Opinion: Compulsory super is not what it seems

By Michael Littlewood*

If New Zealand introduces compulsory superannuation, for example by making KiwiSaver compulsory, one thing is certain, the changes will be significant.

How things change will depend on the detail and there will be short-term and long-term changes and effects. Not all changes are good.

It is not as simple as ‘everybody starts saving, has a better retirement and lives happily ever after’.

Very few people would argue with the concept that individuals should save for their retirement and take personal responsibility. However, it is a separate issue to force those that are not saving at all, and those who are saving but in a different way, to save via a superannuation scheme like Kiwisaver.

For many and therefore, for the country as a whole, it may be better for them to pay off their mortgage, invest in a business or buy a rental property.

For many New Zealanders, NZ Superannuation is more than adequate to meet their retirement income needs.

If we force people to save, for example to Kiwisaver, everyone will have to choose how they will respond.

There are four immediate responses available to them; substitution, increased debt, noncompliance and increased savings. People will fall in to one or a combination of these groups.

Substitution
An individual may shift money being saved elsewhere, to the compulsory scheme. The net effect may be no change to the total savings and could shift current savings to a less efficient form of savings. It also means less flexibility - not a great outcome for the individual or the country.

Increased debt
An investor may borrow money and save it in the compulsory scheme. In practice, an investor may choose to fund their compulsory saving requirements by reducing their current debt repayments (e.g. their mortgage payments).

Effectively therefore, they are borrowing to invest and their debt and risks will be above what they would otherwise have been. Borrowing to invest is probably not something that should be encouraged for the general population.

Non-compliance
Some people will choose to ignore the law and simply not save. We will create a new class of tax avoiders (compulsory super contributions are after all just another form of taxation).

Increased savings
Some people will choose to save extra. They will reduce their current spending and save instead.

The consequence is that reduced spending will mean fewer goods bought and therefore manufactured. Producing fewer goods will mean reduced staff levels for retailers and manufacturers and the social consequences of higher unemployment.

If the reduced spending is on tobacco and alcohol, this may be positive for the country and its health expenditure but it is more likely to be on other things.
 

How many people will substitute, borrow, become tax avoiders or choose to save extra is unknown. In practice, many will adopt a combination.

Overseas evidence favours the first three. (Australians saved an average $6 a week over the four years to 2009 despite compulsion. In Chile, 60% of Chileans do not contribute to its compulsory scheme.)

Even though there will be some new savings, the question has to be whether the cost of the compulsory scheme imposed on everyone justifies the increased savings that flow from just a few.

It is quite possible also, that these extra institutionalised savings may not create a greater NZ based investment pool. Much of it may be invested overseas!

Given that the best evidence New Zealand has is that most New Zealanders are currently saving adequately for their retirement needs, above what is provided by New Zealand Super, the conclusion has to be that making Kiwisaver compulsory is a political solution looking for a problem.

Making Kiwisaver compulsory also raises a number of issues:

1. Role of the government
It is important that there is a clear objective for all government policies. Is it to alleviate poverty or subsidise a financial services industry?

Few would disagree that the government has a role to play in the provision of a state benefit to alleviate poverty of the elderly. The question is whether the government also has a role to play which forces its citizens to save above this level and through a particular vehicle. Is there international evidence that compulsion might help to resolve that policy objective?

2. Default providers
The default providers i.e. the providers who would benefit most from such a decision, are not the best providers. Why should taxpayers subsidise, in an increased way, a section of the industry that is mostly overseas owned and which, in our view, is less than optimal. A shift to compulsory Kiwisaver must involve a rethink of the default providers.

3. Government guarantee
If the government forces people to save, should it mean that the government needs to provide a guarantee particularly to those that end up in a default scheme. The behaviour of some finance companies that were given a guarantee raises concerns about the potential behaviour of scheme providers who are given guarantees.

4. Government subsidies
If people have no choice but to save, should the current incentives to save (the $1,000 kick-start and the $1 for $1 MTC subsidy) no longer be provided? It does not make economic sense to force someone to save and then reward them with government borrowed money. It’s what happens in Australia but Australia seems not to notice that policy flaw.

Removing the current incentives will save the government money or redirecting the Kiwisaver tax incentives into increasing the level of New Zealand Superannuation will be more optimal in reducing poverty in retirement, if this is the objective.

5. What will happen to NZ Superannuation: is Australia a precedent?
Will the age be put back as is happening in Australia? Will the government introduce an income or asset test as applies in Australia? Will the level be reduced? Australia’s pension is a bit lower than New Zealand’s! It is important that the rules around NZ Superannuation are clearly known and the community has confidence that they will not change over the medium term (15 to 25 years). The government has said that a review of NZ Superannuation is off the agenda on the current prime minister’s term. This position is unhelpful as there needs to be long term certainty and sustainability with NZ Superannuation, for further compulsion to work.

6. Retirement more expensive
Forcing people to save will actually increase the economic cost of paying for the retirement of the Baby Boomers unless the government decides to introduce an income and/or asset test for NZ Superannuation. Increasing the amount of retirement savings will just add to the amounts that future retirees will want to be paid once they stop working. Because the government has said that it will not touch NZ Superannuation, compulsion will actually make things worse in that regard.

7. Coverage
Will the compulsory scheme apply to employees only, or include beneficiaries, children, students and stay-home parents? Do those with student loans also have to save through the compulsory scheme? How does one’s earnings-based savings scheme help close the retirement wealth gap between people moving in and out of the workforce and those who work for most of their working lifetime? Will this create a higher maximum NZ Super benefit to bridge this gap? That is, will the "poverty" test move up?

8. Hardship
Inevitably some of those who are required to save will not be able to afford to save. The hardship caused will have other immediate social implications.

Also, the impact that compulsion would have on employers in terms of the increased employer contribution costs as suddenly all employees are covered and the compliance, system change and process change costs should not be underestimated.

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Michael Littlewood is the Co-director of the Retirement Policy and Research Centre (RPRC) at the University of Auckland and a director of Kiwisaver provider, SuperLife.