This article originally appeared in the NZ Herald.
A major Australian Productivity Commission report on superannuation presents an opportunity to compare retirement savings on both sides of the Tasman.
Unfortunately, the comparisons are not flattering — New Zealanders have private superannuation assets of only $17,100 per capita compared with A$111,300 ($118,400) per capita in Australia (see table).
If we include the two sovereign funds — Australia’s Future Fund and the NZ Superannuation Fund — total NZ superannuation assets are $25,200 per capita compared with A$117,200 across the Tasman.
Why do New Zealanders have significantly less retirement assets than Australians and how can we reduce this massive gap?
New Zealand stole a march on Australia in 1975 when Norman Kirk’s Labour Government introduced a compulsory superannuation scheme with individual accounts.
However, Robert Muldoon’s newly-elected National Government terminated the scheme immediately after winning the November 1975 general election.
The abolition of Kirk’s scheme is arguably the biggest economic policy mistake in the past 50 years, as New Zealanders would be facing a far more comfortable retirement if it had been maintained.
As a replacement, Muldoon established “National Superannuation”, a universal scheme starting at 60 years of age. The age of eligibility increased to 61 in 1992 and was slowly raised after that to reach 65 in 2001.
Australia’s compulsory superannuation scheme was introduced by Paul Keating’s Labour Government in 1992 with an initial employee coverage of 80 per cent and a contribution rate of 3 per cent. The coverage increased to 91 per cent over the next decade with the contribution rates rising to 9 per cent.
Source: Herald graphic
The employer contribution rate rose to 9.5 per cent in July 2014 and will increase to 10 per cent in mid-2021. It will then rise by 0.5 per cent per annum until it reaches 12 per cent in mid-2025.
Labour parties on both sides of the Tasman have been the main promoters of superannuation while conservative parties are far less enthusiastic.
This is reflected in Muldoon’s National Government abolishing New Zealand’s 1975 compulsory scheme, John Key’s Government deciding to suspend payments to the NZ Superannuation Fund, and numerous decisions by Australia’s Liberal Party to defer planned contribution rate increases.
Labour Finance Minister Michael Cullen introduced KiwiSaver in mid-2007.
The Cullen scheme isn’t compulsory but includes contributions from employers and the Crown, as well as individual members.
KiwiSaver has been a great success but it hasn’t reduced the huge private superannuation gap between New Zealand and Australia, as demonstrated by the following figures:
- Since mid-2007, private Australian superannuation assets have soared by A$1,636.3 billion, from $1,145.1b to $2,781.4b
- NZ superannuation assets have increased by only $61.2b, from $22.4b to $83.6b, over the same period.
The New Zealand figures include traditional superannuation schemes, as well as KiwiSaver. KiwiSaver assets have moved from zero to $53.6b since mid-2007, while traditional scheme assets have risen from $22.4b to $30.0b over the same period.
New Zealanders are more reliant on the country’s universal superannuation scheme, which isn’t means tested and has an eligibility age of 65. This scheme is forecast to cost $14.5b this year, representing 12.9 per cent of total Crown expenditure.
It ranks third in terms of Government expenditure, after health (15.6 per cent of total spending) and education (13.8 per cent).
By comparison, the Australian Government’s pension scheme is means tested. It starts reducing once a single person has income of more than A$172 per fortnight or owns a house and has additional assets of A$258,500.
There are no plans to raise NZ Super’s eligibility age above 65, but Australian pension eligibility will increase to 67 in 2023 and will slowly rise to 70 by 2035.
There are several reasons why Australia’s emphasis on private superannuation savings is more favourable than New Zealand’s taxpayer funded universal scheme. These include:
- Individual retirement savings reduce the burdens on current taxpayers, particularly if a universal pension scheme isn’t means tested and is available to everyone.
- Retirement savings have a positive influence on individual balance sheets.
- Superannuation has positive implications for national savings and reduces the reliance on foreign capital.
- Long-term superannuation funds invest in alternative assets, including infrastructure and unlisted equity, which contribute to economic growth.
- Superannuation funds provide capital for domestic listed companies as they generally have a home bias.
As far as the latter is concerned, Australian private superannuation funds have A$1,415.5b, or 50.9 per cent of total assets, invested in Australian listed equities, while NZ superannuation funds have only $29.4b, or 35.2 per cent of total assets, invested in New Zealand listed companies.
Muldoon’s decision to switch from a savings to a taxpayer-funded scheme has been a major drag on the development of the NZX.
There is little doubt that the country’s capital markets would be substantially larger if the 1975 compulsory scheme had remained intact.
Although Australia’s compulsory superannuation has been a big success, the 700-page Productivity Commission report has several comments and recommendations. These include:
- There are too many unintended multiple accounts, where individuals open a new default account when they change jobs without closing their existing accounts. The Commission estimates that multiple accounts cost investors A$2.6b in terms of additional insurance costs and administration fees each year.
- A substantial number of individuals — over 5 million member accounts — are in “serial underperformance” funds. The Commission believes that if members in the bottom-quartile performing funds were invested in the median of the top-quartile performing funds, they would gain an additional A$1.2b per annum.
- The Commission wants an expert panel to recommend the 10 best super funds for default status.
- Self-managed super funds (SMSF) have delivered broadly comparable investment returns as the major pooled funds but smaller SMSFs (those with balances under A$500,000) have delivered materially lower returns.
- Fees have been trending down from an average 1.3 per cent in 2008 to 1.1 per cent in 2017.
- Member engagement remains low, except for those nearing retirement.
The commission’s overall assessment is that Australia’s compulsory scheme is working well, although a few tweaks are required.
The two main tweaks are the removal of multiple accounts, which would save A$2.6b per annum, and moving members from poorly performing funds to the top quartile. The latter would add A$1.2b to member balances each year.
KiwiSaver is working very well but it also needs a few tweaks, particularly as individuals are living longer and the Government’s universal scheme will become more expensive and put huge pressure on future taxpayers.
There are two major alternatives — either KiwiSaver is made compulsory or contribution rates are increased.
This column is not a strong supporter of compulsion because many individuals may not wish to sacrifice current income and are content to rely on the universal scheme once they reach 65.
The obvious move is to raise the KiwiSaver employer contribution rate above the current 3 per cent and the employee default contribution rate above 3 per cent.
Employees should also be allowed to contribute 6 per cent, in addition to the 3, 4 and 8 per cent contribution rates that are available at present.
The Government might also consider raising the annual tax credit as it is a powerful incentive for KiwiSaver investors.
There is room to move here, as last year’s KiwiSaver tax credit was only $0.75b compared with forecast Crown universal superannuation payments of $14.5b in the 2018-19 year.
Money spent now on higher KiwiSaver tax credits — as well as higher employer and employee contribution rates — could save the Crown over the longer term as larger KiwiSaver balances might allow it to slowly introduce means testing to the universal superannuation scheme.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.