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Compulsory private saving

Compulsory saving raises difficult wellbeing and fairness issues

The government can require individuals to save compulsorily. In New Zealand, this could be done by changing the law to make it obligatory for individuals to participate in the KiwiSaver scheme. Depending on how it is designed, compulsory saving could raise national saving. Compulsory saving raises difficult wellbeing and fairness issues. Coming to a view on compulsion will require careful discussion and consideration.

Compulsory saving generally increases household saving to some extent

Evidence suggests that compulsory schemes generally increase household saving, but not by the full amount of compulsory contributions. Households typically respond by reducing other forms of saving to some extent.[27] The success of compulsory schemes in raising national saving is heavily dependent on the nature of the design of the schemes. There are potential trade-offs against other objectives, for example, an exemption for low-income workers may reduce the impact on national saving but improve wellbeing and fairness.

A modest compulsory savings scheme might have only a limited effect on New Zealand's national saving. This is partially because many workers are already contributing to KiwiSaver. The effects of compulsory saving on national saving may depend on how it fits with the broader policy package.

Many countries have a compulsory savings scheme, but not alongside a universal pension system like New Zealand Superannuation

Many OECD countries, such as Australia, have compulsory saving schemes along with a means-tested, state-funded, safety-net pension. New Zealand would be unique were it to introduce a compulsory saving scheme in addition to a near-universal retirement income provision, particularly given the relative generosity of NZS compared to other countries' safety-net pensions. The typical OECD country pension model is sometimes referred to as the three-tier system and is set out in the table below.

Tier 1: Mandatory, adequacy Tier 2: Mandatory, savings Tier 3: Voluntary, savings

Typical OECD pension system

   
Safety net pension, means tested and state funded. Compulsory savings accounts. Tax subsidies for pension savings.

New Zealand current pension system and potential additions

   
Universal New Zealand Superannuation (NZS). New Zealand doesn't have a compulsory saving scheme. KiwiSaver, predicted to rise to 1.4 million members.

The following lists some of the potential broader effects of compulsory saving:

  • Effects on households - some people may feel better off with compulsory saving and might welcome an imposed discipline requiring them to save. Others, in contrast, may feel financially worse off because their choices on how much, when best, and how best to save would be constrained by law. Saving by repaying a mortgage, investing in a business or farm, or by acquiring financial assets may be the best saving choice for some people. Others may be better off by not saving at that point in their lives.
  • Labour market effects - compulsory saving may be viewed partially as a tax by people who would prefer not to save, or who would prefer to save in a different form. In particular, compulsory saving risks creating an unintended disincentive to engage in the labour market, particularly for low-income workers, as they are generally less able to set funds aside for retirement.
  • Retirement income options - over the longer term, compulsory saving could link to other retirement income policies.
  • Capital market development - compulsion could have a positive influence on New Zealand's capital market development by raising the availability of domestically-sourced funds available for long term investments.[28]
  • Government intervention in capital markets - compulsion would substantially increase the level of government intervention and direction in the market. Compulsion would likely require increased regulation to reduce financial market risk and could increase pressure to introduce some form of guarantee, which would have implications for the Crown's exposure to potential liabilities.
  • Economic impact - the overall economic impact of compulsory saving schemes is design dependent. Specific compulsory saving schemes would need to be assessed for their overall economic impact.[29]
  Pros Cons
Introduce compulsory saving (there are many different models)
  • Positive impact for  capital market development
  • Modest increase in national saving
  • Substantial increase in government intervention
  • Not the best option for all individuals
  • Negative labour market effects

Questions

  • Would the pros of New Zealand having a compulsory savings scheme outweigh the cons?
  • Would compulsion be a better option than others that direct individuals into long-term savings?

Notes

  • [27]The available empirical evidence for the impact of compulsory superannuation on household saving varies significantly between the studies, with the impact dependent on design of the study, the key features of the retirement income system as a whole, and the particular economic circumstances of the country. See for example in Australia: Connolly & Kohler (2004) The impact of superannuation on household saving; and Connolly (2007) The effect of the Australian superannuation guarantee on household saving behaviour.
  • [28]The empirical evidence of the effect of compulsory saving on financial market development is mixed, with the results influenced by the existing level of capital market development. One of the main areas of study has been analysis of Chile’s experience following the introduction of compulsory retirement savings accounts in the early 1980s. See for example Iglesias-Palau (2009) Pension reform in Chile revisited: What has been learned? For general discussion of the link between retirement income system design and capital market development, see for example Vittas (2000) Pension reform and capital market development, and for a recent cross country analysis, see Rocholl & Niggemann (2010) Pension funding and capital market development.
  • [29]This was the approach taken by the Irish Pensions Board in 2006 when it undertook analysis of compulsory and quasi-compulsory pension systems with a view to recommending the most appropriate system for Ireland at a practical level. For their report “Special Savings for Retirement”, the Pensions Board commissioned work to quantify the macro-economic effects of a range of alternative pension systems.
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