Rozanna Wozniak: How bosses can top up our nest eggs

Rozanna Wozniak

Next month's Budget is expected to bring confirmation of a workplace savings scheme.

Finance Minister Michael Cullen has also hinted at a scheme to give low-income earners help in buying their first home.

The Government hopes both initiatives will help New Zealanders to become better prepared financially for their golden years.

The problem Dr Cullen is hoping to fix with the first home-owner's scheme is the falling level of home ownership.

Although this is partly the result of natural life-cycle changes, such as the trend towards later marriages and childbirth, it has also been blamed on poor savings habits, the burden of student-loan repayments, and affordability constraints because of rising house prices.

Lower levels of home ownership become a problem if private savings do not rise to compensate. For those approaching retirement without a mortgage-free home and with little or no savings, the risk of a retirement in poverty increases significantly. New Zealand Superannuation simply does not extend that far and is unlikely to do so.

Dr Cullen's other savings initiative will be a workplace savings scheme. It is likely that the scheme, to be announced in the Budget, will follow the lines proposed by the Harris working group last year.

Employees will be enrolled automatically in a savings scheme selected initially by the employer. A small percentage of their wage or salary will be set aside for their retirement. If they do not want to remain in the scheme, they have to opt out.

Withdrawal from the scheme is unrestricted after an initial, short lock-in period. This is because of the moral difficulties in not allowing people full access to money that is 100 per cent their own.

The New Zealand Institute has put forward an alternative means of increasing savings. Each child would have an account created automatically at birth, with a series of Government endowments and a system of matched savings. A 2 percentage point across-the-board reduction in the personal tax rate is also proposed, which would be diverted into the individual's savings account.

For voluntary contributions into this account of up to $1000 a year, the Government would provide a matching contribution. It is estimated each child would have at least $14,000 saved by age 18.

A reasonably limited set of criteria for the withdrawal of funds has been proposed - for example, to repay student loans, for a deposit on a home, or in retirement.

Both schemes have their design faults. But which one is most likely to give the desired outcome at least cost and with the fewest distortions?

The main faults with the New Zealand Institute's scheme are its exorbitant costs and its reliance on tax concessions. There is little doubt that savings will be diverted into the scheme.

Unfortunately, this is where the problem lies. International research suggests that those who will benefit most are the wealthy, and most of the money going into the scheme will simply be diverted from other savings in order to take advantage of the tax break. Consequently, it is unlikely that private savings will rise significantly.

And, at $4.2 billion a year, it is likely they will be borrowing to fund the scheme.

The cost is simply too restrictive, and for that reason, the proposal has not been taken seriously by major political parties.

What about a workplace savings scheme? A well-designed scheme should be successful at increasing overall household savings at much lower cost. Unfortunately, the scheme devised by the Harris group falls well short of the ideal.

A research paper released by the Treasury last year suggested that New Zealanders who belonged to an employer-subsidised workplace scheme had a higher level of net worth than those who did not.

Although some of the money going into the scheme will be offset through a reduction in other forms of saving, net wealth will still rise. Interestingly enough, the study showed no measurable increase in wealth for those participating in non-subsidised superannuation schemes.

This is where the problem with the Harris proposal lies. There is no compulsory employer top-up - any top-up is entirely at the discretion of the employer.

If employers do not come to the party, the success of the scheme will rely largely on inertia - that is, people won't be bothered withdrawing their money.

It is unlikely employees will suddenly find a hidden motivation to save just because the Government has taken away some of the hassle in finding a savings vehicle and offered to pay some of the fees.

National finance spokesman John Keys recently described the proposal as a "glorified Christmas Club account".

A survey of members in the state-sector savings scheme backs up these concerns. The survey found the main reason why people joined (over 46 per cent) was to take advantage of the employer top-up.

With a few design changes, the scheme's chances of success could increase significantly. A modest employer subsidy could be added if the scheme's introduction coincided with a one-off cut in the corporate tax rate, to ease the cost for employers.

The employer would have no tax advantage in offering the scheme because it is compulsory and the tax cut is across the board. Workers might still reduce other savings to compensate, but since the contribution rate is a fixed percentage of salary, there is no motivation to divert other savings to take advantage of tax concessions.

Nonetheless, the underlying motivation of creating an environment of working to save appears to be more appropriate than a scheme based mainly on Government handouts.

* Rozanna Wozniak is the chief economic adviser to Spicers Wealth Management.