Universality has had its day and private savings need boost, writes Kirk Hope, chief executive of the New Zealand Bankers Association.
It's Money Week. It's not just about our everyday personal money management. We also need to think about how we're providing for retirement income as a nation. The debate has recently been dominated by a narrow focus on age of eligibility issues for New Zealand Superannuation. Public debate on the best mix of public and private savings has been stifled by criticism of "privatisation" of superannuation.
Getting caught up in low level political debates in these areas reduces the quality of public discussion on how to meet our future retirement income needs in the face of an ageing population that's living much longer than previous generations. That's the reality we need to deal with.
The charge that a discussion on finding the right balance between private and public provision is more about privatisation of superannuation ignores the obvious.
We already have a mix of public and private provision of retirement income in New Zealand. Alongside the public provision of retirement income through NZ Super we have KiwiSaver, which is a private savings scheme. While there is some intervention from the government by way of incentives, the vast majority of contributions are provided by employers and employees.
Ignoring the fact that the best mix for providing retirement income is neither fully public nor fully private leads us to ask the wrong questions, and gets us caught up in issues that may not be as important as we think. The questions we need to ask are whether we should adopt a compulsory approach to private savings, retain the current voluntary arrangements, or move to a mix of the two depending on individual circumstances.
Another critical issue in respect of NZ Super is its universality. Is it necessary? Is it affordable? Most importantly, is it sustainable? The Australian equivalent of NZ Super is both means and asset tested, acting as a safety net for those without sufficient savings income. The Treasury acknowledges in its 2010 paper, Saving in New Zealand - Issues and Options, that if we were to move to compulsory private provision of superannuation then also retaining a universal government funded pension scheme would make us unique.
The provision of a state pension for everyone over a certain age, regardless of their need, assets and other income, was a great innovation in its time. It was a defining aspect of 20th century New Zealand. It had its place in a time when we had a strong economy, a large working population, and a relatively small retired population that did not on average live too long past the age of retirement. Much of that has changed. We now need to develop a sustainable solution for this century, and we're well on the way with KiwiSaver.
Other important factors are the levels of individual, employer, and government contribution levels to KiwiSaver or other private savings schemes. Australia is way ahead of us in this respect. They require a contribution of at least 9 per cent, moving to 12 per cent by the end of the decade. Long ago they decided to go the way of individual savings, with a state pension available for those in need, subject to eligibility criteria. If we were able to raise our individual contribution rates to similar levels over time, we too could dispense with the universality of our state provision of retirement income, which will otherwise grow to be an unsustainable burden on state resources. The cost of NZ Super as a proportion of GDP is projected to double from around 4 per cent now to 8 per cent in 2050.
Another core issue is the way savings are taxed in New Zealand. Other countries with higher savings rates generally have tax regimes that encourage saving and investment. We can't have an effective debate on savings without fully considering this. Many retired people in New Zealand rely on the income from their savings to make ends meet. Bank term deposits have become more attractive following the recession and the collapse of some finance companies. It makes sense to choose safe investment options in retirement.
The current environment of historically low interest rates has highlighted the need for tax incentives to encourage savings. We are still able to get relatively good returns on term deposits compared to other developed economies, but the tax on those returns provides a disincentive and doesn't align with tax treatment on other investments. A reduction in the tax on income from savings would go a long way to increase our national savings and reduce our reliance on overseas funding. This would benefit not only retired people, but all New Zealanders.
Let's not get distracted by debate around the age of eligibility for NZ Super. We have to look at the bigger picture, and accept that we already have a mix of public and private provision for retirement income. It's time to get the policy settings right around that mix. If we get that right, and incentivise higher levels of private savings, the age of eligibility becomes less relevant.By Kirk Hope