Compulsory enrolment in Kiwisaver

I’m puzzled.

Fresh from removing the sign-on bonus for new KiwiSaver members, Bill English is now talking about compulsorily enrolling everyone (well, all employees I assume) in KIwiSaver.  This was National Party policy to do at some stage, when the government’s books were in surplus, but it has now got cheaper to do because people could now be forced to join, at no upfront cost to the government.

It is far from clear what problem the Minister of Finance thinks he would be addressing.   Everyone who has started a new job since 2007 has already been auto-enrolled, and many others have chosen to enrol.  My guess would be that at least half of those who were in labour force in 2007 have changed job since then, and a large number have entered the labour force for the first time. All those people were auto-enrolled.   Most of those who have never joined, or have opted out, or subsequently taken a contribution holiday, have presumably made a considered choice.  Perhaps they can’t afford to be in the scheme now.  Perhaps paying off the mortgage is a higher priority.  Perhaps they are among that large group for whom NZS will already more or less maintain their pre-retirement standard of living.

I had hoped that the government might now leave KiwiSaver to wither on the vine.  After all, there is not much evidence that the scheme so far has boosted national savings, and there isn’t an elderly poverty problem.  Enhancing the retirement income of the relatively comfortable doesn’t seem like an obvious public policy priority.

The Minister did once regard New Zealand’s relatively low rate of national savings as a problem, but Google throws up no references along those lines in the last 3-4 years.  If he no longer regards national savings as a policy problem,  I happen to agree with him (I’ll get to savings as I carry on discussing the reasons behind NZ’s high interest rates).

Surely provision for retirement savings can’t be the problem either?   After all, this government has ruled out any change to the age of eligibility to NZS, and if they have not ruled out lowering the rate or means-testing they have certainly shown no appetite for doing anything.  And, as is well-known, New Zealand’s rate of poverty among the elderly is low, absolutely and by comparison with other countries.  Of course, high house prices may make that picture less rosy in a few decades’ time, but the government knows that freeing-up housing supply is the answer to that one.

And, in any case, although it is proposed to auto-enrol all employees, they could still choose to opt out.  Indeed, given that it is almost exclusively people now over 25 who have not been auto-enrolled already, one might reasonably assume that a large proportion of those who would be compulsorily enrolled if the Minister’s proposal went ahead might choose to opt out.  Yes, I know all the “nudge” literature, but recall that this experiment would not be on the population as a whole, but on a self-selected group of whom many had already deliberately chosen not to join.

And if income adequacy in retirement were really the concern, surely (a) compulsory contributory membership (not just initial enrolment), and (b) something that encompassed the whole population (business owners, welfare beneficiaries, stay-at-home parents) not just employees, would be the way to go.  But, fortunately, that doesn’t seem in prospect.

The National Party’s website says that it believes as follows:

The National Party seeks a safe, prosperous, and successful New Zealand that creates opportunities for all New Zealanders to reach their personal goals and dreams.

We believe this will be achieved by building a society based on the following values:

  • Loyalty to our country, its democratic principles, and our Sovereign as Head of State
  • National and personal security
  • Equal citizenship and equal opportunity
  • Individual freedom and choice
  • Personal responsibility
  • Competitive enterprise and reward for achievement
  • Limited government
  • Strong families and caring communities
  • Sustainable development of our environment

At least three of those values –  “individual freedom and choice”, “personal responsibility”, and “limited government” look inconsistent with auto-enrolling everyone in KiwiSaver.  Perhaps they might justify it under “personal security”, but I’d assumed that has to do with crime, and anyway, as noted already, elderly poverty just is not a major problem in New Zealand.

Compulsory enrolment of all employees in KiwiSaver smacks of something from The Treasury, and its “living standards framework”. But last time I looked, that framework put no independent value on things like individual freedom and choice, except insofar as they served some other end.

The Minister also appears to be using the dubious argument that Kiwisaver is an excellent investment.  If it were really so, you would think that after eight years most people might have got the idea.  But in fact, it is true only on very shaky assumptions.  Certainly, for the time being there is an annual government subsidy of up to about $500.    That is worth having, but it is hardly transformative.  In fact, for most people with a mortgage and contributing to Kiwisaver, it won’t even cover the tax wedge.  So the Minister’s claim is true only if the employer’s contribution to Kiwisaver would not otherwise be paid to the employee.  In the short-term, for any particular job or employee that might be true –  that (and the subsidies) was the main reason I joined Kiwisaver.  But in the medium to long-term surely the Minister of Finance does not believe that returns to labour will be materially affected by whether people take their income in the form of Kiwisaver contributions or in straight wages and salaries?

So New Zealand

  • Does not have a national savings policy problem (although the national savings rate does raise some interesting questions)
  • Has little or no evidence that KiwiSaver so far has made any material difference to national savings anyway
  • Does not have an elderly poverty problem
  • Has a government which is firmly committed to the current NZS system.
  • Has most people already in KiwiSaver, while  those in the workforce who aren’t in KiwiSaver will already mostly have made an active choice to stay outside.
  • Has a governing party that proclaims commitment to personal responsibility and individual freedom and choice.

And for most people in their middle years, Kiwisaver involves a very nasty tax wedge.

So quite why would the Minister of Finance think it was good policy to compulsorily enrol the rest of the employees in the country in KiwiSaver?

9 thoughts on “Compulsory enrolment in Kiwisaver

  1. I just don’t like these schemes. They don’t seem to do anything other than make politicians look they are doing something useful. They feather the nests of the “financial advice” industry, many of which of purely motivated by the % cut of any returns they get wherever the money is “invested”. Even the honest ones are forced to conform to the consensus due to career risk. It is okay in the financial industry to be wrong as long as every one else is.

    All that pales into insignificance though in that it encourages a whole population to be totally, completely, and irreversibly financially illiterate. The beauty of managing one’s own finances is that you can learn from your mistakes. If someone else makes those mistakes for you then you are denied this opportunity.

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  2. I have an account in a compulsory superannuation scheme in Australia worth $253 as a result of some collective bargaining agreement in the public service in the early 1990s.

    Naturally, I stopped paying any attention to correspondence from them 15-20 years ago was it simply wasn’t worth the bother of continually updating them with my address.

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  3. I disagree with the premise New Zealand does not have a national savings problem. Indeed I would argue that your own work suggests that we do have a problem (even though you of course come to the opposite conclusion).

    Reams of paper have been produced by the New Zealand economics community in defence of voluntary savings regime, and none of it is very convincing to me at least. Proponents of purely voluntary saving need to get to grips with the fact that almost all high-performing economies have mandatory social insurance regimes, that New Zealand is very much an outlier and that our approach hasn’t worked. Although mandatory social insurance does involve a diminution of freedoms and short-term welfare losses, it ultimately allows for the highest degree of freedom of any system that is feasible in a modern democracy. Conversely, its absence leads to impossibly high expectations of the welfare state that lead to proliferating universal and means-tested welfare schemes which ultimately diminish freedom.

    I do agree with many of your specific criticisms of Kiwisaver Michael. However, I see the solution as moving to a compulsory regime taking elements of the Singaporean, Swiss and Australian models. So I actually support Bill English’s thought bubble as an interim step to compulsion.

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  4. I think our low national savings rate does definitely act as constraint, but there have been pretty extensive efforts to identify policy failings/differences that might explain low savings rate, without much success. A lot of that work was done by people, eg The Treasury, who wanted there to be a policy problem.

    On your point about association between mandatory social insurance and high performance, can you identify cases (at least mong older advanced economies – we can debate Singapore in other contexts – where performance of the country improved notably subsequent to adopting such schemes?

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    • Good question, and quite hard to figure out – given that saving is both a cause of and a result of economic growth. My simplistic answer is that mandatory saving helps embed and stabilise growth once it gets going (even if the initial growth impulse is from a demand shock), but I will try and come back with a more detailed response with examples when I have time.

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      • The problem is that it is hard to learn how to allocate those savings. People who are actually in business tend to have a higher skill level (skills take practise – you cannot learn to ride a bike without actually doing it) as they build up a list of past mistakes and successes. They also have full access to their own private data. The success of the overall economy reflects the sum of those business investment choices.

        Leave the profits where they can generate future cash flows by reducing the business tax rate. People who are high earners tend to be poor investors as money comes too easily to them, they are not the same tribe as business owners. High earners will just spend on consumption items (ie a bigger house). Policy makers do not seem to understand that ownership is totally different to management and is concerned with different issues. I know this sounds like a purely political argument but it is actually a purely economic one. Asset allocation is hard to learn. We need to identify who is good at it. Then we need to figure out how to help.

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      • In my experience medium-large ($10 billion-$100 billion) do a fairly decent job of allocating capital across asset classes and keeping fund managers accountable. We have some of these institutions in NZ and as far as I can tell they are not corrupt and do a decent job. For-profit arrangements can be good but there are principal-agent problems that can be very difficult to overcome, such as with financial advice.

        Private business owners re-investing in their own business is usually pretty great as they have a realistic grasp of the returns. My pet theory though, is that quite a few domestic business owners face limited competition and hence turn their business into a cash cow once they reach their natural size.

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  5. Michael,

    You may be interested in the following 1999 World Bank paper: http://siteresources.worldbank.org/INTMACRO/Resources/samwick2.pdf which studies countries which have transitioned from a PAYG to a partly funded retirement system. Sadly (for me) the study fails to conclude that making such a switch really boosts national savings. It does, however, conclude that countries with PAYG systems tend to have lower savings rates on average (duh).

    The charts at the back are interesting and show that some countries did in fact experience a strong increase in national saving post the move to a funded model. This suggests scheme design and administration is important. Also, in the biggest failure of a switch to a funded model to increase saving, the UK, the reform coincided with the Big Bang in the City of London, which I would have expected to have a negative impact on saving. Therefore, the slight decline in the savings rate post 1986 does not surprise me. (I also believe that something similar happened in Australia, though that is not covered in the paper).

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