Don Brash: Compulsory super not same as compulsory gain

Saving to avoid a dreary old age is sensible, but compulsory schemes don't necessarily result in prosperity. Photo / Alexander Turnbull Library

Opinion

Last Thursday, the Herald argued that New Zealand should adopt "compulsory superannuation".

It reached this view after noting that the "core issue is the sustainability of NZ Superannuation as the baby boomers move into retirement".

It noted that the Government's response to this challenge has been "sharply constrained by two acts" - first, the Prime Minister's commitment to resign rather than make any changes in the entitlements to NZ Super. And second, the Government's suspension of contributions to the Cullen Fund.

The editorial went on to argue that, in these circumstances, compulsory superannuation is the answer. Indeed, the editorial began with the assertion that "so compelling is the case for compulsory superannuation that it is a mystery why the Government is setting up yet another working group" to consider the issue.

The editorial was certainly right that the Prime Minister's commitment to resign rather than change any of the parameters of NZ Super is "unfortunate".

Actually, it's worse than unfortunate. It's so obvious that at least one of the parameters of NZ Super will need to change as we all live longer - the age of entitlement - that it's astonishing that the Prime Minister got away with the statement.

Most other countries of our kind have already announced that the age of eligibility for the taxpayer-funded pension will have to increase gradually over the next 10 or 15 years - Australia being the most recent to make that announcement.

We will certainly have to do so also, and the longer the announcement is deferred the less time New Zealanders have to prepare for that reality. But the Herald is wrong to lament the cessation of Government contributions to the Cullen Fund.

There may have been some justification for putting money into the Cullen Fund when the Government budget was in surplus - although retiring debt would still have made more sense. But it makes absolutely no sense to borrow money to put into the fund now that we are already borrowing $1 billion a month just to fund the Government's existing operations.

Would introducing a system of compulsory superannuation help a future government to fund NZ Super? Well, it certainly wouldn't help unless NZ Super is means-tested, in the same way that the taxpayer-funded pension scheme is means-tested in Australia.

And perhaps that's the long-term aim - to means-test NZ Super. But the Government has said that NZ Super won't be means-tested so, by definition, compulsory superannuation can't ease its future fiscal cost.

Might compulsory superannuation have other benefits? Let me at once declare a conflict of interest.

I'm involved in the funds management business, and compulsory superannuation would be hugely beneficial to all those in that industry, and to the lawyers, accountants, actuaries, and brokers associated with it. (Note how many of those arguing for compulsory superannuation are associated with the funds management industry!)

It's fair to acknowledge that a compulsory superannuation scheme might assist the development of the New Zealand capital market, though unless superannuation funds were obliged by law to invest a high proportion of their assets within New Zealand, most of those assets would inevitably be invested overseas, as is the case now for many of the assets invested in KiwiSaver schemes.

But contrary to the Herald editorial, the argument that a compulsory superannuation scheme would materially increase our national savings is not strong.

In Australia, it's estimated that their long-established scheme has increased Australian national savings by only about 1 per cent of GDP.

When the Australian Government announced this year that employer contributions to their compulsory scheme would increase from 9 per cent of wages and salaries to 12 per cent, it was also announced the Government expected that to increase Australian savings by an extremely modest 0.4 per cent of GDP - and then only by 2035!

Moreover, to persuade low- and middle-income Australians to buy into their compulsory scheme, successive Australian governments have found it necessary to provide substantial tax incentives for their scheme - with the result that the Australian Government spends a higher proportion of national income providing pensions for Australians than the New Zealand Government does in providing pensions to New Zealanders, even with the means-testing of the Australian pension.

And despite that higher fiscal cost of providing pensions in Australia, poverty among those over 65 in Australia is among the highest in the developed world. By contrast, poverty among those over 65 in New Zealand is among the lowest in the developed world.

The Australian compulsory scheme is particularly hard on women, many of whom spend only a part of their adult lives in the paid workforce; and it makes the retirement of all Australians dependent on the capricious meanderings of the share market.

I think we New Zealanders would be wise to save more than we have done over the last two decades.

But a compulsory superannuation scheme not only deprives people of the right to choose when they save, it would do little for our national savings rate, would do nothing to ease the future fiscal burden of NZ Super unless NZ Super were means-tested, and might not even help then if the Government felt obliged to offer subsidies to persuade people to sign up for a compulsory scheme.

It would probably lead to more poverty than we have now among those over 65, and would particularly penalise women. NZ Super with a modest and gradual increase in the age of entitlement seems like a much better deal.

Dr Don Brash is chairman of the 2025 Taskforce set up to recommend ways of closing our income gap with Australia. He is also a former Governor of the Reserve Bank.