Brian Gaynor: Key's compulsory super talk music to ears

Prime Minister Robert Muldoon's termination of the superannuation in 1975 was the worst economic decision by any New Zealand government in the past 50 years. Photo / NZ Herald

The announcement by Prime Minister John Key that he is looking at compulsory superannuation is a watershed for a National Government.

National, which hasn't been a noted supporter of private superannuation, abolished the ground-breaking New Zealand Superannuation Scheme in 1975.

Finance Minister Bill English has consistently opposed any government supported savings scheme and this Government terminated the annual contribution to the New Zealand Superannuation Fund.

The Key Government also changed the KiwiSaver contribution formula from 4 per cent employee/4 per cent employer to 2 per cent employee/2 per cent employer.

Although KiwiSaver has been a roaring success, the accompanying table shows that we have serious problems as far as superannuation savings and overseas debt are concerned.

Since mid-2000, the country's superannuation savings have increased from just $21 billion to $24 billion while net overseas debt, the difference between our overseas borrowings and lending, has surged from $75 billion to $157 billion.

Meanwhile, Australia's total superannuation assets have risen nearly threefold from A$484 billion to A$1257 billion while its net overseas debt has increased from A$271 billion to A$654 billion.

The Australian and New Zealand figures look like this on a per capita basis:

Australians have A$56,000 of superannuation funds whereas New Zealanders have just $5500.

Australians have A$29,200 of net overseas debt while we have $35,900.

Although there are clear reasons why we must increase our savings rate, whether through a compulsory or voluntary scheme, there is widespread opposition, particularly to compulsion.

A young online National Business Review journalist wrote this week; "If the Government forces me to hand over a certain percentage of my income to fund managers to gamble on the sharemarket, that's not saving because I may prefer a flat-screen TV now to having more money for bingo when I'm 87".

This comment appeared under the headline "Why young Kiwis must reject compulsory saving."

The irony is that we once had a fantastic superannuation scheme which was terminated by Prime Minister Robert Muldoon on December 15, 1975.

This was the worst economic decision by any New Zealand government in the past 50 years and turned the country from being a potential Switzerland of the Southern Hemisphere into a low-ranking OECD country that is falling further and further behind its next-door neighbour.

If the New Zealand Superannuation Scheme was still in place our NBR journalist friend would probably be paid twice his current salary, have plenty of business journals competing for his writing skills, have a flat-screen TV in every room and still have enough money to play bingo when he reaches 87.

The scheme, which started on April 1, 1975 and was abolished by Muldoon just 37 weeks later, had the following characteristics:

It was compulsory for all employees between 17 and retirement age.

Money could only be taken out early when a contributor left the country on a permanent basis.

Each contributor had his or her own individual account and these accounts were portable.

After a short phase-in period contributions were 8 per cent of gross income, 4 per cent by employees and 4 per cent by employers.

The scheme was not taxable except for stamp and cheque duties.

Contributors could receive a lump-sum payment up to one-quarter of the value of their individual fund on retirement with the rest distributed on a regular basis.

It appears the lump-sum payments were tax-free but the regular income was subject to normal income tax.

The funds were managed by the Superannuation Corporation but private schemes could still exist as long as they complied with the provisions of the Superannuation Act 1974.

I wrote about this scheme in September 2007 under the heading "How Muldoon threw away NZ's wealth", which is still available on the Herald website.

I received a bigger response to this than any of the 800-plus columns I have written for the Herald since 1997.

A substantial majority agreed that Muldoon's decision was a disaster for the country, particularly as the compulsory scheme was replaced by National Superannuation which cost $8 billion a year and is funded from taxes.

The abolished scheme would have been worth an estimated $240 billion- plus in 2007 and would be worth around $255 billion today using the same conservative investment returns projections.

This $255 billion, or $58,300 a head, compares with our current superannuation assets of just $24 billion, although the latter does not include the $16 billion held by the New Zealand Superannuation Fund (the Australian Future Fund's A$68 billion is also not included in the Australian figures in the accompanying table).

This $255 billion would have given New Zealanders substantial retirement savings and, more importantly, would have injected significant capital into the domestic business sector to help create a much stronger, vibrant and bigger economy than we have today.

It is not unreasonable to assume that the old New Zealand Superannuation Scheme would be worth more than $300 billion today on the basis that it started in 1975, while compulsory superannuation began in Australia in 1992, and the latter is now worth A$56,000 a head.

A $300 billion value for the terminated New Zealand scheme would not be demanding as this equates to $68,600 a person and it started 17 years before compulsory superannuation across the Tasman.

Nevertheless, there is still strong opposition to any form of government superannuation intervention. The opposition comes from a number of influential commentators who continue to argue that New Zealand doesn't have a savings problem, individuals should be free to do whatever they wish with their money and incentives or compulsion do not boost savings.

The latter view is based on the belief that compulsion or incentives only shift savings from one area to another, rather than increasing the total amount of savings.

If this was the case then Australia and New Zealand would have similar superannuation assets, on a per capita basis, because the compulsory scheme across the Tasman would not have raised the country's total superannuation pool.

Compulsory superannuation would have merely shifted superannuation savings from the non-compulsory to the compulsory area.

This is clearly ridiculous as demonstrated by the accompanying table.

The next steps are for the Prime Minister to announce the terms of reference and appointees to his new expert panel.

These are critical decisions as most people have already formed a view on superannuation and the appointment of opponents to compulsion to the panel will mean that it will be a waste of time and money.

Having said that, I am not a strong advocate of compulsory superannuation as I believe it is far more important to establish a long-term scheme, whether voluntary or compulsory, that the politicians stick to and don't keep chopping and changing.

Savings is a long-term issue yet our politicians, unlike their counterparts across the Tasman, keep adjusting the country's savings policies based on the latest opinion polls.

We have two main choices; either introduce compulsory superannuation or restore the annual contribution to the New Zealand Superannuation Fund and raise the KiwiSaver contribution to 4 per cent employee/4 per cent employer.

Either option will do but it is vitally important that once we choose one of these, or some other option, we must stick to it over the longer term.

The constant u-turns on superannuation by our politicians have been major contributors to the poor performance of the domestic economy and the country's low savings rate.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.