The Post: How kids are the key to our KiwiSaver future

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The trans-Tasman “rivalry” has always had an embarrassing edge, because – as with all such contests between countries of disparate sizes – it means so much more to the smaller party. Australians, as far as I can tell, barely register New Zealand’s existence outside of sports matches; some Kiwis, by contrast, are obsessed by events across the Ditch.

As the two countries’ economic fortunes diverge, and the malaise surrounding New Zealand’s standard of living deepens, the rivalry on the Kiwi side takes an ever-more-envious tone. Forget the fine weather and the golden beaches: it’s Australia’s incomes, infrastructure and overall development that now excite especial jealousy.

This Ocker prosperity has multiple roots, including a resources boom that New Zealand probably cannot – and to an extent should not – try to emulate. But another crucial factor, many economists argue, is the bigger country’s radically different approach to savings.

Decades ago, our two nations took alternative paths. In the 1970s, New Zealand – in the persona of Robert Muldoon – rejected proposals for compulsory savings; in the 1990s Australia embraced the idea wholeheartedly.

Aussie firms now have to pay superannuation contributions equivalent to 12% of each employee’s salary. According to the Association of Superannuation Funds of Australia (ASFA), this has helped generate NZ$4.6 trillion – yes, trillion– in savings. By contrast, KiwiSaver is worth around $120bn, and the Cullen Fund – effectively a down-payment on the future cost of New Zealand Super – another $90bn.

Australia’s stronger savings culture is not only good in itself: it also boosts investment in domestic ventures. Although the country’s superannuation funds sensibly invest large amounts offshore, they also own one-fifth of the Australian stock-market. That local investment helps create more jobs and higher wages.

It looks, on the surface, a near-perfect scenario, and unsurprisingly the calls for us to copy it are only growing louder. But we need to look deeper before we take that leap.

First of all, the Australian system, in the words of ANZ’s Fiona Mackenzie, “hard codes” working-age disparities into later life. Minimum-wage workers and corporate millionaires will effectively be saving 12% of radically different salaries, and enjoy radically different retirements.

As our own Retirement Commission has concluded, New Zealand’s system – based around a universal and relatively generous public pension – reduces income disparities in retirement. Australia’s system perpetuates them.

Second, the compulsory Australian scheme is buttressed by expensive tax breaks for saving. The income diverted into superannuation accounts, and the returns earned by those investments, are both taxed at just 15%.

For people earning over A$250,000, that rate is doubled to 30%. But that’s still well below the top income tax rate of 45%.

As a result, Australia spends tens of billions of dollars on tax breaks for pension savings – around 2.5% of GDP, the equivalent of $11bn-12bn here. And such tax breaks typically provide the biggest gain to those who have the most to save – that is, the well-off.

This, in a nutshell, is the problem with the calls for New Zealand to likewise stop taxing savings. It can sound eminently sensible until one understands its potential to be both enormously expensive and hugely regressive.

What, then, is the alternative? This week the think-tank I helped found, the Institute for Democratic and Economic Analysis, put forward a policy that could be an alternative – or at least a complement – to the Australian system.

We’ve proposed a Kids KiwiSaver scheme in which every child would be enrolled at birth. The government would give their account a kick-start payment, match small annual contributions from their parents, and potentially provide direct assistance to low-income families, ensuring their children weren’t disadvantaged.

Because the scheme would draw on the magic of compound interest and stock-market returns, its first-year cost to government would be relatively small – potentially $20m-80m – while generating tens of billions of dollars over time.

From the young person’s perspective, the scheme could plausibly produce savings of $10,000-20,000 by the time they hit 18. Those savings could then roll over into standard KiwiSaver accounts, giving every young adult a clear pathway to home-ownership and retirement savings, and building a firm foundation for their future success.

Especially if the scheme were weighted towards poorer children – for instance, through direct government payments into their accounts – it could be a much more sensible way to build savings than big tax breaks for higher earners.

It could also be a valuable complement to compulsory KiwiSaver. If we went down that path, it would be all the more important to ensure everyone was starting their adult savings journey on an even footing. Kids KiwiSaver could do that job.

We would still need to narrow income disparities in the workplace, and preserve New Zealand Super’s poverty-reduction power. But a Kids KiwiSaver scheme could be one step towards a better savings future for all – a long-lasting legacy that gives us the chance to reverse some of our past economic missteps.