Freelance articles

Mary is occasionally commissioned to write freelance articles. Here are some of them.

I feared this would happen. Share markets would go through one of their down periods right after KiwiSaver started, and people would leap to the conclusion that the retirement savings scheme was not a good idea.

Sure enough, a story to that effect featured prominently in the Weekend Herald's Business section last Saturday. The story, quoting a former high school maths and economics teacher, began "KiwiSaver has so far been a KiwiLoser, eroding more wealth that it is creating." That is grossly misleading. Anyone who avoids KiwiSaver because of it is doing themselves a big disservice.

Before we look further at that, it's important to acknowledge that there's plenty to criticise about KiwiSaver:

· Michael Cullen and Peter Dunne should be challenged about their enthusiastic announcements of the numbers who have signed up. Most recently, they said 381,000 had joined KiwiSaver in its first six months - far more than the 276,000 expected for the first full year.

But where did the 276,000 come from? Before KiwiSaver started, Inland Revenue said 700,000 New Zealanders change jobs every year - almost all of whom will be automatically signed up for KiwiSaver in their new jobs.

These people can opt out after two to eight weeks. But early data show roughly half are sticking with the scheme - and well they might, given the incentives. Let's guess at 225,000 out of 350,000 for the half year.

Add to that the rush of people savvy enough to realise they would be mad not to join KiwiSaver- and the sooner the better - and 381,000 in the first six months seems disappointing rather than exciting.

I can't help but wonder if the government set the first-year goal at 276,000 so they could repeatedly say, in an election year, "Wow, aren't we doing well."

· The scheme shows many signs of being put together in great haste. One example: the name of the tax credits. Many people think they can't take advantage of them because they don't pay tax. But the credits in fact have nothing to do with tax. The government simply puts the money in your KiwiSaver account.

And there are many other KiwiSaver features that could have been simpler or more efficient if officials had been given more time to develop them. What was the hurry? Again we must cast our eyes towards the end of this year.

· Through KiwiSaver, the government is spending huge amounts of money persuading thousands of people to do what they were going to do anyway.

Many of us who were already saving for retirement have simply moved some of that saving into a KiwiSaver fund, grinning as the $1000 kick-start and $40-a-year fee subsidy are added to our accounts. Our grins will be even wider when we get our first tax credits - up to $1043 a year - some time after July. And employees will be happier still, when compulsory employer contributions start in April.

Sure, there are undoubtedly thousands of others who have joined KiwiSaver who weren't saving before. But who knows how many? Over all, it's not clear that KiwiSaver is a good use of taxpayer money.

For individuals, however, it's a different story. It's crystal clear that contributing to KiwiSaver is a great use of their money - regardless of the poor recent share market performance noted in last Saturday's story.

The story quoted former teacher Gary Osborne, who searched websites and found that in all but 5 of 24 KiwiSaver funds, "savers would be better off if they had slept with their funds under the mattress for the first six months of operation, before allowing for the government contribution."

But let's look more closely at his last six words. They make all the difference. The whole point about KiwiSaver - the reason I and others say everyone should be in it - is that the government contributions turn any otherwise mediocre investment into a really good one. Not allowing for them is like celebrating Christmas without Santa Claus.

There's another important issue here, too. It's a big mistake to judge any investment that includes shares over any period less than about ten years - let alone six months. And it's actually just three months, as KiwiSaver providers didn't get the money until October. Before that it sat in Inland Revenue, earning interest.

The share market often declines over short periods, but the long-term trend is always upwards. It's rare for people who invest in shares or share funds to lose money over ten or more years, and common for them to do extremely well. And that's before adding the KiwiSaver incentives.

Still, some people - presumably including Osborne - can't cope with seeing the value of their investments fall. For them, there's a great alternative: a conservative KiwiSaver fund that invests in stable assets such as bank term deposits and government bonds.

Such funds won't grow nearly as fast as riskier funds over the long term. But by the time you add the KiwiSaver incentives, you can be confident you will do better than in a bank account - let alone under any mattress.

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My biggest concern about Diana Crossan's discussion about raising the NZ Super age and cutting KiwiSaver incentives is that it will discourage some people - especially the financially unsophisticated - from joining KiwiSaver.

There's not much logic behind the discouragement.

True, raising the NZ Super age will also raise the age at which KiwiSaver members get their hands on their money. But such a change would be phased in over many years, probably affecting only those currently in their 40s or younger. For them, adding a year or two to a tie-up of 20-plus years ought not to make much difference.

As for reducing KiwiSaver incentives, that's all the more reason to join now and grab the $1000 kick-start, annual tax credits and employer contributions while the going is good.

But what if the incentives are lowered and you're stuck in the scheme?

Not everyone realises that you can put KiwiSaver on hold if you no longer wish to take part. Employees can take contributions holidays after a year of membership. And everyone else - beneficiaries, the self-employed, early retirees and other non-employees - can simply stop contributing whenever they want to.

"OK," say the suspicious. "But a future government might cancel contributions holidays?" That would surely happen if KiwiSaver became compulsory - at which point everyone who has already joined would be glad they were members while the incentives were available.

Short of compulsion, though, I have trouble picturing a government cancelling contributions holidays. It would be seen as hugely unfair, giving rise to sad stories in the media of struggling families who would have been okay if they had never joined the scheme. And what kind of message would that send to people who had not joined KiwiSaver? Nobody else would sign up.

Don't forget, too, that up to a point, the more people contribute the more the government has to contribute. Cancelling contributions holidays would cost the government plenty.

Similarly, other possible future changes to KiwiSaver shouldn't put anyone off joining now.

For example, Crossan considers - although unenthusiastically - the possibility of income testing NZ Super. Such talk can lead some to ask, "If the government is going to cut my super because I've got income from KiwiSaver, why should I bother with KiwiSaver?"

My reply: If income testing was introduced, I'm sure the government wouldn't cut NZ Super by a dollar for every dollar retirees receive from their savings. Again, think of the message that would send to non-KiwiSavers. It's more likely to be 30c or 50c less Super. Savers would still be much better off than non-savers.

And those hell bent on getting every last buck from the government should realise they will probably get more by being in KiwiSaver than out. For many, the incentives will outweigh any reduction in NZ Super.

While you might not feel totally reassured by Labour and National's protestations that NZ Super won't change, don't let doubt keep you out of KiwiSaver. It's actually all the more reason to join.

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* Various people in the Reserve Bank and the Government have previously urged us all to stop over-investing in housing and to employ our capital more productively so that New Zealand can pay its way in the world.

What could be better for New Zealand than overseas investments that return foreign exchange, profits and dividends and capital gains back to New Zealand? Shouldn't they be trying to encourage this kind of saving in a similar way to encouraging exports and so on?

* I applaud this Labour government for changing the tax treatment of New Zealand investment funds to be the same as direct investment. This sector has long been penalised with poor returns, which is one of the reasons it has been shunned in favour of investing in real estate.

But I have no doubt the proposed tax on 85 per cent of the change in value of foreign funds and investments (ex Australia), will now cause that sector to be shunned. It is not true to say that only "sophisticated wealthy investors" will be affected. It will penalise anyone with savings in a fund or superannuation scheme diversifying offshore.... I implore the government to retain the status quo.

Why would this government wish New Zealand savers to reduce their diversification, which has been useful in smoothing volatility, especially when Telecom shares have lost 20 per cent of their value in the past week?

Does this government wish to risk re-igniting the already overvalued housing market, further reducing affordability for young people?

* Why should savers be restricted to just 2 per cent of the global equity market, which is what New Zealand and Australia amount to, particularly when Australia refuses to accept full exchange of imputation credits, and both governments are busy destroying shareholder value in the power, power distribution, gaming, minerals and telecom industries through heavyhanded regulation?

* The following was recently posted on a UK website.

"Has any consideration been given to the effect on well qualified, well heeled, foreign nationals coming to work and reside in New Zealand ... or indeed those already there? Why would anyone who wishes to keep some investments in their home country, for whatever reason, want to get involved in all this nonsense?

"And what about all those Kiwis currently living and working abroad and with assets outside New Zealand? This is yet another inhibitor against them returning and helping build the home economy and the nation.

"But possibly the biggest unforeseen consequence will build up for the future. If Kiwis repatriate their long-term overseas savings and invest them disproportionately in New Zealand there'll be fewer overseas divis to help pay for their superannuation and eventual retirement.

* My wife and I are retired Americans who immigrated here a few years ago and
are now citizens paying tax in both countries....We could not afford to pay this tax and would be forced to relocate to Australia. We have a number of friends who are in the same
boat. Is it such a good idea to drive these people offshore?

bullet] A question for Kiwis is what effect this will have on housing if immigration turns down....People like myself will likely leave if the new capital gains tax is put to law in it's current draconian form.

* I have heard the new tax on overseas investments described as an incentive to 'bring money back to New Zealand' but for many investors like myself the money never 'belonged' here in the first place.

I emigrated here from England. I have already brought a large part of my savings to New Zealand to purchase a house and invest locally, and my living expenses are funded by a UK pension. I have therefore already made a substantial contribution to the New Zealand economy and will continue to do so.

However, I left some investments in the UK which I would like to retain, in case I should ever decide to return there and because I wish to will part of my estate to UK beneficiaries. I now face a choice of either selling these investments or spending a good deal of time and expense in meeting the proposed tax requirements.

* The hardest part is the unrealised capital gains tax. I have no idea how to figure this out, and when I do, no idea how I'm going to pay it without selling some of my investments, since I don't earn enough to pay a jump in my current personal tax.

* Only yesterday, an international sharebroking firm with operations in New Zealand was quoted on a financial website recommending Australian-listed Newscorp and BHP Billiton as a way of getting exposure to international business operations while avoiding the new tax.

Unfortunately, Newscorp is resident in the USA, hence the new tax will apply. In the case of BHP Billiton, its shares are a hybrid security based on two underlying entities, one resident in Australia and one in the UK. No one has yet been able to tell me how this might be treated.

If an international sharebroker can make such a mistake, what hope that individual investors will ever get it right?

Not to mention that an Australian resident listed managed fund investing in international shares avoids the new tax, while an Australian resident unlisted managed fund investing solely in New Zealand and Australian assets is caught under the new tax. What logic brought that result about?

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Saving is more than putting money into investments

There are 50 ways to leave your lover, according to singer Paul Simon. There are also 50 ways to save for retirement.

A recent survey concluded that only 52% of New Zealanders are saving for retirement, down from 57% a year ago. It also found that some respondents felt guilty about not saving, but that was not enough to encourage them to start. Is this guilt appropriate?

It's likely that the survey - or perhaps the people being surveyed - defined "retirement saving" too narrowly. If people are not putting money into financial assets like shares, managed funds or superannuation schemes, term deposits, bonds, or property other than their home, they may not be included amongst savers.

This is harsh and misleading. The object of any retirement savings must be to increase the saver's wealth on the day they retire. And wealth is best measured as net worth: assets minus debt (including mortgages). So any step that will lead to a person having more assets or less debt should be included in their retirement savings. It might not even be a financial step, but rather an investment of time and energy.

Examples of these steps include: repaying debt such as credit cards or hire purchase loans; repaying a mortgage; getting an education; getting a job or a better job; or starting and running a business. We could even include reading books or articles, attending courses or seeking advice about finance.

Many of these steps can be made by lower-income people who would find it difficult to put aside income each month, and so would be defined as non-savers in some surveys. But if they take a course, get a job or read a book that will lead to higher income or better money management later, that is certainly contributing to their wealth on retirement day.

Even for those who can afford to put money regularly into, say, a managed fund, the alternative steps in many instances are wiser. Let's look at this in more depth.

· Repaying high-interest debt, such as credit cards and hire purchase agreements.

The interest charged on these loans is usually considerably higher than the return, after fees and taxes, that an investor can make on their retirement savings - unless they invest in something highly risky and get lucky.

If they are paying up to 20% on their loan and bringing in an average of 4 or 8% on their savings, they are going backwards financially if they "save".

· Repaying a mortgage at a faster pace than the lender requires.

This is a similar situation. Interest on mortgages is lower than finance company debt. But still, over the years the average post-fees and post-tax return that many savers - especially the more conservative ones - make on their investments is likely to be less than the interest they are paying out.

Many people also find it psychologically satisfying to own a mortgage-free home, so they have "free" accommodation if they come into hard financial times. And most people want to be well rid of their mortgage by the time they retire.

· Acquiring an education.

Most full-time students, and many part-time ones, are in no position to save money. Many are doing the opposite, taking out student loans.

But while they are accumulating debt, they are also acquiring an asset. If the education leads to their earning more - and usually it does - they are likely to be able to save more later.

· Getting a job, or a better job.

It's obvious that this will lead to a greater ability to save.

· Starting and running a business.

At first this may involve debt accumulation rather than savings accumulation. But if the business is successful, the business owner may retire with much more savings than if he or she had stayed in employment and saved regularly.

What's more, many business owners can continue to work, full-time or part-time, well beyond the usual retirement age. They gain flexibility.

· Learning about finance: Reading books or articles, attending seminars or courses or seeking advice from a knowledgeable person about how best to handle finance.

Many people don't really understand even the basic principles of finance, such as the relationship between risk and returns or how diversification can reduce risk.

If they use some of the money they would otherwise have saved to learn more about how to handle their savings, it's highly likely that they will retire with more wealth.

Are we saving enough?

When we define saving to include the above activities, New Zealanders are saving for retirement to a greater extent than some surveys suggest. Indeed, recent research by Grant Scobie from the Treasury and others suggests New Zealanders generally are saving adequately.

Under the definition used by the researchers, a person is saving enough if they will be able to consume about the same level of goods and services in retirement as they are consuming before they retire.

They found that "there is no evidence of widespread under-saving". In other words, at current levels of saving, most people's standard of living won't drop when they retire.

An important assumption is that NZ Superannuation will continue at its current level, relative to the average wage.

It's true that many lower income New Zealanders live on NZ Super and not much more in their retirement. But, the researchers found, their pre-retirement income is often not much higher - and sometimes lower - than NZ Super. Even though they are not saving for retirement, then, they will be as well off or better off in retirement than before they retire. (However, it still makes sense for these people to save for emergencies, or to replace a car or appliance.)

What about higher-income people? Most of them do save, often at a rate that will provide them with a high enough retirement income, including NZ Super, that they can buy slightly more in retirement than before retirement.

All of this assumes average life expectancies. For each individual, though, there is the risk that they will live longer than average. Or they might be forced to retire earlier than planned, or suffer prolonged ill health in retirement, which would eat into their savings.

Because of these uncertainties, it makes sense for each individual to save more than the average person might need.

Many people, too, would like a higher income in retirement than during their working life, to allow for more travel or other expensive leisure pursuits.

Younger people should also consider that NZ Super may not be maintained at its current level when they retire. It is now generally accepted that NZ Super will not be reduced for those who have already retired, or will soon retire. But there can be no guarantees over the longer term.

On the other hand, it's quite possible to "over-save". The saver could be giving up too much now for the sake of their future wellbeing.

Note, too, that Scobie and fellow researchers John Gibson and Le Thi Van Trinh assumed retired people keep their house, so it can be inherited by their family. They don't "eat their house", perhaps by moving to a cheaper house to free up assets for investment, or by using a home equity release scheme, under which a company would give them money during retirement in exchange for some of the equity when their home is eventually sold.

To the extent that people do, in fact, plan to trade down or use an equity release scheme, it could be argued that they could save less in their pre-retirement years.

Do we need tax incentives or compulsion?

Those who define retirement savings narrowly sometimes argue that New Zealanders should be encouraged to boost their saving through either tax incentives or a compulsory scheme.

There are various arguments for and against these ideas that are not the concern of this paper. But one important argument against incentives or compulsion is relevant: When we define retirement saving more broadly, it becomes obvious that neither an incentive scheme nor a compulsory scheme could include some of the alternative forms of saving. It would be too hard for the Government to monitor them.

Given that these alternatives are preferable for many people, any incentive or compulsory scheme that attracted or forced people away from their wisest form of saving to something less efficient would leave New Zealand, as a whole, worse off.

This is fairly obvious when we look at a compulsory system. If, under the current non-compulsory system, Joe Blow is better off repaying his mortgage fast rather than saving in a managed fund, the presence of a scheme that permitted only the latter form of saving has clearly made him do something less than optimal.

With tax incentives, it's a little more complicated. Joe Blow might find, for instance, that because of tax incentives he is better off putting his savings in a managed fund than into repaying his mortgage.

But, assuming the Government needs to maintain its total tax revenue, when it introduces the incentives it will have to raise other taxes. That means that other taxpayers - including lower income people who can't afford to take part in a tax incentive savings scheme - will subsidise Joe to do something that would normally be less than optimal for him.

Again, New Zealand as a whole would be worse off.

Conclusion

The same survey that found some people felt guilty about not saving for retirement also found that 73% of respondents were confident they would have enough savings to support themselves in retirement.

Perhaps the guilty ones thought they would save more later. It may well be, though, that the majority of people are aware, even at an unconscious level, that they are handling their financial wellbeing quite well. The work done by Grant Scobie and others tends to support this.

When saving for retirement is defined broadly, as it should be, most New Zealanders currently seem to be saving enough. We don't need tax incentives or compulsory saving. In fact, we are better off without them.

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