Finance minister Dr Michael Cullen sees New Zealanders' poor levels of savings as “one of the country's most serious long-term economic problems”. Earlier this year he set up the Savings Product Working Group for advice on ways to increase work-based savings for retirement. The Group reported back in September, proposing all new workers be automatically enrolled in a savings scheme with an optional ‘opt-out' clause. Employers would deduct employee savings using a special tax code. The savings would be forwarded to the tax department, which would send the funds through a central administrator to a designated provider.

The government is yet to formally consider the report, but Dr Cullen called the plan "a practical proposal” and announced he is “committed to seeing progress made on workplace savings in my 2005 budget”.

Echoing Dr Cullen's concerns, the Savings Product Working Group claimed New Zealanders "lack confidence about how [to save]", and "put off difficult decisions and fall back on non-saving habits". It is paternalistic to suggest better judgments about savings will be made by politicians than by the individual savers who vote them into office. Further, the claim that New Zealanders do not save enough is dubious. The Tax Review 2001 examined available evidence and found “it was not clear to us that New Zealanders save too little”. Although submitters disputed this conclusion, “none… cited any supporting evidence other than a claimed consensus among relevant experts that there is a problem”. The most exhaustive attempt to assemble evidence on New Zealand's savings level and trends is contained in a 2002 paper by Treasury officials Iris Claus and Grant Scobie. They concluded that, after making adjustments for inflation, there has been no apparent downward trend in the level of private savings in New Zealand and national saving rates could be much higher than suggested by conventional measures.

Just as there is no principled reason to switch to a compulsory system, there is no evidence that voluntary arrangements are failing. As in other areas, competition is vital to promote efficiency, including cost containment and innovation over time. Both employers and employees have incentives to enter into efficient, voluntary remuneration arrangements. Around half of large employers deduct employee contributions to workplace or retail superannuation or other savings schemes from their wages. Employees who value such arrangements are likely to be attracted to firms that offer them. If other firms believe that their ability to recruit and retain staff is adversely affected by the absence of workplace superannuation or deduction facilities they would be encouraged to put them in place. People's preferences on many matters differ, as a casual survey of the range of vehicles in a workplace car park would illustrate.

Even where workplace arrangements are not available, employees can arrange so-called ‘painless' ways of saving if they wish, through automatic payments and the like – 420,000 New Zealanders choose to belong to retail superannuation schemes.

Many potential members of the proposed compulsory scheme would be in debt. In their case, a strategy of paying off debt would almost certainly yield a higher return (and a better personal outcome) than putting money into a superannuation scheme. Also, it would be less risky.

A compulsory scheme would inevitably reflect political factors, lobbying by interested parties, information problems and weak incentives. Every official review of superannuation arrangements conducted in the last 25 years has rejected the introduction of compulsory superannuation. Compelling employers to provide workplace superannuation, employees to contribute (even for a limited period), or both, would involve an unjustified intrusion into people's lives. In fact, the compulsory scheme outlined in the Working Group's report, if implemented, may well prove to be a Trojan horse for a compulsory scheme along the lines of the New Zealand First-promoted scheme that was overwhelmingly rejected by New Zealanders in a 1997 referendum.

The proposal, if implemented, is likely to put at risk existing workplace superannuation schemes, be excessively costly and impose higher compliance costs on employers. Superannuation arrangements, other than the safety net provided by New Zealand Superannuation (NZS) and the benefit system, should be a matter of personal responsibility and should be voluntary for employers, employees and other people.

Policy on superannuation should focus on lifting the rate of economic growth, reducing the cost of NZS over time below the levels projected on current parameters (eg by increasing the eligibility age for future retirees), and reducing regulatory burdens for all superannuation and saving schemes.

Voluntary arrangements provide the only effective means of ensuring that any generic workplace superannuation scheme that is developed is efficient. Employers and employees should continue to be permitted to agree voluntarily on pay and conditions of work, including whether to provide workplace superannuation.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Advisor
Ph: 04 494 9101
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz