The Government is flying the compulsory saving kite to test public opinion on the matter. I suppose it was inevitable given the crescendo of vested interest pleadings from the fund management industry. I have previously written in this column on evidence that suggests that compulsory savings not a panacea for low national savings. I will not repeat the arguments in this article. I will instead focus on the other reason many proponents give for this policy that compulsory saving will boost the capital available for domestic investment. Of the common arguments for making saving compulsory thesis the most spurious.
The first issue is the nature of the capital market problem compulsory saving is meant to fix. There were a number of perceived problems highlighted by the Capital Market Development Taskforce last year. These include a lack of transparency in capital markets, poor financial literacy, lack of trust in retail investment markets, over-reliance of businesses on debt financing, undeveloped venture capital and angel investment markets, and tax and regulatory bias between different types of investment. These are likely to be valid problems that are amenable to being addressed by specific Government measures. To the Taskforce’s credit, it was careful to recommend policies that directly target the problems and not introduce additional distortions that would cause problems elsewhere. It is notable that the Taskforce did not mention compulsory saving as a potential solution to capital market deficiencies.
Compulsory saving would be a crass policy to tackle capital market development because it does not address the specific sources of the perceived problems and it has very significant costs. There is no doubt that fund managers would benefit from people being forced to save more. Some of that money may filter down to the areas where there is evidence of problems, such as venture capital for small and medium-sized enterprises. But most will not. The primary goal of fund managers is to diversify and make good long-run returns for investors, not do New Zealand SMEs a favour. A compulsory saving scheme is a broad-brush approach that will provide massive support for the already thriving funds management industry, but with no guarantee of substantively addressing the real problems in New Zealand’s capital markets.
It is the costs of a compulsory savings programme that is the most ignored aspect of the debate. Forcing all workers to save reduces their disposable incomes during their working lives. Therefore, workers will not be able to consume as much as they would in the absence of compulsion. This reduces their welfare, despite what the more paternalistic in the business and political communities would like to think. Proponents of compulsory saving might counter by saying that the short-term pain will be justified by long-term gain as an increasing pool of saving stimulates future investment and growth. The evidence on that is ambiguous at best witness Japan that has maintained high saving and low growth, or the U.S. that has maintained low saving and high growth. Saving compulsion would be a case of certain pain for highly uncertain future gain.
Another cost of compulsory saving is the reduction in financial choice it entails. It does not allow for differences in peoples’ financial circumstances, preferences, or stages of life. It would, for example, force people to lock money away long-term at a time when it may make more financial sense to pay off debt at a faster rate or save short-term for a deposit to buy a house. Others may be forced to save when they have inheritances or other forms of existing wealth that would serve them adequately in their retirement. Some on low incomes may not want lower disposable income in their working years because they would be satisfied with a freehold house and National Superannuation in their retirement.
Some argue that now we have KiwiSaver it would be a short and painless step to compulsory saving. Generous Government subsidies make KiwiSaver a no-brainer for the majority of workers. But there is still a significant rump of people that have not signed up to KiwiSaver either because they cannot afford to despite the subsidies, or they choose not to because it does not suit their circumstances. These people would be worse off as a result of a move to saving compulsion. And once KiwiSaver is compulsory the policy rationale for subsidies disappears. It would be inevitable that they would be phased out over time.
If saving becomes compulsory, there would be a substantial risk that it would become the thin end of the wedge for more fundamental changes to retirement income policies. An embedded compulsory saving scheme would undoubtedly call in to question the need for universal National Superannuation. Decisions about the retirement income environment need to be considered transparently and holistically with specific retirement saving objectives in mind, not as a consequence of a misguided decision to make saving compulsory for the purpose of boosting domestic capital markets.
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