KiwiSaver needs to change

Although it is very, very tempting to add my two cents worth in critiquing the Government’s Budget announced this week, I won’t.  There has been plenty of commentary over the past few days.  I must however say please stand back and look at what’s happening here:  quite succinctly summarised as tax, borrow and transfer:  that’s all we’ve seen for the past six years, and I wouldn’t expect anything different should this lot be returned to Government later this year.

Budgets are always interesting times in my industry i.e. financial services, savings, Kiwisaver etc.   We have a list of wants, and like most people are more often than not disappointed.

KiwiSaver announcements are almost always budget announcements.   I remember sitting in the office when KiwiSaver was first announced in the 2005 budget and I thought that this could be the start of something good, maybe even transforming New Zealand into a nation of investors.  Unfortunately, it was somewhat downhill from there with KiwiSaver incentives hollowed out from the initial proposals in both the 2009 and 2015 budgets.  To quote one of our most famous sailors, Chris Dickson, overheard reacting to a poor jibe manoeuvre on board the Oracle boat during one of the Americas Cup regattas “…lost opportunity.”

I was wistfully hopeful that Finance Minister Robertson might look to emulate his Labour predecessor, Michael Cullen, and at least start to bring KiwiSaver in line with most other pension schemes around the world, by incentivising more contributions to Kiwisaver accounts.  And at a time like now where we have massive inflationary pressures, incentives to encourage more saving also has the great benefit of taking spending out of the economy.  Not only could it help tame inflation, it’s popularity could make it a potential vote winner as well.   A double win for an astute finance minister.   Alas nothing – again – just more borrowing and spending (unproductively I might add).  “Lost opportunity.”

One big issue facing future Government’s is the affordability of NZ Super.  Today, NZ Super costs the Government around 4.5% of GDP.  Research out of the University of Auckland has forecast that this will grow to 7.5% of GDP over the next 20 years as our population ages.  For some politicians, the answer is to simply increase the retirement age.  That answer works perfectly well for people in sedentary desk jobs, but is not really an option for many people with physical jobs.  Ask most farmers or builders whether they can possibly keep working past 65 and they will probably laugh at you.

A possible solution would be means-testing NZ Super and only making it available to the people that really need it.  Though to do this we certainly need to make sure that KiwiSaver works and is going to give people the retirements that they expect.

The two main problems with KiwiSaver at the moment are that people are not really incentivised to contribute, and if you do contribute the default rate, that is nowhere near enough to fund a retirement.

Most KiwiSaver members save the default rate of 6% of their income (3% employee contribution plus 3% employer contribution).  Our neighbours in Australia are moving to a compulsory contribution rate of 12% over the next few years and that is even considered not quite enough.  Politicians there have talked about pushing it to 14%.

Here in the New Zealand, there is no real incentive to contribute to your Kiwisaver scheme.  The Government will only contribute up to $521 each year if you contribute at least $1,042 and are aged over 18 years, but that is all.

The New Zealand situation is materially different to what happens internationally:

• In Australia employees can direct up to A$27,500 per year of their income into their super and incur tax at 15% instead of up to 45%.
• In the UK, employees can invest up to GBP50,000 per year in their pensions tax free, though it will be taxed on the way out though at which point earnings are significantly lower
• In the US, all capital gains in retirement accounts are tax free

These are big incentives – and a major reason why for example the Australia private super pool now exceeds A$3 trillion – and why people are happy to prioritise saving for their retirements and their futures over other short-term savings initiatives.  To my mind, changes in KiwiSaver need to precede changes to NZ Super, people need to have sufficient savings in place before we tighten the availability of NZ Super.

For those that think we can’t afford to do something we need to look closer at the Australian model.   As pointed out above, Australia provides material tax incentives though on the flip side they use means testing for their pension (called Age Pension in Australia).  Despite the means testing, 80% of Australian’s receive some form of pension, though it will be scaled, those most in need can receive up to $1,200 per week whereas those that don’t need as much receive only a fraction of this.

The Australian model costs the Australian Government 4.5% of GDP and is not expected to increase.  Compare that with a New Zealand model that is expected to cost 7.5% of GDP and provides those that need it with a paltry $362 per fortnight, a long way from the $780- $1,100 that it is estimated to be needed to live a comfortable life.

Change is needed here in New Zealand and Joost, in spite of its shortcomings, is a very  popular product.  I can now only hope that Minister Robertson hopes he is returned to government in October and is keeping his KiwiSaver fixes as an election sweetener to make sure that he gets biggest bang for buck out of it.  But I’m not holding my breath, “lost opportunity”.

And just quickly, for those of you that have not yet qualified for your “incentive” from the Government, make sure you contribute your $1,042 to your KiwiSaver before 30 June if you haven’t already.   There’s $521 waiting for you once you do, don ‘t lose the opportunity.