New Zealand wants to copy our super: here’s why it’s a bad idea

New Zealand’s opposition party has a long road to tread to support its case for compulsory super. Trey Ratcliffe/Flickr, CC BY-NC-SA

Australians and New Zealanders have a healthy rivalry about who follows who. Both countries claim as their own Pavlova, Crowded House and Phar Lap. To this list might soon be added compulsory superannuation savings schemes.

In a major pre-election policy announcement last week, the New Zealand Labour Party promised to follow Australia and introduce compulsory retirement savings. This would be done by turning KiwiSaver, New Zealand’s voluntary, work-based retirement savings scheme, into a compulsory one. Labour has also promised to up employee contributions from the current 6% (3% employee contributions and 3% employer) to 9% of earnings.

If New Zealand introduces a compulsory retirement savings scheme, the reasons will be different to Australia’s. Labour’s plan could also harm middle and low-income earners.

A different agenda

New Zealand has toyed with compulsory retirement savings schemes over the years, but usually it has decided not to have one. In 1975, for instance, Labour introduced a scheme, which the next National Government replaced with national super in 1977. Interest grew again three decades later, when many New Zealanders looked upon the great stock of capital that Australia’s super funds had generated and lamented the opportunity that was lost in the 1970s.

Australians might be forgiven for thinking that New Zealanders have changed their minds on compulsory superannunation, now that Labour is pushing for it again. But Labour’s reasons for wanting to make KiwiSaver compulsory now have less to do with the fiscal sustainability of retirement savings, and more to do with short-run macroeconomic policy.

According to the IMF, New Zealand’s dollar is currently over-valued by between 5 and 15%. Labour’s idea is to use a higher rate of compulsory KiwiSaver contributions to help devalue the dollar. By upping savings, Labour hopes this will take enough money out of the economy to cause the exchange rate to fall. In short, Labour wants to use retirement savings as an additional tool for managing the economy.

One of the reasons Labour has used to justify making KiwiSaver compulsory is that Australia already has a universal scheme. But Australia did not introduce work-based compulsory retirement savings for the reasons Labour wants to.

When Australia first introduced compulsory savings in the early 1980s, the country was experiencing a dangerous wage-price spiral. In 1983, the government struck a deal with the unions — the Prices and Income Award — so that wage increases would be transferred to savings, thereby easing the pressure on prices created by rising wages. In 1992, the government introduced a new superannuation guarantee, with the purpose of helping make Australians’ retirement incomes more affordable.

Even if they had downstream effects on the economy, Australia’s compulsory retirement savings schemes were not designed as alternative macroeconomic tools. In 2014 New Zealand, which has a central bank whose purpose is to target short-term inflation, using compulsory retirement savings would only muddy the objectives of monetary policy. It would also give the bank political powers and increase uncertainty for savers, as the bank would have the power to change the savings rate depending on economic conditions.

More losers than winners

This is why it is hard to see how Labour’s plans for KiwiSaver would help make anyone better off. In theory, increasing savings slowly over a long period in good economic times, when households can afford it, can help to restrain inflation. It has been estimated, however, that the KiwiSaver contributions rate would have to increase to 15%, not 9%, to have an immediate effect on inflation equivalent to raising the cash rate by 1%. Labour’s plan to gradually increase contributions by rises of 0.5 to 1 percentage points per year would also mean the tool would have no discernable impact to make it worth the cost.

This is the really worrying issue with this proposed policy — it will exact a high cost on New Zealand’s poorest workers and those who aspire to get ahead. Labour’s plan would require them to save money which they could use to help feed and clothe their families, pay off a mortgage or invest in other valuable activities, like starting a business. Is having an additional macroeconomic tool really worth the economic pain and uncertainty that it would bring to New Zealand’s most vulnerable?

Labour’s reasons for wanting to make KiwiSaver contributions compulsory are different to why Australia established its ones. Since Labour’s reasons are concerned with bringing down the New Zealand dollar, it should not justify introducing compulsory superannuation because it is what Australia has done.

Moreover, Labour should reassess whether its plan would have the kind of impact on the exchange rate that it claims. Otherwise, if it wins government and introduces the policy, it might find it does more harm to the interests of the producers, and low-income and middle New Zealanders who it wants to protect.