Unfortunately, compared to other advanced economies, New Zealand is woefully behind in the area of retirement income, domestic savings and use of private funds to increase our investment in assets such as hospitals and infrastructure.
As one of the many young Kiwis who left to go to Australia, I am stunned by our transtasman neighbour’s financial wealth. It greatly exceeds NZ, even after adjusting for their larger population size.
Australia’s Sovereign Wealth Fund, called The Future Fund, has NZ$350 billion in assets under management.
Meanwhile, their compulsory superannuation system is world-leading. Total accumulated funds are currently NZ$4.6 trillion. It is expected to become the second-largest savings pool in the world by 2050 and is 35 times larger than total KiwiSaver balances. Every Australian has an account. Individually their balance averages 10 times the balance in one of ours.
Astonishingly, around 20% of Kiwis don’t have a KiwiSaver account, and no savings at all.
The Australian scenario would not have been possible without solid and competent political leadership. Former Australian Prime Minister Paul Keating introduced Compulsory Superannuation in 1991 to “reduce the future reliance on the age pension, and over time, give ordinary people a better retirement”. Employer contributions started at a compulsory 3% of wages per year and gradually increased to the 12% where they sit today.
Thanks to compulsory superannuation, Australia is the only country across the OECD expected to have its government old age pension spending decrease from 2.3% of GDP today to 2% of GDP by 2060. By contrast, New Zealanders’ demand on the public purse to fund our pay-as-you-go pension system is projected to rise from 4.9% to 7.7% of GDP by 2060.
There is a common theme that emerges from such comparisons. Countries that create strong compulsory savings systems can reduce the fiscal burden of public pensions and also create pools of capital which they then have available to invest in the country’s national development.
They need not beg other countries for more foreign direct investment, as NZ has now been forced to do.
Winston Peters has put forward a plan to make KiwiSaver mandatory, offering tax incentives for employers while pushing contribution levels up to 10%. Photo / Mark Mitchell
After leaving NZ to study for a master’s degree in Singapore, I was amazed to learn about the city-state’s unorthodox social security and public asset system. Its development is deeply rooted in Singapore’s national savings schemes. The country’s Central Provident Fund requires citizens to save up to 20% of their wages – with another 17% provided by their employers. It currently has NZ$834 billion under management.
Singapore’s Sovereign Wealth Funds manage more than NZ$570b through Temasek Holdings and NZ$1.3 trillion through the Government Investment Corporation.
Singapore’s economy is expected to continue remaining the crown jewel of Southeast Asia. It is a capital exporting nation with a current account surplus and net zero debt.
Australia and Singapore have both taken the path of focusing on long-term capital accumulation through use of sovereign wealth funds and compulsory saving schemes. It is time New Zealand follows suit.
Many older Kiwis know about how former Prime Minister Sir Robert Muldoon made an awful mistake by abolishing the compulsory superannuation scheme set up under Norman Kirk in 1974.
Peter’s new savings proposals may mark the new beginning of a bipartisan agenda for NZ’s future public asset development.
Politicians across the spectrum support this transition. Labour’s David Parker said in his valedictorian speech, “[Australia’s] universal work-based savings [is] why those clever Aussies own their banks plus ours, our insurance companies, and much more. It’s why their infrastructure is better, their current account deficit lower, their net international liabilities lower, and their growth rate higher.”
Former National Party Commerce Minister Andrew Bayly also understood the vitality of higher domestic savings. He said, “One largely untapped source is the $109 billion of capital held by KiwiSaver providers… By comparison in Australia, I understand roughly 15% of its $3.8 trillion pension fund industry is invested in alternative assets, such as private equity and infrastructure.”
Now, NZ First has proposed a policy to ensure KiwiSaver becomes a major economic vehicle for our future economy. There are gripes about the fiscal costs of the tax cuts needed to buttress compulsion – including me – but the idea behind the policy is sound.
New Zealand stands at a crossroads. Our low domestic savings rate, combined with our ageing population, poses a long-term fiscal challenge that cannot be ignored.
The late Harvard economist Martin Feldstein’s words still ring true, “The problem with the current system is that retirees’ benefits are financed on a ‘pay-as-you-go’ basis, by taxing concurrent employees. The obvious solution is to shift to a privatised system of pre-funding those benefits through mandatory contributions to individual accounts.”
Many analysts argue that foreign capital can drive investment, but as other nations have now successfully demonstrated, mandatory savings systems supplemented by Sovereign Wealth Funds strengthen not only financial stability but also productivity and national independence.
As far as I know, there are no options to addressing long-term fiscal debt problems for a country like NZ other than by hiking taxes, printing money, defaulting, or cutting public services, or by promoting domestic savings through policies that support schemes like KiwiSaver and our Super Fund.
Which one do you prefer?
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