Michael Littlewood: KiwiSaver - and the problem is?

The 2005 Budget announced a "compulsory, opt-out" programme called "KiwiSaver" to help fix our retirement savings "problem" and set us all on the asset-ownership path.

I am apparently part of a group described by the Minister of Finance as "one or two strange people who think we don't have a savings problem" (Herald, May 20). What I actually say is that there is no evidence we have a retirement saving problem. Here is the Government's evidence for the "problem". I offer a brief response on each:

* Household saving numbers. Households have apparently been spending more than they earn for 12 years. If we have really been "dis-saving" for 12 years, households would by now have spent all the assets they owned 12 years ago. That clearly isn't true and no one can sensibly argue that it is. These numbers are simply unhelpful for understanding if households are "saving".

* Balance of payments. A traditional economic view describes a balance of payments deficit as drawing on others' savings to meet our capital needs. But more than 80 per cent of our current deficit pays an investment return on $200 billion invested here by overseas investors. Does anyone suggest we shouldn't attract overseas investment? Or that, having got it, we should pay a lower-than-market return? Or that a patriotic New Zealand investor would accept a lower-than-market return?

* National debt. The next "worry" is the amount New Zealand has borrowed. We are apparently the worst in the developed world. But "New Zealand" hasn't borrowed the money. Individual New Zealanders and institutions, such as banks and other businesses, do this. So what are we saying?

That lenders and borrowers don't know what they are doing? And why worry about only foreign lenders? It's difficult to see what anyone might do about these market-based transactions. Encourage borrowing from only New Zealanders?

* Employer superannuation scheme membership. People worry about the membership of workplace superannuation schemes. It about halved (to 16 per cent) over the past 20 years. But this ignores the growth in retail superannuation. About 24 per cent of all adults now have a superannuation membership.

Some look down on the country as a whole and say the "macro" statistics look dire and something must be done.

"Macro" statistics are interesting but it's facile to adopt them without interpretation. Anyway, I question the relevance of these superficially dire national numbers to any discussion about retirement saving.

When we talk about retirement saving, we should understand what New Zealanders are doing as opposed to deducing what might be happening from the top-down "macro" numbers.

In 2002, the Retirement Commission published a study: The Net Worth of New Zealanders. Based on that and other data, Treasury economists, including Grant Scobie, concluded that New Zealanders, on average, are possibly saving slightly more than they need for retirement. Those conclusions applied across age groups, sexes, income levels and ethnic groups.

This is the best information we have and is consistent with what we might expect. Scobie and his team reached the startling conclusion that we seem rational. Why should anyone be surprised?

That report, Saving For Retirement - New Evidence for New Zealand, is on the Retirement Commission's website. None of KiwiSaver's supporters seem to have read any of the Treasury's reports on this issue - or, if they have, they aren't saying.

Peter Harris' group (the KiwiSaver designer) didn't even mention them.

The Minister of Finance must have read them because he questioned the work's relevance, saying "it's based on some quite heroic assumptions". Here are the key guesses made by Scobie and his team:

* Everyone would continue behaving roughly as now. Nothing too "heroic" about that. If they're behaving badly, they'll keep doing that.

* Everyone would retire when New Zealand Superannuation starts (age 65). In fact, 25 per cent of New Zealanders between 65 and 69 work now - that will increase.

* New Zealand Superannuation would continue as now. If this is "heroic", what is the minister saying? That NZ Super can't continue at its present levels?

* Everyone would spend the same after retirement as before, so their standard of living would stay about the same. In fact, most probably expect to spend less each year during retirement.

* Everyone would survive for the average expectation of New Zealanders at age 65 (adjusted for sex and ethnicity).

* No one would "eat the home" so the value of the principal residence would pass to the next generation as an inheritance.

None of these assumptions seems "heroic". So I invite the Minister to justify his dismissal of his own Treasury advisers' work.

The Reserve Bank also gathers household wealth numbers. The net wealth of New Zealand households grew from 2.5 times disposable income in 1979 to 4.3 times in 2003.

This understates household assets because the value of small businesses is ignored, taking farms, forestry partnerships and other businesses out of "assets". But any debt used by households to finance those businesses is counted in "liabilities".

New Zealanders have become more, not less, wealthy over the past 25 years. This explains why the "micro" numbers (what New Zealanders are doing) are more useful than the "macro" in any discussion about retirement saving patterns.

I think KiwiSaver will be a retirement saving failure like equivalent schemes in Britain and Ireland. KiwiSaver should attract many members who join just for the $1000 subsidy, then go on a perpetual contribution holiday, leaving taxpayers to pay the administration fees.

This should be good business for efficient financial service providers but won't do anything for the country.

Despite what the Government says, the best evidence we have shows we seem to be saving enough for retirement.

So, can someone explain what the retirement saving problem is that KiwiSaver is supposed to fix? It beats me.

* Michael Littlewood is an Auckland superannuation adviser.

Savings sense

New Zealanders have become more, not less, wealthy in the past 25 years.

The net wealth of households grew from 2.5 times disposable income in 1979 to 4.3 times in 2003.

KiwiSaver could be a retirement saving failure like equivalent schemes in Britain and Ireland.

It could attract many people who join for the $1000 subsidy, then go on a perpetual contribution holiday.