Should Savings be made Compulsory?

Over the last few days, there has been talk about thinking among major political parties for making saving compulsory in New Zealand.

The views of public and commentators are fairly divided about if it should be made compulsory.

It is a fact that the saving habits among people in major developed countries are not very good. In New Zealand, these are particularly worse. Actually there had been neither a need nor any incentive to save.
Knowing that we will get free healthcare, free education, unemployment benefits, sickness benefits, superannuation when we retire, then where is the need to save?

However those migrants, who have come from Indian sub continent, Fiji or other countries where there are pension schemes, understand the importance of little but regular savings.

In New Zealand, Government took the very right step by introducing Kiwisaver. Already there are more than 1 million Kiwisaver members in NZ. Though a good percentage of those will be children below the age of 18, still the numbers are quite good.

There are some commentators and members of public who are opposed to making savings compulsory. Their view is that many people are not financially literate enough to decide where the money should be invested. (Though they can always seek the advice of a financial adviser) Furthermore they point out that it should be the individual choice whether one wants to consume now or save for consumption in old age.

In my opinion, the savings should be made compulsory just because for the reason that the people are not financially literate enough to make their own choices. They do not understand the fact that in the future, the resources would not be enough to fund present NZ Super rates. These are people who live in the present and are totally careless about the future. If an enough provision is not made for these people’s future, it will lead to social tensions in the future as financial disparities will increase.

I am in favour of not only making certain minimum savings compulsory but also encouraging savings through suitable tax breaks for additional savings.

The Government should make a certain percentage of Kiwisaver or superannuation contributions apart from the minimum threshold as tax deductible. The Government should also bring back Mortgage diversion in case of Kiwisaver, but with certain changes.
Kiwisaver diversions should be allowed to be paid towards the principal amount of mortgage only but without any restrictions, whether it is member’s own contribution, employer contribution or IRD contribution.

As the people should be given freedom to choose where they want their funds to be invested, they should be even allowed to divert the kiwisaver funds towards Principal of mortgage on investment properties as well. Restrictions can be laid upon the use of funds in case of sale of a house or tapping up of equity in case a person wants a top up on mortgage. In that situation, it should be compulsory that the funds which were diverted from kiwisaver be put back in Kiwisaver fund.

There is a perception in the minds of some people, that the funds invested in Kiwisaver or other superannuation funds are not safe as these are invested in different asset classes like shares, bonds, etc. It is true that the performance of a fund will vary over period of time. However one should remember that even NZ superannuation fund is invested in a mix of different financial assets namely shares, bonds and other money market instruments.

If someone has any doubt about putting money in kiwisaver, fearing it may be lost, he should also worry about the fact that NZ Super fund may lose in value as well, endangering future superannuation payments. In that case, it should reinforce the fact that one should save for his/her old age.

Over the coming months, Kiwisaver and other superannuation funds may be more regulated to create more confidence in the minds of investing public. However making it compulsory and encouraging savings in other ways are definitely required.

Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. A disclosure statement as required under Securities Act 1988 is freely available on request.