The lost years for NZ superannuation

The recently released June quarter managed funds’ statistics illustrate once again that we are poor savers.

This has important implications for the economy as the post-World War II baby-boomers retire and life expectancy rates expand.

Our inadequate savings rate will place huge pressure on future governments and tax payers, as many retirees won’t have enough savings, particularly in the form of liquid financial assets, to fund their day-to-day living and healthcare requirements.

The low savings rate also means the country has insufficient equity to fuel the country’s ambitious entrepreneurs and companies.

As a result we are not creating enough high-paying jobs, particularly compared with Australia, and this limits the ability of individuals to lift their savings rate.

New Zealand had only $60.2 billion of managed funds at the end of June compared with A$1319.5 billion in Australia. This is just $14,100 a head compared with Australia’s A$63,800.

Managed funds are financial assets held in the form of superannuation, life insurance, KiwiSaver and PIEs or other unit trusts. They exclude assets under the jurisdiction of financial planners unless these funds have been specifically allocated to one of the investment areas outlined in the previous sentence.

New Zealand’s managed funds’ statistics also exclude the New Zealand Superannuation Fund but include the Government Superannuation and National Provident Funds. The total figures are influenced by the inflow and outflow of funds and the rise and fall in the value of the assets held.

In New Zealand, managed funds represent about 60 per cent of total household financial assets, excluding bank deposits, compared with an estimated 75 per cent in Australia.

As the accompanying table shows, New Zealand’s total managed funds have increased by only $6.3 billion since the end of 2004 compared with A$465.2 billion in Australia.

Over the same period the total value of residential property in New Zealand has risen by around $200 billion and A$1000 billion in Australia.

There is a far better balance between managed funds and housing across the Tasman as Australians have $1319.5 billion invested in the former and $3500 billion in the latter, whereas our mix is $60.2 billion and $614 billion respectively.

There are a number of reasons why Australians have far more financial assets than us. These include:
* On December 15, 1975, newly elected Prime Minister Robert Muldoon announced the abolition of the 37-week old compulsory New Zealand Superannuation Scheme. This scheme, which was an international trailblazer and remarkably similar to KiwiSaver, would be worth an estimated $240 billion today and would have placed New Zealand retirees in a far better position than their transtasman neighbours.

The Superannuation Scheme was replaced by the taxation-funded National Superannuation, which is costing more than $7 billion a year and rising. This dreadful decision transformed New Zealand from a potential powerhouse economy into one where individuals, particularly retirees, have become increasingly dependent on the state.

* On December 17, 1987, less than two months after the sharemarket crash, Finance Minister Roger Douglas announced the removal of superannuation tax benefits and the concessionary tax treatment of medical insurance. Douglas argued that superannuation tax concessions were a major cost to the Government and the income tax cuts, announced at the same time, would encourage individuals to save.

He also believed that the removal of the tax concessions on superannuation, estimated at $660 million for the 1988/89 year, would allow for additional company and personal tax cuts.

A few years later the tax concession Loss Attributing Qualifying Company (LAQC) scheme, which is particularly attractive for property investors, was introduced. The LAQC scheme and Douglas tax reforms have diverted a huge amount of funds from superannuation to residential property.

* The Australian Government introduced compulsory superannuation in 1992. Australians now have A$799 billion of superannuation funds, or A$36,300 a head, compared with just $21.1 billion, or $4900 a head, in New Zealand. These superannuation figures are included in the managed funds’ statistics.

* Inadequate protection for domestic financial asset investors, particularly during the 1980s sharemarket boom and the recent finance company debacle, has encouraged New Zealanders to invest in residential property, short-term bank deposits and overseas. At the end of June New Zealanders had 41.1 per cent of their managed funds invested overseas, whereas Australians had only 18.8 per cent of their management funds in overseas assets.

In addition, the Reserve Bank of New Zealand estimates that nearly 40 per cent of our direct equities – shares held in an individual’s own name – are invested in overseas sharemarkets.

The strong bias towards residential property, vis-a-vis financial assets or managed funds, has a number of important implications for the domestic economy. These include overpriced houses, a heavy reliance on overseas borrowings to fund residential housing investment and a tiny sharemarket.

At the end of June the total value of all domestic companies listed on the NZX was only $48.8 billion, compared with A$1287.5 billion on the ASX.

The over-emphasis on residential housing, compared with financial assets, has a number of serious implications for retirees, including:
* Residential property, unlike financial assets, is essentially illiquid and cannot be partially sold to meet unexpected expenses. In this regard it is important to note that finance company debentures are not included in the managed funds statistics because most investment managers did not invest in this asset class, partly because of the lack of liquidity before maturity dates.
* National Superannuation costs will rise dramatically as the number of individuals over 65 increases from 500,000 at present to more than one million by 2030. This scheme will be a huge burden on future taxpayers even though the New Zealand Superannuation Fund was established to partially alleviate the problem.
* Healthcare costs will also rise dramatically as New Zealand’s life expectancy grows and a higher percentage of the population enters the 65-plus age group.
Per capita expenditure on medical surgery and age-related health rises from only $1250 a year for those aged between 60 and 64 rising to $5250 for the 75 to 79 age group and $10,750 for those over 85. The managed funds’ statistics clearly demonstrate many New Zealanders will have insufficient savings to fund their healthcare requirements if they live beyond 80.
This will place an enormous burden on the state as total expenditure on health and National Superannuation is expected to rise from 11 per cent of GDP in 2002 to 14 per cent in 2021 and 19 per cent in 2051, according to a Treasury working paper.

The New Zealand Superannuation Fund and KiwiSaver are positive developments, but the true benefits of these will not be felt until 2020 and onwards.

In the meantime, baby-boomers with limited financial assets will be highly dependent on the Government in their retirement.

This reduces the opportunities for further tax cuts unless there is a dramatic increase in economy activity and tax revenue in the years ahead.

Managed Funds: New Zealanders are less prepared for retirement