A super idea; mandatory saving for retirement

New Zealand’s rapidly ageing population is putting increasing pressure on the Government’s budget, with threats of large cuts in welfare, or tax hikes, or both.

Mandatory savings, as have been successfully modelled by both Australia and Singapore, could help ease the burden without undermining our state pension, NZ Super.

Australia’s former Labor Prime Minister Paul Keating enacted mandatory savings in 1992, supplementing an existing mean-tested pay-as-you-go public pension. He says its advent slashed reliance on taxpayer-funded pensions.

With a contribution rate of 12 percent, and on the back of compound interest, Australia’s Super wealth is estimated to reach $8 trillion by 2035, becoming the second largest in the world (after the US).

Singapore also has mandatory savings, managed by the Central Provident Fund. The institution is lauded globally with around NZ$876 billion assets under management. Both superannuation and healthcare are provided through mandatory individual accounts.

Meanwhile, 19 years after New Zealand’s voluntary KiwiSaver was set up, a low default rate of employer and employee contributions equal to 3 percent of wages (from 2009 to 2025) has meant average balances nationally now sit at about $41,000.

Mandatory accounts were set up in Chile in 1981, although under dictatorship without democratic mandate. Similar models later spread through Latin America and Eastern Europe, but many countries reversed course after the 2008 global financial crisis, shifting back towards optional state systems or abandoning individual accounts altogether.

Why have so many governments refrained from ensuring individuals build greater savings to fund their own welfare needs? Particularly in retirement, and given that public welfare is in such jeopardy?

In New Zealand, there are three reasons why politicians have been unwilling to implement mandatory savings to bolster the state pension.

First, because many policymakers and thinkers across both left and right political ideology have opposed it. Second, because none of the political parties have produced a well-supported plan for how to make the change in a way that doesn’t hurt average workers financially. Third, because of myopia in political decision-making underestimating compound returns.

Although Prime Minister Helen Clark’s government promoted savings through introducing KiwiSaver in 2007, a mandatory scheme was a step too far for her party. This may be related to suspicions about ‘privatising welfare’.

Many politicians on the left in New Zealand still prefer to prioritise reliance on a public pension.

Some politicians and academics on the left worry that making KiwiSaver compulsory would eventually undermine NZ Super, by prompting governments to introduce means-testing arguing that retirees with significant savings no longer need the full pension.

Mandatory savings have also not sat comfortably with National Party ideology either. When KiwiSaver was first proposed, then-National Opposition leader Sir John Key called it a ‘glorified Christmas club’. His party voted against KiwiSaver.

Although the current coalition Government increased minimum KiwiSaver contributions by employees and employers from 3 percent to 3.5 percent in 2026, it also ended subsidies and amended the KiwiSaver Act to create the new first-home withdrawal option.

Proposals for mandatory savings reform usually require employees, employers or both to contribute more. But those extra payments don’t replace taxes. They sit on top of them. That means people could end up paying both: contributions into KiwiSaver and taxes that fund NZ Super, leaving workers with less.

So how might reform in this area win majority support?

Former Australian PM Keating says the political feasibility of his reform depended on including it in a package of tax and tariff cuts, and a shift to union enterprise bargaining through agreements with the Australian Council of Trade Unions.

In his 1995 Budget, he proposed 3 percent tax cuts would be paid into people’s superannuation accounts to raise contributions by 3 percent. That left government with a revenue shortfall, so to keep fiscal balance it came with cuts in areas receiving government support.

This could be done in New Zealand by targeting high-income groups receiving welfare, such as tertiary students from wealthy families on interest-free loans and fee subsidies, winter energy subsidies to the wealthy, screen production grants for big-budget films, and accelerated depreciation allowances to chosen industries.

This would be met with fierce political resistance. The ending of movie subsidies was met with threats to go elsewhere, even though grants totalling $300 million have already been made for Avatar films and Amazon’s Lord of the Rings franchise.

Whatever one’s views on the best structure for our pension system, relying on each young generation to support the elderly with taxes is, more than ever, threatened by the size of our ageing population. Neither the right nor left in New Zealand have provided an answer.

But mandatory savings have been shown to work in nations like Australia and Singapore. They provide an unorthodox but a more seamless pathway out of fiscal crisis, and in contrast to rapid increases to taxation, monetisation of public debt, or harsh fiscal austerity measures.