Susan St John, Co-director, Retirement Policy and Research centre introduced the session:

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1 Breakfast Briefing, Wednesday 3 November KiwiSaver turns 3: are we celebrating? Proceedings of a breakfast seminar at The University of Auckland Business School, Decima Glenn Room, Level 3, Owen G Glenn Building Wednesday 3 November Whether or not New Zealanders are saving enough is unresolved, yet there are calls for KiwiSaver to be made compulsory. Has KiwiSaver been a success? Is it welldesigned? What are the costs and benefits? Has it been good for New Zealand or just for the industry? Susan St John, Co-director, Retirement Policy and Research centre introduced the session: The Retirement Policy Research Centre has been very keenly monitoring KiwiSaver. It is a world first; auto enrolment, opt- out scheme and there is much interest in it from other countries. The RPRC has written several briefings and a working paper on the distributional implications of KiwiSaver and we have a keen interest in how schemes are compared. The RPRC produced a paper on KiwiSaver for the Pensions Policy Group in Ireland and Susan presented it there in June. Attendees at the presentation were 1

2 astonished at how the scheme was developed and that it had three major incarnations KiwiSaver 1, 2 and 3 since it was first a gleam in Michael Cullen s eye in Right from the beginning no-one has been clear about whether this is a scheme to address our national saving problem (CAD/overseas debt) or to help people save more for their retirement by increasing household savings to give people a better standard of living in retirement. The goals are actually contradictory. Policy design has been driven by a particular view of human behaviour that people save more when returns are higher and when they are tripped (or tricked) into saving. The experience in Japan indicates savings can be insensitive to returns. The incentive effects of KiwiSaver, including the opt-out auto-enrolment feature, has become impossible to evaluate because so many other things have also changed: tax cuts, the recession, and the global financial crisis. Now, there is an implicit acknowledgment that past settings have not worked by the latest tax rebalancing exercise with a rise in GST. In this context, the government has now set up another special taskforce to come up with some answers. The Savings Working Group has an unenviable task. Susan then welcomed and introduced the three speakers. Craig Ansley (formerly professor in the Accounting and Finance Department at the University of Auckland), Director Capital Markets Research at Russell Investments and is a member of the Savings Working Group (SWG). Craig discussed the saving problem faced by New Zealand as seen by the government. New Zealand s net external liabilities are very large (86% of GDP)...and rising (100% of GDP by 2014). This provides a point of reference for savings policy. New Zealand has low Gross Public debt, but high overseas indebtedness as shown in the chart. Countries that are in the most difficulty such a Greece and Ireland have high public and national debt. A high level of debt: leaves New Zealand vulnerable to creditors sentiment, limits NZ s options in dealing with future problems, and potentially limits future growth prospects. New Zealand is vulnerable to a sudden stop in the lending: High debt reduces unused borrowing capacity; as borrowing costs rise, the currency weakens; with lower growth, the tax base erodes. The SWG hopes to stimulate public discussion on savings and is looking at: - Fiscal policy government vs private saving; 2

3 - Tax policy dual tax system, indexation - KiwiSaver efficiency, compulsion, subsidies. Out of bounds for the Savings Working Group are New Zealand Superannuation, welfare policy, capital gains and land tax. Craig Ansley s full slides are available here. Alasdair Thompson; Chief Executive of Employers & Manufacturers Association (Northern) Inc (EMA). Voluntary saving is done for both short term and long term reasons at different stages in the lifetime of both individuals and families. In some countries workplace saving, via a tax on payrolls, is compulsory as they do not have universal pension systems. The ability or propensity to save is not as high in NZ as in other OECD countries because our incomes per capita (and labour productivity) are among the lowest in the OECD, and we also have a relatively (in the OECD) high number of people living on low incomes however that didn t stop the likes of Chile and Singapore introducing compulsory savings when their GDP per capita was lower than ours. Many people, especially those who leave secondary school with sub-standard numeracy and literacy skills, are either in low paid jobs or spend time on welfare. Even many people who are in work are being partially supported by Working for Families tax credits. There are approximately 300,000 families receiving Working for Families tax credits. Their ability to save is clearly impaired as the state considers their incomes (despite over 3

4 70% being on a highest marginal tax rate of 17.5%) to be so low that they need state support. Within the OECD, New Zealand has a lower per capital GDP of just over $US27,000in New Zealand s GDP per capita is almost 20% below the OECD average. Our low GDP and thus income per capita relative to other OECD countries means that our capacity for savings per capita is also going to be lower. In a general sense, way too many New Zealanders have a lifetime income insufficiency which impairs their ability to save. So not only is the per capita income of New Zealanders not high, but quite a large number (10.8%) have incomes less than half our median income level. Their capacity to save is very low, if possible at all. Our highly regarded National Super scheme makes it less essential for people to save for their retirement. It should be retained and at the point the government can get back to running a surplus, it could resume its prefunding. Better still it should use any future surplus to reduce its debt. In the event that it becomes necessary due to the aging of our population and more importantly due to people living fitter longer lives, the government should phase in a rise in the age of eligibility for National Super and/or incentivize people to stay in the workforce after the age of 65 by offering them a higher entitlement to National Super if they delay taking it up from age 65. Backing up our universal National Super are voluntary private savings of which KiwiSaver has become the focus for its 1.662m members. KiwiSaver provides substantial incentives for people to save and has attracted 1,662,000 (equal to 76.6% of the employed workforce June 2010). It is likely that the generous taxpayer funded incentives have been a key factor in its success. But these incentives are adding to the government s deficit or dis-saving. We don t see the point of the government borrowing $1.7 billion+ per annum to pay $1,043 annually into individual KiwiSaver accounts, Yes, keep the initial $1,000 taxpayer funded start-up subsidy as an incentive, but we say the $1,043 annual subsidy should be dropped. Because people taking up new jobs are automatically enrolled and many don t exercise the opt-out provision, the number of people in KiwiSaver will grow without further intervention. The extent to which the private sector has increased its reliance on foreigners savings is high. For example, according to the Reserve Bank of New Zealand, Corporate sector foreign debt has proportionately gone up 2.15 times in the last 15 years from 53.8% of GDP in June 1995 to 115.7% in June But in that same time frame Official Government foreign debt went down from 24.4% to 14.5% GDP. Total foreign debt went up from 78.2% to 130.2% GDP. However, New Zealanders appear to be responding to this by making reduction of debt and increasing savings, especially via KiwiSaver, their number one financial priority. 4

5 So given our low propensity or ability to save and our universal National Super scheme, should we increase the burden of saving by making it compulsory in New Zealand. Well, for the state to compel its citizens to do things is well accepted for such things as funding public expenditure (taxes and property rates), acquiring land for public works, compulsory military service and laws regulating illegal and antisocial behavior, but compelling people to save against their will, individual best interests or income ability is not a particularly good public policy in a democracy that values the maximization of freedom of choice and which already has a tax funded universal pension. Compulsory savings are justifiable, even essential, for social purposes, i.e. to provide means for the elderly, in countries that do not have a tax funded universal National Super Scheme as we have in New Zealand. Their way of ensuring the elderly have means in their old age is to impose compulsory savings via separate taxes on payroll directed into individualized savings accounts. New Zealand has one of the lowest levels of elderly poverty in the world and this indicates that New Zealand s universal National Superannuation scheme has been very effective. It must get the credit for us sharing with the Netherlands the lowest level of elderly poverty in the OECD. Yes, the EMA would like to see us collectively become more self reliant on domestic savings, but we are sceptical that compulsory savings would actually increase total savings. For example if those on Working for Families were forced to save then this may cause the government to have to increase its Working for Families tax credits. For others it might reduce their debt reduction or other forms of saving rather than increase net total savings. Making savings compulsory is hard to justify in the NZ context. Unlike Australia, Chile or Singapore, NZ has a tax funded universal National Super scheme. One aspect of KiwiSaver that is a pain, however, for employers is the opt-out provision. When a new employee is engaged they are automatically enrolled in KiwiSaver, but the employee has a subsequent right to opt out. Most employers don t like the forced in/opt out provision because both the employer and employee are forced to pay IRD the joint contribution and then wait ages for it to be reversed and refunded if the employee subsequently opts out. They would much rather be required to ask all new employees if they want in the first place. The EMA thinks the best solution would be that no one is required to start paying money until the forced in/opt-out period has finished 56 days after the new employee has started their job. Alternatively, if the government wants to continue the forced in requirement, employers would prefer that the opt out provision be removed, but the holiday provision be retained in order that employee KiwiSaver members retain control over what is best for them rather than to be compelled to save via KiwiSaver. 5

6 But the real challenge, of course, is to achieve policy settings that will drive increased investment to raise productivity and exports as a percentage of our GDP. Michael Littlewood, Co-director, Retirement Policy and Research Centre Michael thinks that KiwiSaver was a solution looking for a problem to resolve. It was not an example of a research-based answer to an identified shortcoming in public policy. Does that mean KiwiSaver should be dumped? Perhaps not. For KiwiSaver to justify its continuation, some basic questions need addressing. Michael Littlewood thought we should celebrate KiwiSaver s birthday with 18 questions. [A] First, fundamental questions: 1. Are New Zealanders really behaving inappropriately? We didn t really know until What we have is, perhaps, not the best information but it s the best we have. 2. Do retirees really need more financial help? The best evidence we have is that the old have the lowest levels of financial hardship (and greatest levels of satisfaction with their position) of any group in New Zealand. 3. Do we really want to increase the future economic claims of the old? 4. Is KiwiSaver really the best use of $1.2 billion in 2010? 5. Why wouldn t New Zealanders change their other saving decisions, whatever the government decides? In 2006, after about 15 years of settled, but very different public policy on saving issues, Australian households had financial assets that were about 54.5% of total net assets. The equivalent number in New Zealand for 2006 was 51.2%; not so different. 6. What is the real problem that KiwiSaver addresses? Is it financial savings for retirement? If so, where is the evidence that New Zealanders are not saving enough? In fact the evidence says they are. [B] Given KiwiSaver s continued existence, there are 12 more questions: 1. Why does the government give business to default providers? Who are they protecting? Default status seems to be worth about 60,000 free members: there is no marketing costs or risk for the default providers in collecting those members. 2. Why do we have home purchase subsidies for first home buyers? 3. Why doesn t the IRD charge for administration? Do we even know how much that subsidy is costing taxpayers? 4. If KiwiSaver s design is really about behavioural economics, why are there any tax subsidies? The 2004 Savings Working Group was captured by the glamour of behavioural economics but did not identify what the problem was. 5. Why allow children to join a retirement savings scheme? Surely, that should be available only once people start working. 6. Why require employers to contribute? 6

7 Should the country really be concerned about the total remuneration practices of employers? That should be a private matter for employers and employees to resolve. 7. Why fix the minimum benefit age? Back to behavioural economics issue if we are concerned to get people thinking about retirement saving then we should let them make use of that money as they think fit. The savings belong to the members. 8. Why isn t everyone a member? The IRD says only 38% of eligible citizens are members in employer subsidised schemes. In the old days that would be a disappointing result for a subsidised savings scheme and those schemes typically required somewhat higher contributions than KiwiSaver s. 9. Are financial assets better than clearing debt? For most New Zealanders with debt, paying that off first should be a priority. 10. Why wasn t the Retirement Commission asked to address the questions put to the SWG? The Retirement Commission is due to report in December 2010 and the SWG s project should have been part of that. 11. Can we ask that SoFIE extends beyond 2010? Once the last tranche of SoFIE data is processed for 2010, there is no current commitment to extend that longitudinal work. If, as Craig has suggested, micro data such as produced by SoFIE are important, we need to ensure its continuance. 12. Is political consensus too much to ask for? The mere presence of the SWG is a bit of an indictment. The Retirement Commission is in the midst of a review. The SWG is not just about retirement but neither is the Retirement Commission s review. Michael Littlewood concluded by saying that he was therefore happy that the SWG seems not particularly interested in KiwiSaver. That still leaves the 18 questions that need answering. Summing up Susan St John If we listen to government hype, we might think that the KiwiSaver can be judged simply on the basis of the number who have joined. This morning has shown Issues are much deeper than that. The speakers have reinforced the conclusion that KiwiSaver is very difficult to evaluate. Official Evaluations may be little more that an ex post justification. Does it affect saving? May be we will never know in a climate where GST, tax have changed dramatically and we have experienced a global financial crisis and a recession But KiwiSaver is here to stay. Like Kiwibank and KiwiRail it is part of us now. The good points have not been discussed this morning and we should not forget its positive aspects. KiwiSaver has given everyone access to a work-based scheme while not excluding non workers and it is portable which is a huge improvement over what happens in Australia. So perhaps we can celebrate, albeit modestly 7