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Nadine Chalmers-Ross: A savings lesson

opinion Nadine Chalmers-Ross

By Nadine Chalmers-Ross Business Presenter

Published: 1:05PM Friday October 21, 2011 Source: ONE News

Opportunity cost: it's one of the first principles you learn in economics.

It might sound obscure but it's simple - when you choose one option, you forgo another and the opportunity cost is the value of what you miss out in order to get what you've chosen.

It's a bit like the cliché - you can't have your cake and eat it too - you must choose.

When you choose there is always a cost.

It's a concept I sometimes wonder whether enough of us grasp. To get something you have to give something up.

Perhaps that's why we're poor savers.

Money is scarce - if it wasn't it wouldn't have any value. When you have a dollar you must decide, do you to spend the dollar or save the dollar?

We have traditionally chosen the former - spend the dollar. In fact we've chosen to spend more than the dollar, the dollar and then some.

Then we wonder why we aren't richer, why our retirement is not provided for, why our capital markets aren't deeper and why we must borrow so much money from offshore.  All of that is the opportunity cost of spending more than we earn.

While it's clear that needs to change - what is still up for debate is how best to do that.

National this week promised a one-off automatic enrolment in KiwiSaver to get all workers in the scheme - but they still have the option to opt-out, and it's still dependant on the Government returning to surplus by the 2014/15 financial year.

It would also hike employer contribution rates - which of course they cut when they came into power in 2008. So is that enough?

No seems to be the general consensus among KiwiSaver providers.

Amanda Morrall, the personal finance editor at interest.co.nz told AMP Business this week that most tend to favour compulsion and while yes, those that provide the funds do have a vested interest in getting as many people signed up as possible, they're not just self-serving.

"There is a genuine crisis with savings in New Zealand and we have a negative savings rate. Generally speaking people don't give much thought to their retirement futures, nor do they plan for it, so I think they're just trying to push them along that route and get them better prepared".

The current compulsory employer contribution is set at 2%, as is the personal contribution rate and Morrall says many fund managers believe contribution rates need to go up significantly over time.

"In other countries they're looking at a much more dramatic contribution rate...in the US when they talk about retirement savings they're talking about between 12 and 20% that you should be setting aside".

The scheme's overwhelming popularity saw the government scale back its incentives in this year's budget and its estimated compulsory enrolment would cost it $550 million over four years.

But it's not just the government, or even just individuals' budgets that may be stretched by the scheme. 

More employees enrolled in KiwiSaver means greater costs associated with both contributing to and complying with it. For that reason Business New Zealand says employers are unlikely to cheer the decision.

They also argue KiwiSaver is not the only means of saving for retirement and forcing people into the scheme reduces their financial freedom.

When there's a provision to opt out, I don't buy that.

But Labour is due to release their policy this week and I'd put money on them favouring compulsion. Does that reduce people's financial freedom? Perhaps.

But if we're not willing to prepare for our own futures, then maybe we need to be forced to.

Maybe forgoing some of our financial freedom now is the cost of having some financial freedom in retirement.

 

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