Centre for Public Policy Evaluation

College of Business, Massey University

Superannuation: what are the issues?

A referendum is to be held from the 5^th to the 25^th of September 1997 on the proposed Retirement Savings Scheme. The question will be:

"Do you support the proposed Compulsory Retirement Savings Scheme?"

If approved, the scheme will start on 1 July 1998. Contributions would be 3% of income initially for those earning $96 or more per week, and are planned to rise to 8% over four years.

The Independent Referendum Panel has the task of impartially providing information on the proposed scheme. It is not to give pros and cons of the scheme or compare it with any other method of providing income in retirement.

It is the aim of this discussion sheet to identify the main issues which must be addressed when considering provision for retirement. The referendum allows people to state their opinion on one possible approach.

The fundamental issue is that some provision for retirement is necessary

- what approach should New Zealand take?

This issue can be subdivided into five principal questions:

1. Should it be funded through savings or through taxation?

This is the main difference between the current and the proposed scheme.

A taxation funded scheme means that current taxpayers provide for current retirees. Is this affordable? What will the burden be? Will future taxpayers be prepared to bear this burden?

A savings based scheme means that individuals provide for their own retirement (possibly subject to top-ups as in the proposed scheme). Can individuals afford this? If not, are they living beyond their means?

There are broad economic implications to consider:

• Will the alternatives have different effects on New Zealand's levels of savings?
• Would a savings-based scheme encourage higher savings?
• Would higher savings result in lower interest rates and encourage investment, or would it discourage demand?
• Where would the funds be invested, at home or abroad? Is this important?
• Will there be balancing tax cuts? How will they be made, and will this pass other costs onto individuals?
• What tax rates would be required for a tax-funded scheme? With what implications?

2. If the scheme is savings based, should it be compulsory or voluntary?

If it is voluntary, some may decide not to make adequate provision. Would the government then feel obliged to assist them?

If it is compulsory, people's choices are constrained. Some may be compelled to save inappropriate amounts at inappropriate times in inappropriate ways.

If a fixed amount is specified, will people then assume that they are making adequate provision, or would they continue with other saving (i.e. will people take individual responsibility when the state is intervening)?

3. If savings, how much, and where, with what security/guarantees?

What is an appropriate amount for people to save? It may vary depending on life expectancy, desired living standards, the extent to which other family members can be relied on to provide for them.

Where should the funds be invested? Higher returns can commonly be expected from riskier investments, but the risk includes the possibility of losses. Should individuals be required to spread their risk, or to keep to relatively safe investments?

Should the individuals carry the risk themselves, or should there be some government intervention if things turn out badly?

Should there be approved funds only? If so:

• Would this distort financial markets?
• How would the funds be selected?
• How would they be monitored and/or regulated, if at all?

4. Should Government involvement apply universally or be targeted towards those with less ability to provide for themselves? If targeting, how are these people/groups to be selected?

There are issues of freedom and responsibility, plus equity and ability to provide.

5. Are there transition problems moving from one approach to another?

Will one group be both paying taxes for those already retired and saving for themselves?

Will those who are already making provision be penalised (through contributing to a superannuation scheme and also having to make compulsory savings, for example)?

Stuart Birks

Last updated 25 August, 1997