STUFF on new workplace superannuation
Does New Zealand need workplace superannuation?
NZ has low savings rates - check in with the ISI or the Retirement Commission.
We also have a looming problem with our pay as you go model of providing state pensions. These problems, are often confused, they are linked but they are not the same thing.
Workplace Super requires the employer to do some things. It will not be too hard, and will be introduced slowly (new employees only, lowish contribution levels etc). However, costs still apply.
For workers, too, the introduction is a modest one. Not a lot of compulsion - you can opt out. Your funds will not be locked in. There will not - at this stage be incentives.
But you can see where this is headed.
Pretty soon in this debate we'll have to deal with issues like:
'hey, if you want an incentive to save you'll have to leave it locked away for a while'.
'These super schemes are damned expensive, someone should limit what they can charge'
'What will we do about people that change job a lot'
Later we'll get to loonier stuff like 'hey, this money should only be invested in organic moonbat farming with a low environmental footprint, on NZ land, in a sustainable way...' Not to say that such a venture wouldn't be profitable - who knows - but deciding where savings are invested, we think, is best left to the savers and investors.
Nevermind: Is a slow transition to an Australian-style workplace super scheme desirable?
Here is a view: We don't like to see starving old people. You lot act like youre not saving, and we can't afford to look after all of you that well. So we'll make you save some.
Another view is: You lot tend to save in your homes or consume. When you get to retirement you'll have your hand out but won't want to leave your big expensive houses. What we have here is an asset misallocation problem - and the state does not have to pay for it. So we'll require you to allocate saving to assets in a different way.
Same end result. Only problem being that we generally like to think that people know what is best for themselves. They are currently, deliberately, choosing to live in bigger houses and consume more in spite of all the facts.
These are hazards set up by our current minimal provision for people. They can kid themselves - to some extent - that government will do it for them, because there is a basic state pension. The more we intervene in the market here, the more choices we will have to make to manage the further hazards set up.
You see, people know they should save, look here at a good researcher in the field. (You'll need a login but its worth it).
Debra thinks that the lack of savings is the fault of the investment industry and its advisers. This may be partly true, but ultimately it comes down to the fact that consumers are either making a choice to consume in the face of the evidence or they are choosing other ways of saving.
If you buy the argument that this is the first gentle nudge towards a compulsory regime of workplace super, then you are looking down the barrel of a lot of choices required to manage the moral hazards created:
What level of incentive?
What level of tax break - a low dollar amount, reviewed frequently, or a proportion of income?
What vehicles will qualify for the breaks?
Super funds, direct rental properties, public companies, listed trusts?
Why should some qualify and not others?
At what level of rebate?
What about the people that save and then spend the lot on the day it becomes unlocked - then claim state pension...
Oh, so we need to insist on annuities then... at what level?
...which means we need to revise the annuity taxation approach because right now its awful... what level shall we set that at? Urk Variable tax rates make annuity pricing complicated...
You get the picture...
For those with short memories, we had all of these things before, and decided it was such a mess, distorting the behaviour of investors that we said to hell with it and walked away.
I'm not saying that it would not be a good thing. Many of my clients would love the kick to investment business that would be generated by such changes. By implication, so would I.
The point is this: do not pretend that this is a nice simple, low key way to solve the superannuation problem. It is a nice low key first step along a path which must at some stage answer all these questions and more.
In the meantime, the market has not been helpless about the situation.
It has been quietly inventing ways for people with the asset misallocation problem in retirement to access their capital without moving house. These are home equity release loans, go look over here.
While personal debt has risen sharply as a proportion of income, wealth has been rising too - and so balance sheets have actually improved.
Whats the bottom line?
I like the idea of encouraging a broader spread of assets (outside property) for investors. This is at present not a hard control, but a form of signalling. Its probably in the same order of fiddling as public health advertising. So it is not the dead hand of control yet - it is just a nudge in the right direction. But lets keep a damn close eye on this. As soon as that dreaded word compulsion rears its ugly head we'll find all sorts of crazy things going on. Tax this and that, more fertile ground for avoidance and fun and games... endless trouble. But hey, but endless work for me too :-)