Jamie Gray is a business reporter for the NZ Herald

Forced savings debate heats up

Politicians and fund managers alike cast an envious eye on Australia's compulsory super scheme and ask: Could it work here?

KiwiSaver now has 1.75 million members, $8 billion in funds, and is growing at a rate of around 20,000 sign-ups a month. Photo / Thinkstock
KiwiSaver now has 1.75 million members, $8 billion in funds, and is growing at a rate of around 20,000 sign-ups a month. Photo / Thinkstock

Australia's two-decade long scheme, now worth A$1.23 trillion, has been a resounding success.

Australians now have more security around their retirement and the savings mountain has made for a robust capital market, which in turn has served the economy well.

In contrast, New Zealand's efforts have been stop-start and characterised by bouts of political intervention, and its capital markets have lacked depth.

The advent of KiwiSaver four years ago is seen as a step in the right direction but for many, it does not go far enough to redress New Zealand's savings imbalance, particularly as more "baby boomers" become a greater part of the national demographic.

KiwiSaver now has 1.75 million members, $8 billion in funds, and is growing at a rate of around 20,000 sign-ups a month.

Those making a case for a compulsory scheme argue that it would provide certainty for people in retirement and would help improve New Zealand's poor savings record.

Those against it say that compulsion would act as a disincentive for people to sort themselves out. Then there is the middle ground, or "soft" compulsion, which involves people being enrolled into a scheme automatically, putting the onus on them to opt out.

David Ireland, chairman of Workplace Savings NZ - a not-for-profit, apolitical organisation - says it's time to debate the issue to figure out what is best for NZ Inc.

"At this stage it is hard to sift through the noise to work out what are vested interests and what is actually genuine belief that this will be the best savings outcome, so that is a challenge."

The case for

Revenue Minister Peter Dunne says there is already huge support for KiwiSaver and there is little point in keeping it voluntary.

"I've always felt that once KiwiSaver was established and once it achieved a certain critical mass of membership it was far more logical to have a compulsory scheme than have an optional one and I think with around 1.7 or 1.8 million Kiwis [enrolled] we're very close to that point," he said.

Tower Investments chief executive Sam Stubbs says compulsion would mean New Zealanders could help guarantee their quality of life upon retirement.

"KiwiSaver has become ubiquitous with retirement savings. The real benefit [of compulsion] is that people end up having a more comfortable retirement," he says.

"[Saving] is something that's very difficult to do voluntarily.

"Most people will not put that discretionary dollar away in savings, so if you're obliging people to do it, it will be short-term pain and long-term gain."

However, Stubbs says New Zealand needs to move past the debate on making KiwiSaver compulsory and start looking at increasing contribution rates.

"The biggest risk to KiwiSaver to my mind is not the compulsion issue, it's that people think that their contribution level will guarantee them a comfortable retirement and that's far from the truth," he says.

"If you look at most developed economies you need contribution rates around 9 or 10 per cent of your salary and arguably up to 12 per cent over the course of your working life to give you a comfortable retirement, unless of course the Government will be able to fund that for you," he says.

Making KiwiSaver compulsory and increasing contributions would also stimulate New Zealand's investment market.

"In the long term, it takes New Zealand from being a capital-poor or capital-starved country to a capital-rich one," he says.

"There's some large employers who want to get access to capital markets outside of the banks and very welcoming of an environment where there were more choices, and those choices would come as a consequence of having more savings."

The case against

David Ireland says one of the arguments against compulsion is that it can encourage people to divert what they would have saved in other areas into their superannuation.

"There are many different ways of getting towards a retirement nest egg," he says.

"The danger of compulsion is that it reduces those options, or forces people down a particular route that may not actually be the best for them in their circumstances, so compulsion without flexibility has the potential to work negative outcomes in particular circumstances."

The experts say many self-employed people would make investments in their businesses, over time, as their de-facto retirement fund.

Financial adviser Ed Schuck says making KiwiSaver compulsory would force some people to save for their retirement at the expense of reaching other financial goals, such as paying off their mortgage.

"There are also people who want to save for their retirement, but not with KiwiSaver, and so [compulsion] would disadvantage them. There would also be those who can't afford to save, and those who could save but don't want to."

He says a compulsory system could also threaten national superannuation and lead to the pension being reduced.

If this happens, co-director of the University of Auckland's retirement policy centre, Susan St John, says women and those on lower incomes will be hit the most.

"All New Zealand women, along with everyone else [over 65], get New Zealand super in their own right, independent of what their partner earns or their partner's wealth ... but women, who are doing the unpaid, valuable work of care giving do not benefit from KiwiSaver subsidies because their work is non-monetary," she says.

"If you were to make KiwiSaver compulsory and keep the subsidies as they are, then you would probably compound the problem."

Workplace Savings' Ireland says calls for compulsion could be a red herring if people continue to sign up to KiwiSaver at around 20,000 a month.

- NZ Herald

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