everyone aged 65 and over.

The Retirement Commission gave protection of universal super as one reason for not supporting compulsory KiwiSaver.

Littlewood worries KiwiSaver could become an excuse for means-testing the pension, which he says would distort the system in favour of rich people who are better able to hide their assets.

"If you offer incentives for private super [KiwiSaver] the only real policy justification for doing that is if you save money on New Zealand Super at the end," he says.

Labour's finance spokesman, David Cunliffe, says there is no trade-off – taxpayer funded super is a "guarantee" under Labour. It would, however, gradually raise the age to 67 as recommended by the Retirement Commission to make the scheme more affordable. "We believe that we can and should have both," says Cunliffe. Superannuation will provide for a person's "basic living needs"; while KiwiSaver will add the "comfort", he says.

WHOEVER wins the election, ongoing changes look likely. And that's a problem when people are being asked to invest their life savings, says the funds industry.

Every year, there's a spike in membership just before May, when politicians do their customary Budget tinkering, as people seem to fear losing the current scheme incentives.

Could the parties get together to try to agree on KiwiSaver's future once and for all? Cunliffe says a victorious Labour would initiate cross-party talks. "It is important that there is as much certainty as possible, especially when you're dealing with funds that more or less lock people's savings up," he says.

But a spokesman for Finance Minister Bill English says National does not envisage taking part in such talks. Post election, Kerr is hoping the parties agree on a "measured" way forward and stop tinkering.

Current indications are that would take a miracle.

 NIP, TUCK, OR SUPER-SIZE?

KiwiSaver has experienced several changes over its four-year lifespan

June 2007: KiwiSaver  launched by then-Labour government. Minimum contribution is 4 per cent each from employers and workers. Tax credit of  $1 for every $1 contributed by members, up to a maximum of $1042 a year.
April 2009: Incoming National Government drops the minimum contribution rate for employers and workers to 2 per cent each.
May 2011: National announces employers' and workers' minimum contributions to rise again to 3 per cent each from 2013. Introduces tax on employer contributions and halves member tax credit to 50c for every $1 contributed, to a maximum of $521 a year, from mid-2012.
Election 2011: National would auto-enrol all workers in 2014/15 with an option to leave, subject to returning to surplus. Labour  would make joining compulsory for workers and gradually raise employer contribution rate to 7 per cent, while leaving  worker rate at 2 per cent. Greens would create a low-cost public default fund to drive down fees.

- © Fairfax NZ News