This is an interesting article by Brian Toohey, a respected Australian financial journalist.

A school of thought in New Zealand has favoured the adoption of Australia’s compulsory superannuation regime.  But Toohey writes:

To this day, there is still no detailed policy report showing that net economic and social gains flow from forcing employees to hand over a growing slice of their salary to the richly rewarded fund managers in the nation’s booming financial sector.

The union movement in Australia strongly backed the scheme (which has boosted union influence in Australian economic life).  But Toohey writes:

Several younger union officials now say privately that they believe the majority of their members would be better off if compulsory super contributions were paid instead as a normal part of salaries, letting all employees decide how best to allocate their income over the course of their working life …  Some older union officials like to portray money diverted compulsorily to super as a free gift from employers. It is not. It is money that could otherwise be paid as wages – a point that the superannuation minister (and former Australian Workers’ Union secretary) Bill Shorten candidly acknowledges.

This is correct.  Like other non-wage labour costs (such as ACC levies), the initial incidence is on employers but the costs are ultimately borne largely by employees.  (In competitive markets firms have no choice but to shift the burden – they have to maintain returns which cover their cost of capital.)

Toohey reports on recent APRA figures which received wide coverage in Australia:

The Australian Prudential Regulation Authority recently released figures showing that the average nominal annual super fund return over the ten years to 30 June 2011 was a pathetic 3.3 per cent. Given that the average annual increase in the CPI over that period was 3.2 per cent, returns only beat inflation by the slimmest of margins. Australians would have been better off putting their money into government bonds and term deposits, or reducing their mortgage or upgrading their educational qualifications or those of their children.

A corollary of this finding relates to the impact of the scheme on economic growth in Australia.  Some people argue that a similar scheme here would boost growth in New Zealand.  I have never seen any account of Australia’s improved economic performance over the past 25 years that attributes it to compulsory superannuation.  Rather, the main explanation is the economic reforms initiated by the Hawke and Keating governments and carried on by John Howard.  These figures suggest why compulsory savings have not been a significant factor, at least over the past 10 years: the returns to the scheme have been poor and capital has been misallocated.

The Australian Productivity Commission has amplified this point as Toohey notes, saying:

Compulsory saving imposes a deadweight loss as it distorts decisions about which savings vehicles to use, as well as between consumption and savings.  In particular, younger people may be less able to invest in their preferred mode of savings (for example, owning their own home, which is a tax effective savings vehicle and offers social benefits).

There are other drawbacks with compulsory savings.  Toohey notes that fees paid to fund managers and administrators now amount to about $18 billion a year.  Last year it was reported that around $10 billion in superannuation accounts had gone missing – the owners of the lost accounts could not be tracked down.  The legislation backing the scheme has been endlessly tinkered with – over 2000 amendments to it had been made at last count – and further amendments are currently being debated.

Perhaps considerations such as these led the recent Savings Working Group not to recommend a compulsory savings scheme for New Zealand.



  1. Whilst the article contains the usual philosophical issues associated with compulsion, does it really add that much?

    There is much arm waving about the nasty banks and fund managers, a popular target currently, and some strawman structuring of a potential counterfactual, but little or no analysis.

    Surely the fact that all people are forced to save internalises the costs (to them) of the potential future costs (to everyone) of funding their retirement?

    Do you like the situation in NZ where current taxpayers pay for past taxpayer’s retirement, or do you propose that there be no safety net? As you know the problem with safety nets is that politicians turn them into entitlements which then become a fiscal nightmare with no certainty to the recipients.

    Humans are not rational, most have little or no understanding of economics and finance, most are focused just on today with some vague aspiration for the future. I have read the book Nudge and I have a lot of sympathy for the arguments it makes.

    • The post just drew attention to some (pretty powerful) factual points – it wasn’t a comprehensive analysis.

      For a fuller discussion see this submission.

      You would still have to have a safety net even with compulsion. Many people won’t be able to save or would lose their savings.

      Compulsion is not a nudge. Nudge doesn’t recommend compulsion – at most something like KiwiSaver Mark I

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