Opinion: New carrot to save for Retirement

By Andrew Macdonald of NZPA

Friday 17th September 2004

This week New Zealand workers had the old cliche of saving for retirement repackaged and thrust upon them, albeit with a novel approach.

The authors of this savings proposal - the Savings Product Working Group (SPWG) - are touting simplicity and flexibility as factors that mark it as a different beast.

But SPWG's proposal is just that - it hasn't yet been considered by the Government and is years away from implementation, if at all.

Essentially, SPWG has offered up a "pathway" for government intervention to encourage worker savings.

It has also suggested a generic savings structure that could be adopted, one that is carefully embedded in hard-earned pay packets.

Economist Peter Harris, who chaired SPWG, was lyrical as he launched the proposal this week from the Wellington offices of Revenue Minister Michael Cullen.

He quickly outlined the proposal's portability as a drawcard.

"It's capable of being maintained despite entry and exit from the labour market and despite changes of employer," he said.

"We've done all of that within a regime that is basically voluntary."

Yet, Harris said, this proposal also attacked the poor savings habits of workers from a different tack, one that matched psychology with economics - that's the novel element.

"What we're proposing is that people are automatically enrolled in the scheme when they change jobs ... the first pay cheque you see is the take home pay ... and the savings element is already gone."

Workers could voluntarily opt in or out of the scheme, although a stand-down period for opting out might apply.

Within hours his proposal came under hostile fire from Rozanna Wozniak of Spicers Wealth Management.

She told National Radio that SPWG's proposal could be undermined because it didn't include a mandatory employer contribution.

"Without an enticement from the employer, why would they (employees) want to stay in - there's no real incentive for them?

"Automatic enrolment will help membership rates. However, after 30 days a lot of people will say they no longer want to be part of it."

Wozniak said if the boss was seen to contribute some money, employees would be more inclined to join up.

Furthermore, workers could withdraw up to 50% of their savings after five years, a clause that Wozniak described as a "huge temptation" for those being encouraged to save more.

For his part, Dr Cullen - who was seated next to Harris, his former economic advisor, at the launch - urged that the proposal not be shot down in flames too quickly.

"What I would ask for, I suppose somewhat forlornly after a long period in politics, is that there's actually a positive consideration of the report even if people have disagreements ... rather than just a sort of immediate blanket rejection," he said.

"We're a great country for shooting ideas before they even get off the ground, as opposed to actually trying to develop ideas and do something about them."

Despite Dr Cullen's plea, pundits around the country have already cast their tuppence worth into the emerging debate.

One was Waikato University economist John Gibson, who said SPWG's proposal was based on flawed research.

Gibson disputes the proposal's claim that New Zealanders were poor savers.

Research showed household saving rates had risen since the mid 1980s, he said.

Lifetime savings rates were lowest among today's pensioners, but those still in the workforce had higher lifetime savings than their parents or grandparents.

"Tentatively there is little evidence that New Zealanders are, on average, under-saving for retirement," Gibson said.

"Given expected growth in their existing net worth and their expected receipt of New Zealand Superannuation, most people will be able to sustain their real consumption in retirement."

But will they?

The working group led by Harris states that membership of occupational superannuation schemes fell from 22.6% of the employed workforce in 1990 to 13.9% in 2002.

Add to this burgeoning household debt over the same period, which has risen from 65% of annual disposable income to 130%.

Younger generations tended to enter the workforce with a student debt, bought their first home later in life and had more restricted access to employer subsidised superannuation.

"There is a risk that compared with their parents and grandparents; they may enter retirement less well placed to sustain an acceptable lifestyle," the SPWG report says.

There's also the argument that retirees of the future will be asset rich - having eventually paid the mortgage - but cash poor, a scenario that also concerns Australian savings experts.

These are some of the arguments that underpin SPWG's proposals for the introduction of its savings regime.

Its recommendations include educating and informing the workforce on savings, and introducing sweeteners to encourage participation.

The generic savings mechanism would assign a special tax code for workplace savings, collect a savings element from gross wages, create a central administrator for the funds, and ensure contributions could be voluntarily increased, suspended or maintained.

Workers could opt out of the scheme if they chose to, thus reverting to a standard tax code.

The savings component taken from wages would be forwarded to the Inland Revenue, which would then move the funds, via a central administrator, to a designated provider or fund manager.

Providers would be selected on a number of criteria, while choices of funds would be restricted and a default option was likely.

But Dr Cullen is quick to point out that the proposal, which was unlikely to be introduced before April 1, 2007, hinged on voluntary contribution.

"I need to say ... this is not a trojan horse of compulsory employer contributions. It is not intended to be that and won't be that."

He was unsure what form sweeteners would take.

"One of the issues that I would be most concerned about would be to structure any sweeteners in such a way that low to modest income families get a fair whack at that," Dr Cullen said.

"One of the problems with most forms of tax incentives in this area is they seem to go proportionally to higher income, higher saving people who tend to save anyway."

So here we have it - a novel proposal to encourage savings complete with enticements and a carefully planned structure.

Will it work? Possibly not, because the proposal's success is ultimately based on the goodwill of the recalcitrant savers it seeks to convert.

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