KiwiSaver in the context of New Zealand’s superannuation and savings

1. KiwiSaver in the context of New Zealand’s superannuation and savings Presentation to the 9th Annual SuperFunds Summit March 2008

2. Structure • Stocktake New Zealand’s superannuation and savings • Draw lessons from foreign experiences • Project KiwiSaver’s outcomes • Consider KiwiSaver’s future role

3. Population ageing Source: Treasury

4. Declining household savings? Source: Le (2007) NZIER Working Paper 2007/1

5. Declining household savings? Source: Le (2007) NZIER Working Paper 2007/1

6. Household wealth increasing Source: Le (2007) NZIER Working Paper 2007/1

7. Households switching to business savings? Source: NZIER (2007) December Quarterly Predictions

8. Proportion of people with inadequate retirement savings Source: Le, Scobie and Gibson (2007)

9. Current account balance and the savings rate Source: Wilkinson and Le (2008) NZIER Working Paper 2008/1

10. New Zealand Superannuation: provided to all people 65+, no income or means test, funded out of current taxation NZS Fund: investment fund with contributions paid out of general taxes Subsidised private retirement savings (including KiwiSaver) Current retirement income policy

11. Current retirement income policy

12. The public pillar (international) • Most common reform in OECD countries has been to • target entitlements • increase contributions • diversify pension types • Most common pension type • earnings-based (social insurance) • often supplemented by means-tested or (more rarely) universal pension

13. The public pillar (international) • PAYG funding common but potentially unsustainable • Pre-funding rarely used • closest equivalent to NZS Fund is the Irish National Pensions Reserve Fund • Canada has partial pre-funding, with a proportion of employee and employer contributions to the Canada Pension Plan going to an investment fund • Some supplementary earmarked taxes

14. The private pillar (international) • A range of supports have been used • promoting and improving financial literacy • mandating private employer-provided pensions to run in parallel with public scheme (Australia, Switzerland) • mandating private pensions with pension fund companies (Chile, Peru) • offering preferential tax treatment for private pension schemes (Canada, USA)

15. Possible lessons • New Zealand unusual in • retaining PAYG funded universal pension • adopting some pre-funding of universal pension • subsidising private contributions • A relatively high burden is placed on current taxpayers – funding universal public pensions, public-pre-funding (NZS Fund), and subsidies to private contributions (KiwiSaver) • New Zealand also needs to directly manage the cost of the public pillar

16. Projected Outcomes • Hon Dr Cullen noted in a September 2007 speech entitled “why NZ is poised for further economic success (and winning the World Cup)” • KiwiSaver like a “ferocious flanker, tacking every threat in site” (savings rates, retirement security, deeper capital pools) • New Zealand and overseas evidence throws doubt on these projected outcomes

17. Projected Outcomes • New Zealand evidence on source of contributions indicates that KiwiSaver is unlikely to lift national savings Source: Gibson and Le (2008)

18. Projected outcomes • Overseas evidence is mixed on whether schemes increase national savings. E.g., in Australia • some commentators point to the build-up in Australian superannuation fund assets • yet 30 to 50 percent of the income directed to superannuation funds diverted from other saving (crowding out most likely to face above-median-income households) • costs associated with tax concessions lead to a potential opportunity cost of reduced government savings • compulsory contributions only raise wealth if households do not increase consumption to fully offset the growth of their pension account (e.g., borrow against the equity held in the account)

19. Projected outcomes • Overseas evidence mixed on whether schemes increase national savings. E.g., in the USA • some studies have found that most 401(k) contributions are new savings • in contrast others (using same data) have found a significant substitution effect (savings in 401(k) substantially offset by declines in other forms of savings)

20. Future role of KiwiSaver (pressure points) • Concerns over a supposed household ‘savings problem’ should not be used to justify poorly thought-out policy. The policy must stand or fall on its own merits • KiwiSaver creates a complex web of subsidies. Subsidies incur deadweight costs of taxation. To offset these costs Treasury guidelines require $1.00 subsidy to return $1.20 increase in savings • Compulsory employer contributions further add to the growing (non-wage labour cost) burdens facing businesses

21. Future role of KiwiSaver (pressure points) • KiwiSaver subsidies create an imbalance in the funding of retirement income assistance policies – current taxpayers fund subsidies and tax exemptions, universal pensions, and part of the cost of future pensions. No effort to manage actual costs of public pillar • The heavy burden on taxpayers is unlikely to be sustainable as the population ages and the proportion of the population at working age declines