Govt halves contribution to workers' KiwiSavers; employers get tax cuts

Newsroom

22-05-2025

Analysis: Workers will have to take responsibility for a bigger share of their own retirement savings, with the Government cutting most of its contributions, as well as opening the door for employers to negotiate a lower share.
Over the next four years, Finance Minister Nicola Willis has cut a handy $2.5 billion (roughly $620 million a year) in spending by halving the Government contribution to 0.25 percent, and stopping any contribution to high-income earners.
For most workers, this will work out as a reduction of nearly $261 a year – swallowing up round about a third of any tax cuts they received last year.
Willis defends this – she says officials recommended removing the Government contribution entirely. 'But it's my view that keeping a bit of a contribution is a little bit of juice, that means that some people, who might not otherwise contribute, will.'
At the same time, the default employee contribution, matched by their employer, will rise to 3.5 percent, and then 4 percent.
This means most workers should put away more savings – but the changes set up an arm-wrestle between employers and their staff.
Willis admits as much in her speech to Parliament: 'The Government recognises that, over time, employer contributions may effectively form part of the wage negotiation process.'
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She expects the KiwiSaver changes to slightly slow wage growth, but that will be outweighed by the benefits to business and their employees from an average $1.7b a year Investment Boost tax incentive scheme, also announced today.
Willis is not concerned that workers on low incomes might be more reluctant to maintain payments, without the Government contribution. 'The advice we received from our officials was that there is actually very little evidence that the size of the contribution influences people's decisions to go in KiwiSaver. The most influential thing is the auto enrolment and then the auto contributions.'
Already, many employers hire new staff on total remuneration packages; that is, the employee pays both their contribution and their employer's out of a total gross salary package. This means that if they want to increase their contribution to the new higher default, their contracts may require them to pay the additional employer contribution as well, all from the same gross salary.
Willis tells me the Government needs to do more work on how this will pan out. It has until April next year to figure out how the changes will be implemented, and how employers will behave.
The Government has 'very poor data' on how widespread total remuneration packages have become, and who will pay the increased employer contribution in such cases. 'That will be for employers and employees to resolve as part of their wage bargaining on a case-by-case basis,' she says.
Willis tells me she went back and read former Labour finance minister Michael Cullen's speeches about KiwiSaver, when the policy was introduced.
'At that time, he fully acknowledged that, yes, employers would meet these costs in different ways, but ultimately, the benefit for greater savings both for individual New Zealanders, for our businesses and for our economy would stack up.
'And I don't agree with Michael Cullen on everything, but I agree with him on that.'
Employers and Manufacturers Association strategy head Alan McDonald, who was in the Budget lockup with media, says the association will encourage bosses to act in good faith in pay negotiations.
He believes most will be happy to contribute the extra percentage point, because it will be good for their workers and good for the economy. 'Ultimately, most employers are good people,' he says.
But Council of Trade Unions economist Craig Renney isn't so sure. 'As Einstein said, the most powerful force in the galaxy isn't gravity, it's compound interest. And if you are taking away contributions, however small, from low-income households with the power of compound interest you're also taking away their future savings.'
He says that with the changes to pay equity, the repeal of fair pay agreements, the loss of the living wage guarantee, and now this, workers feel like they're under assault. 'I think
they've got every right to feel battered.'