Rozanna Wozniak: We had better start saving before the super runs out

COMMENT

The advertising pitches are compelling. Spend now. It has never been easier to borrow money. And savings - who is saving?

According to Treasury research, three out of 10 households have negative savings - that is, their consumption exceeds their income. Furthermore, based on their optimistic definition of saving, spending on items such as furniture and appliances is classified as savings.

Should that be a cause for concern? Yes, on three fronts. Surveys conducted for the Retirement Commission show that three in four people do not expect New Zealand Superannuation to provide enough for their retirement. Secondly, the savings rate of households is low by international standards, meaning the state has to save more on their behalf. And thirdly, New Zealanders are relying on the savings of people in other nations to invest in business and infrastructure.

The Government has acknowledged the problem, and the growing burden of costs as baby boomers head into retirement, with the creation of the Cullen Fund. The fund aims to smooth the cost of super by raking in higher taxes now.

From 2021, earnings from the fund will be used to pay part of the cost of super and, to that extent, guarantees that super will be paid at some level to retirees.

But the existence of the fund does not remove the need for higher taxes, and/or changes to superannuation benefits, or spending cuts in other areas as the proportion of the population who are drawing on super grows. Nor are there guarantees that super will continue to be paid at today's levels from the age of 65.

If there are unexpected surprises such as war, soaring oil prices or falling investment returns, the government of the day will be faced with the unpalatable choice of raising taxes, reducing the amount of super, increasing the age of eligibility or a combination of some or all of those options.

Ironically, rather than acting to offset these risks, international experience indicates the savings of New Zealanders may in fact decline in the mistaken belief that the Cullen Fund is guaranteeing retirement comfort.

For example, in Australia it is estimated that for every dollar contributed to compulsory superannuation, private savings reduce by 38c. If New Zealand follows this trend, the result will be doubly perverse. During the past 30 years life expectancy has increased by more than four years - to 76 for men and to 81 for women. By 2050, that is expected to have extended further, to 82.5 for men and 86.5 for women.

So savings need to increase merely to sustain living standards for a longer retirement plus cover additional health costs.

Spending patterns are also changing. Young people are brought up on a diet of debt, fostered by student loans and relentless pressure to keep up with their peers.

Furthermore, home ownership is declining, with a third of households now living in rented accommodation. This could result in problems because today's level of superannuation assumes retirees will be living in homes that they own (or have sufficient savings to compensate).

This level of superannuation benefits, while providing a basic income for low-income earners, is not designed to be a complete form of retirement income; 31 per cent of older people with no private provision are considered to be in hardship.

There is the prospect of today's 20 and 30-year-olds reaching retirement with few net assets and without their own roof over their heads.

The Government's Periodic Review Group believed there was sufficient uncertainty surrounding the outlook for superannuation spending and retirement savings to reconsider the issue of workplace savings. A working party was established and is due to report back soon.

Two attempts to introduce compulsory schemes have failed. Roger Douglas' 1974 scheme was targeted by the National Party, led by Robert Muldoon, as creeping socialism. Advertisements of dancing Cossacks were used to great effect during the election campaign in 1975 that returned National to power. Voters also rejected Winston Peters' version of the scheme when it was put to a referendum in the mid-1990s.

Surveys now show that an overwhelming majority of New Zealanders recognise the need to save for retirement. But many either do not save or save very little. Although there is probably little scope for many low-income earners to save more, there are middle-income New Zealanders who could - but have chosen not to.

Summarising the available information last year, Peter Harris, the chairman of the working party on workplace superannuation, found that personal savings were low and distributed unequally - a small number of households control a large percentage of the savings.

Today's younger generations are paying off student loans as well as mortgages. Those who do manage to save are usually in their 50s before they start making any worthwhile asset accumulation.And their single largest asset is usually the family home.

On average, national superannuation makes up just under 60 per cent of the income of the retired. But the variation is wide.

For those whose incomes were low during their working years, national super provides 90 per cent of their retirement income.

At the other end of the spectrum, for a small percentage of retirees national superannuation is insignificant.

The challenge for the Harris working party and decision-makers will be to find a way of persuading New Zealanders (in an encouraging way) to do what they know they should do.

Finance Minister Michael Cullen has made it clear that he is against compulsion and tax incentives. That makes the task even harder in the face of the unrelenting pressure to obtain instant gratification with those "must-buys" now.

* Rozanna Wozniak is an economic adviser to Spicers Portfolio Management.