Tough KiwiSaver changes

Otago Daily Times

3 days ago

The milk was spilt in the retirement savings failure of 1975. How different and more prosperous might New Zealand have been if Labour's compulsory scheme had endured?
Most retired New Zealanders would have had substantial nest eggs, and the nation would have benefited from the massive savings pool.
Instead, Robert Muldoon stormed to power, and that was that. Universal New Zealand Superannuation, funded through taxes, took its place.
Mr Muldoon described the scheme as socialist. Cossacks, epitomising a Soviet-like future, danced across television screens in an infamous and scurrilous ''attack'' advertisement.
The respected financial analyst, the late Brian Gaynor, once described the abolition of the Superannuation Scheme as New Zealand's worst economic decision since that date.
The scheme mandated 4% from employee and employer — the same figures Finance Minister Nicola Willis outlined in the Budget.
She said minimum contributions would rise in two stages from the present 3%.
In 2007, the Labour-led government, under prime minister Helen Clark and finance Mmnister Michael Cullen, introduced KiwiSaver. Designed as a voluntary, work-based scheme, KiwiSaver aimed to encourage long-term retirement saving and reduce reliance on government-funded pensions. It was not overturned by National.
Initially, a $1000 kick-start encouraged participation, abolished by the National-led government in 2015. The annual contribution of up to $1042.82 halved in 2011 as part of cost-saving measures.
Now, the government has announced the halving of the halving. More than $1000 in 2007 reduces to $260.72 in 2025 dollars. The cut is a money grab from a finance minister desperate to trawl for savings, estimated at $575 million a year for this measure.
However, that contribution is proportionately more valuable for lower-paid workers. Their retirement savings, or first-home deposits, will suffer accordingly.
Treasury and officials' advised Ms Willis that the contribution was ineffective as an incentive, an assertion to be treated sceptically. Ms Willis lacked the boldness to abolish the contribution altogether.
Given the large sums, Labour should face pressure on whether it would reinstate the contribution. It failed to reinstate the kick-start or the $1042.86.
Less disputatious is the decision to eliminate the contribution for those earning more than $180,000, a move that saves about $160 million a year.
Increasing minimum contributions is fundamentally positive, although it comes at difficult times for employers and employees under economic pressure. An extra 1% will be hard to find for many. Increased contributions could also strengthen National's case to raise the superannuation age.
There is a long, long way to go to match Australia's 11.5% saving (soon to rise to 12%). Furthermore, the entire 11.5% is untaxed, whereas New Zealand reduces employer KiwiSaver contributions through tax at the employee's marginal rate. Many retired Australians are now relatively wealthy. Government superannuation there is means-tested.
The extra 1% bill for the government, as a huge employer, will be about $700m a year. Yet, the government and Treasury have made no allowances for this. It is either a ''fiscal cliff'' as the Greens have claimed, or it becomes absorbed into wage increases.
In theory, KiwiSaver should be in addition to wages and salaries. In practice, it is often part of the salary package. Thus, the employee, in effect, pays some or much of the employer's contribution.
The government's move to extend KiwiSaver to 16 and 17-year-olds is welcome. It encourages savings early.
KiwiSaver has helped many New Zealanders into their first home and grow their retirement savings. But its benefits could never be spread evenly. Those in lower-paid jobs will have lower balances. Some, too, opt out, unable to afford the 3%, let alone 4%, or too tempted to spend that money elsewhere. Those who take time out of the workforce, often women, will inevitably be disadvantaged.
KiwiSaver has, overall, been positive for many New Zealanders, despite average balances of only about $40,000.
Erosion of the tax credit is a step backwards, one that significantly affects retirement security.