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Should KiwiSaver be Compulsory?

This analysis from the 2007 SuperFunds Summit by Brent Layton debates whether KiwiSaver should be mandatory. Examining market failures, savings trends, and asset allocation inefficiencies, it questions the efficacy and net benefits of regulation in this context. Conclusions suggest resolving issues through improved financial literacy, tax reforms, and diversified investment options instead of mandatory savings schemes like KiwiSaver.

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Should KiwiSaver be Compulsory?

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  1. Should KiwiSaver be Compulsory? Annual SuperFunds Summit 2007 Brent Layton, March 2007

  2. Should KiwiSaver be compulsory? • Only regulate if there is a market failure and • Regulation is the most efficient way to correct the problem and • Regulation creates a net benefit • What is the market failure?: • Households saving too little for retirement due to myopia? • Country saving too little restraining investment and so restraining economic growth? • Households or country choosing to put too much into housing? i.e. inefficient asset allocation

  3. Net household savingsPercentage of GDP Source: Statistics New Zealand, NZIER forecasts

  4. Net household savings Australia and New ZealandPercent of GDP Source: Statistics New Zealand, Datastream

  5. Net household savings comparison(as a percent of disposable household income) Source: Statistics New Zealand, OECD Economic outlook

  6. Spicers’ Index of household net worthAnnual percent change Source: Spicers

  7. Household assets and liabilities(Million dollars) Source:Spicers

  8. Net public savingsPercentage of GDP Source: Statistics New Zealand

  9. Net business savingsPercentage of GDP Source: Statistics New Zealand

  10. Net household, public and business savingsPercentage of GDP Source: Statistics New Zealand

  11. Net national savingsPercentage of GDP Source: Statistics New Zealand

  12. Net worth per household(Dollars) Source: Spicers

  13. Growth rate comparisonsPercent Source: Statistics New Zealand, OECD Economic outlook

  14. Conclusions • No evidence that households able to save are saving too little for retirement. • Enticing those with too little to save to save will not solve this issue; it will just increase their current misery. Not a market failure • No evidence of savings/investment/growth link for second problem to be a real issue

  15. Conclusions ctd • Saving too much in housing and fixed interest? • Public and business savings are non-residential so the weight of residential assets in household total “balance sheets” not so heavily residential as the direct household balance sheet • The capital gains tax myth – same tax regime for direct property and direct share investments • Offset borrowing costs against other income – negative leverage – does shift income to period when some individuals expect their marginal tax rates will be lower. Solution - flatten the tax rate? • Residential property has performed well – domestic shares not so well. Broaden market. Sell SOEs. • May be some inadequacy of financial literacy about shares. Improve school curriculum. Fund Retirement Commissioner better.

  16. Conclusions ctd • KiwiSaver not most efficient way to deal with the small issues there might be around asset allocation biases • Negative net benefit from KiwiSaver i.e. compliance costs and admin costs less than any benefits • Don’t make KiwiSaver compulsory; scrap it.

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