Super: Political parties yet to show their superannuation hand

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AMP's Linda McCulloch reviews the landscape in the superannuation field and finds that there are plenty of obstacles to tackle this year.

Monday, January 28th 2002, 12:47PM

With both major political parties rating savings issues as a key policy concern, superannuation is well and truly on the political radar screen as we head into election year.

No doubt the politicians will continue to debate the merits of the New Zealand Superannuation Fund. A difference of opinion between Labour and National over the fund was almost to be expected. However, the decision by the Greens not to support it has added a new dimension to a topic that often seems too dry for the 6pm news bulletins.

Greens co-leader Rod Donald spelled out the Greens policy on superannuation when he announced their opposition to the fund.

With all political bets on the Greens getting a bigger slice of the electoral pie at the general election timed for later this year, it will be interesting to see how superannuation fares in pre-election political manoeuvrings. For instance, is there room for trade-offs between socially responsible investing through the fund and support for the fund itself?

National will also be watched with interest. There’s been plenty of comment from that quarter about what’s wrong with the super fund, but the details of National’s own superannuation policy are yet to emerge.

Those of us who recognise the impact superannuation will have on the economic future of New Zealand are pleased to see the issue high on the election agenda.

But one of the most significant superannuation events of the year will happen outside of the political arena. In mid year the Retirement Commission will release the first results of the Household Savings Survey and this promises to provide invaluable information about savings.

Around 4,500 people have been surveyed. They have been asked about their net worth, employer sponsored super schemes, trusts, private companies and partnerships, human capital, and consumer durables. The results promise to provide us with the most comprehensive information ever gathered on New Zealanders’ savings patterns.

From a policy perspective it will be invaluable in providing information to:

• evaluate existing retirement income policies
• monitor the effect of tax policy on savings and debt levels

• identify groups who aren’t putting enough aside for their retirement
• help understand the impact of student loans on a household’s financial situation.

Financial services companies will find the results useful as an indicator of future demand when designing new investment vehicles and retirement programmes.

The savings industry has long argued that many New Zealanders are not saving enough to provide the kind of retirement income and lifestyle they expect. However, others have argued that, in aggregate, there is no evidence that New Zealand has a saving problem.

This view was expounded most recently by the McLeod Tax Review, which last year reported that most people would not be well served by being induced or compelled to make additional retirement provision at the expense of living standards during their working lives.

AMP’s SuperWatch survey shows that while people know they have to save over and above what the Government might provide, less than half are actually doing anything about it. If what SuperWatch is telling us proves correct and New Zealanders are not saving enough to generate sufficient income for our retirement years, there will be no excuse not to develop a comprehensive framework for long-term savings. Such a framework should incorporate private savings – both workplace and personal savings plans – to complement New Zealand Superannuation.

And while retirement savings is the biggie, there are other savings imperatives.

Student debt is a relatively recent, but increasing social and economic phenomenon. Health costs could potentially have more impact on an ageing population than the cost of government superannuation.

We need to consider the broader implications of these issues in an integrated savings programme while maintaining focus on superannuation.

Some progress towards a savings framework was made last year. The age and level of eligibility for government superannuation – the ‘65 at 65’ deal is now enshrined in Part I of the New Zealand Superannuation Act.

This puts a ring around the Government’s future commitment to taxpayer-funded superannuation. While the politicians will continue to argue about the best way to pay for that commitment, the way forward is not to delay, or rest on our laurels, but to tackle the other components of a comprehensive savings framework.

On that front, the Government’s announcement in January that it won’t be making any moves this year to improve the private retirement savings rate is disappointing.

At least we are reassured that the Government is still actively exploring ways to make it easier for employers to set up staff superannuation schemes and it was good to see support from Business New Zealand for employment-based schemes.

AMP continues to lobby for government action to kick-start private savings and the sooner the better. We believe there are good reasons for changing the taxation of superannuation towards a deferred taxation model.

It is important to remember that tax deferral is not a tax reduction but a trade-off, because tax will be paid, only later. From a tax policy perspective tax deferral extends the tax base long term and provides equity for all retirement savers.

Tax deferral may reduce the tax take now, but the pay-off is that it will extend the tax paying years of baby boomers into their retirement years, when public health and superannuation costs are projected to impact substantially on Government expenditure.

The equity that tax deferral delivers to savers is that it taxes income at the appropriate rate when it is received as retirement income, not at the marginal tax rate that applies at the time it is saved.

This removes the current anomaly that sees some taxpayers pay either more or less tax on retirement savings than on their income. This is a particular issue for those on a 21% marginal tax rate who are currently penalised with SSCWT at 33% for employer contributions to workplace savings plans.

Detailed modelling work has been commissioned by the Investment Savings and Insurance Association to quantify the costs and future benefits of various options for changing the tax treatment of savings. It is hoped that this will provide some guidance for Government, and the industry, on the longer-term impact of delaying taxing retirement savings until they are received.

One of the arguments often heard against tax changes being used to boost private savings rates is that such changes only benefit the well off.

Research conducted for AMP in the United Kingdom challenges this.

It shows that income levels have relatively little impact on whether people save or invest money.

Age tends to be much more influential, as does factors such as ethnic origin, marital and family status, whether people are householders or non-householders, and their housing tenure.

The research also indicates that lasting savings habits tend to develop in childhood. This suggests that everyone, regardless of income levels, can benefit from policies designed to boost the private savings rate.

At the very least the playing field for low-income savers should be levelled so they are not paying penal tax rates on retirement savings.

From a broader economic perspective, tax deferral is likely to motivate people to save more. This in turn would generate a bigger pool of savings, which if invested well, would improve New Zealanders’ net worth and, ultimately, our economic well being.

New Zealand still lags behind other countries in not having an integrated policy for public and private provision of retirement income. It has to come. Making the sort of changes required to implement such an integrated policy won’t be easy, but the longer we wait, the harder it gets.

Linda McCulloch is the head of superannuation strategy at AMP.

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