Editorial: Work-based savings the way forward

Probably the most painless way of catering for retirement is a work-based savings scheme. Money deducted from pay never touches the inside of the wallet, never features on bank account statements and is never really missed. Thus, such schemes are a prime means of encouraging personal and retirement saving. Yet they feature little in this country. Three per cent of employers offer access to superannuation schemes to just 16 per cent of the workforce. It is a lamentably low rate by international standards and good reason for the Government to have appointed a panel charged with devising work-based savings schemes that can be easily set up by employers.

New Zealand lags in this area of savings for several reasons. The present system imposes a high cost on employers and requires them to grapple with complexity and bureaucracy. From the employees' point of view, it is a considerable deterrent that membership of a scheme must be terminated if they change jobs. The increasing mobility of the labour market in recent years makes this no small factor. It was a further discouragement that employer contributions to superannuation schemes and fund earnings were taxed at 33 per cent, irrespective of investors' marginal tax rate.

The task for the Finance Minister's group is, therefore, to remove snags at both ends of the present system. Most obviously, this will mean ensuring that employee contributions are transferable from one workplace to the next, since there is nothing to suggest the labour market will be any less fluid in the years ahead.

Transferability could be provided most obviously by official recognition of a number of approved products. It is crucial that these are able to compete for work-based savings contracts, and that employers are free to choose the one that best fits their need. Work-based saving, if it is to be revived, cannot be hamstrung by the state monopoly mindset that saw workplace accident insurance made once again the exclusive business of the ACC.

Nor, in the wider sense, must work-based savings schemes be compulsory. There is, of course, a considerable allure in such a proposition. No better way exists for ensuring coverage of a high percentage of the working population. But the taskforce's job is to find ways to make such schemes attractive to employer and employee alike, so attractive that people will extend their retirement plans beyond the limited scope of the Cullen fund.

Inevitably, the question of incentives will arise. Two years ago, Treasury officials said that if these were to be introduced for work-based superannuation schemes, they should involve tax "rebates" and a cap on contributions at between $1000 and $2000, which would qualify for a lower tax rate. Michael Cullen ruled these out at the time, saying the financial cost would be too high. But with a large surplus at hand, that reasoning is more difficult to apply.

Tax incentives would be a politically safe option for Dr Cullen. But that should not be seen as a magic wand. There may be a case for minor changes where there is a clear disincentive to save. But the shortcomings of wide-ranging incentives have been demonstrated over and again. Always they are distortionary, and in this context they may well benefit wealthier, rather than poorer, contributors. In sum, they would be unlikely to increase savings rates to any great extent, certainly not enough to justify politically the dent in the Government's kitty.

The taskforce should not seize on such supposed quick fixes as the basis for work-based savings schemes. It should concentrate, instead, on removing the impediments that, currently, are so daunting for employers, and on guaranteeing ease of access, and the maintenance of access, for employees. If that is achieved, there is no reason work-based schemes cannot be as popular here as overseas, where they are often as important as state pensions and personal savings - one of the three pillars of sound provision for the future.