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Compulsory Retirement Savings

There has been much talk recently about whether KiwiSaver should be made compulsory and the percentage contribution increased. In theory, there could be several economic benefits from this approach. As a result, millions of dollars would be saved rather than spent and this would help take the heat out of the economy and reduce inflationary pressures.

saving

There has been much talk recently about whether KiwiSaver should be made compulsory and the percentage contribution increased. In theory, there could be several economic benefits from this approach. As a result, millions of dollars would be saved rather than spent and this would help take the heat out of the economy and reduce inflationary pressures.

The money saved would be invested in bonds and shares, providing funding for business investment and economic growth. Over time, the amounts saved could potentially allow NZ Superannuation payments to be reduced or the age of entitlement increased, thus easing the financial burden on the Government as the population ages. It is difficult to argue against compulsory retirement savings from an economic point of view.

Looking at the issue from the point of view of an individual provides a very different perspective. By definition, around half the working population earns less than the average wage and in addition there is a large segment of people who are not working or who receive a Government benefit.

The reality for many of these people on low incomes is that the best financial outcome they can hope for by the time they retire is to have no debt. Compulsory saving for such people would place them under significant financial pressure.

While the remainder of the working population may be in a position to save with better management of their income, many still have a mortgage. From a strictly financial perspective, it makes more sense to pay off a mortgage faster than to save for retirement as this provides a better return.

If the problem to be solved is one of encouraging people to cut back on spending, the best solution is increased financial literacy and to give people the tools they need to better manage their money.

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