Rozanna Wozniak: Neighbours better squirrels than us

Rozanna Wozniak

Are we saving enough for our retirement? This debate has been going on for some time, and the jury is still out. Besides, why should we worry about our debt level? As long as we can afford the repayments and it is being used mainly to buy assets that appreciate in value over time, is there a problem?

The savings debate has two sides. Data on the annual flow of savings (as opposed to the stock of savings or wealth) paint a gloomy picture. New Zealand households consistently spend significantly more than they earn and this trend has been deteriorating for at least 15 years.

The other side of the savings debate focuses on the stock of savings. According to the Spicers Household Savings Indicators, the average New Zealand household has enjoyed an increase in net worth of around $60,000 during the past two years.

Although rising consumer debt levels have received a great deal of attention, asset values, particularly housing, have risen even faster.

Household balance sheets do not appear to be under any excess strain. To the contrary, the average homeowner is feeling rather wealthy.

Of some concern, however, is that by international standards, the stock of wealth is heavily tied up in housing. Households are not only putting all their eggs into one basket, but they are also relying heavily on being able to unlock that housing equity to pay for their retirement.

However, Spicers estimates suggest that around 88 per cent of the value of the housing stock is tied up in our homes (including holiday homes) and only 12 per cent is invested in rental properties.

Having become accustomed to the best house that we can afford in the best suburb, downgrading to unlock this equity may prove less pleasant than originally anticipated.

Or, is it? Treasury research has concluded that, based on household wealth and income levels, New Zealanders are, on average, saving enough to maintain their present living standards into retirement. Before households can save more, they will need higher incomes.

However, this doesn't mean that we shouldn't aspire to do better. The standard of living of the average New Zealander, based on GDP per capita, ranked a poor 21st in the OECD in 2003. Australia ranked around 10th. There is clearly room for improvement.

A comparison of New Zealand and Australian household balance sheets shows that Australians are also better-prepared for retirement.

Australian research, which is based on a slightly broader definition of savings than is used in the Spicers Household Savings Indicators, shows that the median Australian household had a net worth of around A$218,000 in 2002 (the equivalent of around NZ$230,000 based on today's exchange rate). Their average or mean net worth was A$404,000.

Using the equivalent definition of wealth, Statistics New Zealand has estimated that our household median net worth in 2001 was only $113,500. Suddenly we don't look as wealthy.

Why Australians fare so much better than us is open to debate. Their average income is higher, so they are in a better position to save. Australians are also better at living within their means.

Australians have only recently started to spend more than they earn. Australia also has a compulsory superannuation scheme with an employer contribution.

International research suggests that although money invested in workplace superannuation is likely to be partly offset by lower savings in other areas, they will not cancel each other out entirely.

The danger for New Zealanders is that they mistakenly assume that the New Zealand Superannuation Fund (aka the Cullen Scheme) will provide them with the same level of security in retirement as the Australian scheme with individual accounts.

Even with the Cullen scheme in place, an increasing percentage of tax revenue will be gobbled up on super spending as the population ages.

Although the political parties of today appear committed to the present universal pension, there are no guarantees that in 20 or 30 years' time the level of commitment will be the same.

This is probably one reason the Government has decided to proceed with a private sector workplace savings scheme (despite the existence of the Cullen scheme, and despite Treasury research which suggests that household savings are adequate).

However, the proposal lacks conviction and is best described as a Clayton's response. Unlike the workplace savings scheme put in place last year for state sector workers, the proposal for private sector workers provides no motivation for consumers to remain in the scheme, and there is no employer top-up.

Furthermore, employees will be able to withdraw all their money after the initial lock-in period. The risk of a mad rush to withdraw a few months after inception seems high. The scheme could end up a messy, costly affair.

A two-pronged approach to savings policy seems logical. Generating higher economic growth and better investment decisions is crucial.

However, the Government and consumers must also take the savings issue more seriously. Although the average household may not be in a position to save more, many households probably could.

When faced with the decision, the extra holiday and the nicer car always sound better than the nest egg for a retirement that seems such a long way off.

"If all else fails, the kids will look after me, won't they?" seems to be what many think. Maybe - if their debt repayments aren't gobbling up too much of their income.

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