If compulsion is the answer, what was the question?

When it comes to financial security in retirement, most New Zealanders agree on one thing: if you want more money in retirement than New Zealand Superannuation, you need to build up savings before retirement.  Therefore, the real question is whether the government should force everyone to do that?

Some have suggested ‘yes’ by making KiwiSaver compulsory, perhaps with higher contributions of 6% from employees and 6% from employers, 12% in total and other variations on this theme.  At first glance that sounds sensible.  If people aren't saving enough, it is better to make them save.  Others have also suggested enrolling new babies at birth and giving them a taxpayer-funded kick-start. 

But before supporting compulsory retirement savings for workers or for all, it is worth asking a very simple question:

Where does the money come from?

Money does not appear out of thin air.  If someone, including an employer, is required to save an extra $100 a week, they must first stop doing something else with that $100.  Also, if someone has to pay more tax, say another $50, on top of the extra savings of $100, so a baby can receive a kick-start, they have to also stop doing something else with the extra $50 tax.  There are only a few possibilities.

• They save less somewhere else.

• They repay debt more slowly.

• They spend less, or

• They borrow more.

There is no fifth option.

Not everyone needs the same thing

Compulsory saving assumes everyone has the same problem.  But they don't. 

• Some people are already saving enough for retirement. 

• Some are paying off a mortgage as quickly as possible.

• Some are trying to save for a first home.

• Some are struggling to pay the grocery bill or meet health costs.

A law that forces everyone to do the same thing ignores these very different real situations.

For some people compulsory KiwiSaver would simply mean moving savings from one account to another.  Their total savings would not increase at all.  For others, it would mean delaying debt repayment or taking on more debt.  For others still, it would mean cutting spending they can already barely afford.

The problem with compulsion is that it treats all these people as if they are the same, have the same saving needs and have the same priorities.  They do not.

Paying off debt is also saving

Many think of saving and debt repayment as completely different things.  Financially they are often very similar.  Imagine someone has a mortgage costing 6%.  Every extra dollar used to reduce that mortgage effectively earns a guaranteed 6% return after-tax and after management fees on the dollar; not a bad return and there is no investment market risk.

Paying off debt faster is one of the best investments available for most.  A compulsory contribution to KiwiSaver may force them away from what is already the best financial decision for their circumstances.

Why should the government decide that a managed fund like KiwiSaver, with restricted access, is always better than lowering debt?

But people are bad at saving

This is the strongest argument for compulsion.  Many people do struggle to save.  Many procrastinate and many focus on immediate spending rather than future needs.  Even if we accept that, it does not follow that compulsory retirement saving is the best solution.

Imagine someone struggles with regular exercise; in fact, that probably means most people.  Would we immediately support a law forcing everyone into a gym membership?  Probably not.  We would look for less intrusive options first.  Retirement saving should be no different.

There are many ways to help people save without forcing them.  For example:

• Automatic enrolment with the ability to opt out as per KiwiSaver, as we already do.

• Better financial education.

• Simpler savings products and restrictions on how fund managers market.

• Clearer income in retirement projections, and, possibly,

• Targeted assistance for vulnerable groups.

These approaches recognise that some people need help while preserving the freedom of those who do not.  Compulsion should be the last option, not the first.

People's lives change

One of the problems with compulsory retirement saving is that it assumes retirement is always the highest priority.  Mostly, it isn't.

• A young family may need every spare dollar for a house deposit.

• Someone else might need to deal with medical costs.

• Another person may need to reduce debt.

• Another may be investing in a business.

Life is complicated and people's priorities change over time.  A compulsory savings regime assumes that a government can make those decisions better than the individuals living with the consequences.  This is a very big assumption.

Who benefits?

Whenever a major policy change is proposed, we should ask who benefits?  Individuals may or may not be better off from compulsory saving.  We can guarantee that some will not be and it is normally those that can do least about it.  It depends on the individual’s circumstances.

But one group benefits almost automatically; fund managers and the financial services industry.  More compulsory contributions mean more funds under management.  More funds under management mean more fees.  That does not mean fund managers are wrong, but it does mean we should carefully examine claims that compulsory saving is obviously in everyone's best interests.

A better question

The debate is usually framed as:

"Should people save more for retirement?"  For many people, the answer is yes.  But that is not the real question.  The real question is:  Should the government force everyone to save in the same way, regardless of their individual circumstances and level of current savings and at a level above what is optimal for many?

These are very different questions.  Someone can support saving, support planning for retirement and support KiwiSaver, but still oppose compulsory KiwiSaver.  Recognising that saving is important is not the same as believing that government compulsion is the best way to achieve it.

Some people do make poor financial decisions but that does not automatically mean taking choices away from everyone is the right answer.  Before introducing compulsion, we should be sure that a less intrusive solution cannot achieve the same goal.  This is a very high bar, and compulsory retirement saving has not yet cleared it.