Compulsory super - retirement saving not priority for all

BUSINESS FORUM

BY PHIL O'REILLY

OPINION: Setting up a working group to look at New Zealand's overall savings performance is a good call. The establishment of the Savings Working Group has sparked conversations in media, blogs and elsewhere.

Observing those conversations, it would seem there is a belief that the Working Group will recommend compulsory superannuation.

I don't believe that is likely, but it is certainly worth debating because of the important issues involved.

Compulsory super would be a fairly simplistic response to the very wide and complex range of issues involved in "New Zealand's overall savings performance".

Those issues need to be carefully examined, among them: Are New Zealanders saving enough for their retirement? Is NZ Superannuation unsustain- able at current levels? Does New Zealand have too much foreign debt? Is New Zealand Inc too exposed to the whims of international investors? The first question - are New Zealanders saving enough for their retirement - has been well investigated.

Treasury research in 2004 - which considered the whole range of ways in which New Zealanders save - did not find this to be a particular problem, and neither did the 2001 MacLeod Tax Review.

When you look at the high uptake of KiwiSaver, plus the Cullen fund, plus the existing national superannuation, you would have to say that provision for retirement is not a major risk area for New Zealanders.

The answers to the other questions are less clear-cut - they all tend to start with the words: "It depends on . . ."

It depends on variables such as growing exports, improving international competitiveness, deepening capital markets, focusing on investment instead of consumption, growing skills, achieving tax and welfare reform, getting scale in small businesses, getting a better balance between numbers of private sector businesses, co-operatives and SOEs, and others.

How well we do in these areas makes all the difference to our savings, superannuation and debt. Working through those issues is a harder task than just plumping for compulsory super.

Its proponents point to its success in Singapore and Australia, both successful, high- growth economies. But it's wrong to assume that compulsory super was the main cause of that success.

While compulsory superannuation arguably contributed to the prosperity of those two countries, it was not the decisive factor.

Singapore and Australia, for reasons not primarily dependent on superannuation policy, are internationally competitive economies with high market capitalisation and high rates of economic growth.

They are well linked into the global economy and get a greater share of their wealth from international trading than New Zealand does.

By contrast New Zealand has a low rate of growth in exporting and thin capital markets. So our situations and priorities are different.

I believe New Zealand's greater priority is to overcome our smallness and remoteness, and export more branded, high value goods overseas. We have to start earning more in international markets.

Saving is a priority too, but a lesser one, since we need to earn before we can save.

Looking at the priorities separately makes this clearer: Just say we adopted compulsory super, but without improving our export growth and international competitiveness - what would be the outcome?

Our wealth would diminish.

In the context of a dynamic world where our competitors constantly strive to increase exports and growth, our failure to improve our export growth would mean comparative decline.

With less money earned from exports, there would be less to invest in productive enterprise.

Our rate of GDP growth would decline. Our pay rates would get further behind other OECD countries. Our asset base would shrink further. More of our companies, farms and assets would end up in overseas ownership.

This trend would be exacerbated by compulsory super.

Choosing among priorities is deadly serious for an individual as well as for a country.

Consider the case of a young woman who is working in a low income job to pay for her university study.

Would it be better if she was made to save part of that income for her retirement? Or would it be better if she could use it all to support herself through her studies?

Her university education could set her on a high income path, with few problems in providing for her future retirement

But removing part of her wages for compulsory super could render her unable to pay for her university course.

It could conceivably deny her the ability to achieve her qualification and get on a high income path.

Or consider a small business owner who has mortgaged his house to establish a business and whose cashflow in the early days is barely enough to support his family.

The success of his business could set him on a high income path, with few problems in providing for his future retirement.

But removing part of his income for compulsory super could make it too hard to make a living.

He needs all his earnings to maintain and grow the business, otherwise it could fail. In his case, growing the business is a higher priority than retirement savings.

For countries as well as for individuals there is a hierarchy of priorities.

Reality dictates that not every priority can be addressed at once, and choosing one can reduce our ability to choose another - so the choices we make are critical.

I believe our highest priority is to first earn our wealth through growing exports, but I would like to hear others' views about their highest priority regarding savings, super- annuation and debt.

I hope that the conversations sparked by the Savings Working Group help us all to see New Zealand's hierarchy of priorities very clearly.

Phil O'Reilly is Chief Executive of BusinessNZ.