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‘At the heart of savings is productivity. It has to be productivity’, Milford Asset Management chief executive Blair Turnbull says on panel covering longevity and superannuation
Before we have a retirement problem, we have a productivity problem, Milford Asset Management chief executive Blair Turnbull said.
“If we just look at OECD countries, for example, we are 27 out of 37 in terms of productivity, and when it comes to savings, we’re 33 out of 37 because the two are inextricably linked,” Turnbull told the audience at the Politik Election Summit in Wellington on Wednesday.
“Essentially, you have low productivity, you have low wages, you have low disposable income, and thus low ability to to save. And therein lies a real problem when you put on top of that a very unique NZ Super, which is becoming a heavy fiscal drag, and on top of that we simply just don’t save enough.”
Turnbull alongside the New Zealand Initiative chief economist Eric Crampton spoke about the country’s longevity problem as part of a panel at the summit. The panel was facilitated by RNZ Business Editor Corin Dann.
Turnbull pointed out that four out of 10 workers just survive from pay packet to pay packet, and have about $1000 worth of emergency savings, “so the thought of saving for your retirement when you’re surviving week to week is really not feasible.”
“This is something we just absolutely cannot afford to keep kicking down the road. And I do hope that we do get bipartisan support because we need it.”
Crampton said with Treasury’s projections, based on no policy changes, you wind up with debt to GDP ratios of 200% and the number of workers between 15 to 64 per retiree would shift from about four workers to two.
“I don’t think anybody believes though that policy won’t change,” he said.
“So, what options have you got? It’s reducing the amount of entitlement that goes to people over the age of 65, whether by changing the amount that each person gets or by changing the age. You can CPI index [NZ Super], which would be tremendous. Treasury has done some very good work suggesting that that can help a lot. Those could be beneficial.”
If wages went up faster than the Consumers Price Index (CPI), NZ’s official measure of inflation, then superannuation would go up a lot faster than CPI and that’s what really blows the costs out, Crampton said.
“Treasury’s modelling was suggesting that if you shifted to CPI indexation alone and got rid of that wage floor, workers would be protected in retirement.”
He said people would be able to afford the same basic bundle of things we consider as part of a basic retirement.
“Getting rid of the wage floor [in superannuation] … would mean that we’re not pushing much past. You wouldn’t get past 6% of GDP. It would stabilise a little over five, so that one change over a long period could do an awful lot of good, along with some other changes.”
Compulsion and KiwiSaver?
Both NZ First and National have proposed making KiwiSaver compulsory as part of their election year policies.
Asked about compulsion and KiwiSaver, Turnbull said people realised they needed to save.
“Just to make it real, how urgent is this? Right now, today, people who are approaching 65, one quarter of them have a house and that’s all the income they have, and that’s it. They’re relying 100% on NZ Super.”
“If you’re born in 1980 … you’ve got a life expectancy of 82. So you’ve got a long time, a long time on a very very minimal level of income, and you can’t eat your house … It’s not something that’s going to come down the road. We have this problem. We have this problem now,” Turnbull said.
NZ Super needed to be addressed and at the same time, the country needed to become better at saving, he said.
“At the heart of savings is productivity. It has to be productivity. You’ve got to ask yourself, ‘why can’t we save better?’ … If you have low productivity and low wages, you have no discountable income and don’t necessarily save, you can’t break the cycle of productivity, and that is the key part of it.”
Asked if he had seen a “circuit breaker” on productivity from any political parties, Crampton said it was clear from National’s Chris Bishop and Labour’s Phil Twyford that both seem committed to competitive urban land market ideals and both wanted to enable more housing.
“I think that’s fundamental. One of the reasons that we have low productivity is that any time you get a productivity increase, it just banks into the price of land. Rents go up. It’s a problem,” he said.
Freeing that up would allow more “economic dynamism” and more business formation because people wouldn’t be as constrained by zoning and other conditions, Crampton said, which would be helpful.
On NZ Super, he also said it was promising that National had signalled they would be announcing something but noted that they faced a constraint: NZ First.
“I hope that they’re able to get across indexation because if you know that, say that you’re 30 now, and you know that New Zealand Super will only index for CPI, you will want to save more if you want to have more than just a basic CPI bundle in your retirement, so that gives you demand for more savings,” Crampton said.
Crampton said: “Whether or not you couple it with compulsory savings, so long as New Zealand Super is run as it is, you can’t grow your way out of the problem.”
There were other ways of growing your way out of a problem, he said, and it was about thinking outside of the box.
“New Zealand is ageing. We understand that Europe has aged. They are in far worse a spot than we are. If you go to Germany, workers there have to support far more retirees for every worker than they do here.”
“You can almost imagine an ad campaign from Immigration New Zealand. Put up some big billboards saying ‘German youths, if you are 25 to 35 and you want to come to New Zealand and have a family, we will force you to support fewer old people than your government will’.”
This was met with laughter from members of the audience.
Crampton said if NZ got in about 1.8 new young people for every new retiree, the ratio would stabilise and if there was net immigration of around 110,000 a year of young people out of countries that have this specific problem, NZ Super could be sustained as is.
“You would have to increase immigration at an increasing rate and the people who tend to hate changing Super also tend to hate immigration,” he said.
“It’s a trick that can only work for a country that’s really small relative to the big European countries. Like we couldn’t do it if we’re Germany, right? Because you’re already big. We’re tiny relative to the population that we could suck out of Europe, we could make some progress that way,” Crampton said.
‘We’ll have to look long’
Means-testing superannuation, like in Australia, is often floated as something NZ could possibly do and often brought up on panels about retirement.
Turnbull said “we’ve got paralysis by analysis on spinning around on CPI means-testing and income testing”.
“It’s quite frustrating when we’re just not moving, and I think that is half the challenge. Nothing will be perfect here. There won’t be a perfect silver bullet solution to an ageing population. We’ll have to try a number of things, and we’ll have to look long. We have to look long.”
Turnbull said the key thing is that the retirement shortfall problem has a productivity problem.
“If we can enhance wages and invest in people and opportunities and technology and so on. We will break down the retirement shortfall.”
