New Zealand is on the brink of a financial crisis unless national savings increases, according to the final report of the Savings Working Group (SWG). Government, households and businesses are all guilty of overspending and borrowing too much money, leaving our economy in a vulnerable state. The SWG has recommended policies to increase the quality, quantity and rewards of saving. These include reducing serious tax distortions, and improving the disclosure for financial products, especially for fees and performance as well as improving their efficiency and returns.
In the area of retirement saving, the SWG has recommended that all employees over the age of 18 be automatically enrolled in KiwiSaver with the ability to opt out. At present, automatic enrolment applies only for new employees. Also recommended is that the enrolment age be lowered to 16 and that the default employee contribution be set at 4% with the option to drop it to 2%. Of course, one of the most obvious solutions to our savings problem is to increase the retirement age. Despite this being a good economic solution it is still politically unacceptable, at least until after the next election.
The proposal for the Government to help make annuities available to retirees is an excellent one. Many retirees prefer to have a regular monthly payment to supplement income rather than a lump sum to invest. It has been suggested that payouts from KiwiSaver could be part lump sum and part annuity.
While much progress has been made to introduce financial literacy into the school curriculum, the SWG has gone one step further and suggested that financial education be compulsory in schools. This is to be applauded. Increasing the level of knowledge of financial matters is critical for changing attitudes towards saving and thereby securing the financial future of our nation.