John Armstrong: Australia shows the way but report wimps out

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Those still looking for answers to the question of why New Zealand incomes lag so far behind Australian ones should read the last few pages of the report by the Savings Working Group.

Buried deep in the appendix is an account of how Australia's compulsory superannuation scheme has not only lifted that country's saving rate and cut its foreign indebtedness, but raised it to the kind of levels the working group says New Zealand urgently needs to replicate to spur economic investment.

Yet, the group stops short of recommending a compulsory scheme, instead suggesting a number of refinements to the design of KiwiSaver which could bring some of the benefits of compulsion without making contributions mandatory. Those refinements may improve KiwiSaver. They may avoid the negatives of compulsion by preserving choice.

But they will not spark the much-needed public debate on savings which would have been generated by a provocative recommendation for compulsory KiwiSaver with the employer contribution raised to 4 per cent, for example.

According to the report, such an option would boost savings towards levels enjoyed by Australia.

The failure to be bold is the most disappointing aspect of the report. But it is not all the savings group's fault.

Its hands were tied. National deemed current policy settings on national super eligibility and payment levels untouchable. The group could only do half its job because it was forbidden in its terms of reference to discuss the parameters of national super.

As the report notes, that leaves KiwiSaver basically an adjunct to national super - rather than a replacement for it.

This muddle over the exact role of KiwiSaver is in stark contrast to what is happening across the Tasman. There, the Holy Cow is being slowly slaughtered. By 2050 less than 30 per cent of Australians over 65 will be getting that country's equivalent of national super in full. That is because it is means-tested. By 2050, the compulsory scheme will be the source of substantial retirement incomes sufficient to stop recipients getting national super as well.

That will save Australian governments a lot of money at a time when the retirement "bulge" will be putting pressure on health funding and other government social services both there and here.

The savings group's solution is to call - though not too loudly - for the resumption of the pre-funding of future national super payments begun by Labour and then halted by National.

The report devotes considerable space to outlining New Zealand's economic vulnerability given its heavy reliance on overseas borrowing.

Yet, when it comes to the nuts and bolts of lifting household savings, it comes over all timid and tentative.

There are some worthwhile ideas in what Bill English called a "useful range of options" for the Government to mull over. Putting them all together might change savings attitudes and behaviour - but not overnight.

The report does win points for analysing distortions in the tax system which result in some savings - such as interest on bank term deposits - being heavily overtaxed.

It makes some recommendations for reducing those distortions, such as taxing interest payments on an inflation-adjusted basis. However, it gives no indication of how much that would cost in terms of lost revenue.

Such information is crucial. For a cash-strapped Finance Minister like Bill English, there is a fine line between removing distortions and unintentionally creating exchequer-draining savings incentives.

Without details of likely costs, there can be no worthwhile debate on the political viability of such recommendations. All in all, there is nothing in the report to make the public really sit up and take notice. It all adds up to a missed opportunity.