It’s not just the government’s job to save for our retirement
In the first of two articles on superannuation, John Drabble, general manager of AMP Financial Services, argues that Michael Cullen’s super fund is only a partial solution.
Tuesday, September 12th 2000, 12:00AM
The population is ageing and, on current evidence, we are saving too little. By international standards our savings rate is low. For example, the pool of savings in New Zealand occupational pension schemes is equivalent to only 14% of GDP, against 94% in Britain, 66% in the US and 55% in Australia, according to a report, Older getting wiser, published last year by the London Institute for Fiscal Studies.
Not only are we not saving enough, but we are also saving less than we used to. According to statistics published last year by the Retirement Commissioner, in 1988 New Zealand households saved $3 billion or 8% of their income, but by 1998 that had dropped to $500 million or 1%. In addition, 27% of New Zealanders aged 44 to 64 (567,000) say they are making no provision for retirement at all.
To date our response has mostly been to debate the structure and funding mechanisms of New Zealand Superannuation. But the issue is far broader than that.
Regardless of the merits of Finance Minister Michael Cullen’s proposal to partially pre-fund NZ Super with fiscal surpluses, it will never be the total answer.
State funding is only one of three pillars for retirement income provision, as pointed out by various commentators ranging from the Todd Task Force to the World Bank and International Monetary Fund.
The other two pillars are occupational pensions and private savings.
We tend to lose sight of this because NZ Super dominates our retirement income provision. In fact, as the Super 2000 Taskforce noted in its November 1999 study, International Retirement Income Systems, New Zealand is the only developed country with a universal tax-funded pension as its principal form of public provision for retirement.
While increasing numbers of people are concerned about their standard of living in retirement, there is a danger that with Cullen’s proposal dominating the debate, super will be seen as solely a government issue. Cullen is trying to solve the government’s superannuation problem - not ours. His aim is simply to ensure the government can afford to continue paying New Zealand Superannuation at its present level without blowing the Budget.
NZ Super was always intended to provide only a basic level of retirement income which pensioners must top up from other sources. Dr Cullen is not planning to change that.
So it’s encouraging to note his concern that so few people are reaching retirement with anything but an adequate top-up. He should back up that concern with action to help reduce the number of New Zealanders who will be either wholly or mostly dependent on NZ Super in retirement.
That means adopting a comprehensive approach to superannuation by addressing the second and third pillars, as well as the first.
To date the approach of successive governments has been to treat them as an afterthought – something to address once they have sorted out NZ Super.
But New Zealand does not have a second pillar and the third is very lean.
According to figures published by the Retirement Commissioner, only 3% of employers offer or sponsor entry into occupational superannuation schemes. Consequently, most employees are no longer being offered access to one of the most effective means of saving for their retirement, while employers are missing the opportunity to offer the kind of remuneration package which would better enable them to recruit and retain top staff. Whereas 93% of Australian employees and 55% of British employees are in an occupational superannuation scheme, in New Zealand the figure is 17% and falling.
However, according to a PA Consulting survey published in March of this year, superannuation is one of the most popular benefits for employees after salary and wages.
It’s a vicious circle. Too few New Zealanders are making adequate savings for their retirement, and of those who want to, few have access to one of the most effective retirement savings vehicles.
But we have the opportunity to convert that from a vicious to a virtuous circle.
The challenge is to find a circuit breaker –such as compulsion or tax incentives – which will change people’s behaviour and attitudes towards saving.
A recent Colmar Brunton survey commissioned by AMP illustrates the point.
In early June, Colmar Brunton surveyed 14 superannuation and insurance service providers collectively representing more than 90% of the industry.
Those surveyed agreed there is no compelling reason for employers to sponsor superannuation schemes for their employees, let alone contribute to such schemes on behalf of employees. Furthermore, they cannot see any upfront benefits. Rather, they identify a number of tax and regulatory impediments, which have caused many employers to close their superannuation schemes to new members or, in some cases, wind them up altogether.
In short, we have tax and compliance structures which provide no incentives for employers to set up superannuation schemes.
John Drabble is General Manager of AMP Financial Services New Zealand
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