27-05-2025
Is the KiwiSaver ‘fiscal hole' a glitch – or the whole point?
The government's $3bn saving on KiwiSaver changes may come straight out of workers' future pay – and it's no accident, writes Tayla Forward.
In last week's budget, the government announced adjustments to KiwiSaver: government contributions are set to decrease, with KiwiSaver members compensated by increases to employer contributions. Savings to the Crown will total $3 billion over the forecast period, from the reduced expenditure on government contributions and the tax collected on increased employer contributions.
Greens co-leader Chlöe Swarbrick emerged to challenge this, pointing out a potential $700 million uncosted 'fiscal hole'. The government is a major employer – healthcare workers, teachers, environmental workers and officials are all on its payroll. Wouldn't the increased employer contributions hit the government's books, too?
Examining the budget documents carefully, the increased employer contribution appears to not be included among the government's expenses – but this is no oversight. Rather, they're not expecting to be the one paying.
The employer contribution changes were, in fact, 'costed in' as lower future wages for public sector workers.
In budget documents, the Treasury is explicit: 'We have assumed that employers will offset the majority (80%) of their higher contributions via lower-than-otherwise wage increases… Furthermore, reducing the provision for pay-equity settlements results in slower-than-otherwise wage growth… These lower wage increases have a negative impact on household spending.'
That 'negative impact on household spending' translates to lower household incomes.
What this means is that the increased employer contribution is assumed to be almost entirely absorbed by workers, implying the government achieves its savings directly at the expense of its employees' future earning potential. The same goes in the private sector. In other words, it appears the government, as a major employer, intends to manage its total wage bill – including increased KiwiSaver contributions – by decreasing the growth of take-home pay for public servants in the future. The costs borne by workers across both private and public sectors in the form of lower future wages may be greater than the purported savings won by the Crown.
There was no explicit cost counted in Budget 2025 recognising the government's increased employer contributions, nor was the potential cost prominently listed as a 'new risk' in the budget documents. Instead, it was buried within the Public Sector Employment Agreements item, as an 'unchanged risk' under the comically titled category 'Forecasts Dependent on a Status Quo that is Uncertain'.
The 'specific fiscal risk' that the policy change poses is the risk that the government is not able to sufficiently suppress public sector wages through upcoming pay negotiations to push the cost of the increased employer contribution onto workers.
When Bill English considered cost-saving KiwiSaver changes in 2011, the fiscal costs to the government from employer contributions were explicitly set aside and centrally funded. After the 2011 changes, responsibility for funding the contributions was shifted onto agencies, with the expectation that they would absorb these costs within their existing baselines, realising efficiencies by cutting elsewhere.
As Treasury notes, 80% of the cost of higher employer contributions are expected to be met by employees. What of the final 20%? The finance minister's answer was that any additional funding required – anything they're unable to shift through suppressing public sector wages, or through further cuts to public services – will be counted against the Budget 2026 allowance.
If 'going for growth' depends on suppressed wages and scant public services, then 'growth' here can only refer to increased profits and economic rents.
In the international literature, the impact of higher contributions on take-home wages is lesser in countries where collective agreements and other bargaining processes have a greater role in wage setting. In New Zealand, recent cuts to the real minimum wage, the contentious changes to pay equity initiatives, the repeal of Fair Pay Agreements and the extension of 'fire-at-will' provisions all contribute to an environment where the bargaining power of workers is systematically weakened.
There is another cost buried in the estimates, too. The $3bn in savings includes higher revenue of $540m over the forecast period – $1.2bn more in Employer Superannuation Contribution Tax (ESCT) tax being collected, offset by a $693m reduction in the corporate income tax paid by private employers – owing to the 20% of the higher contributions expected to hit profits, rather than wages.
What is absent from estimated savings are the tax implications of the suppressed wage growth. If the government is indeed relying on depressed wage growth to balance its books, this strategy will likely mean lower tax revenue in the future. Treasury notes in the Regulatory Impact Statement for the policy that the higher tax revenue from increasing the employer contribution rate does not include the impact on income tax revenue from slower wage growth over time. They say this means the fiscal benefit may be overstated. Treasury has said that 1% lower wage growth sustained over the forecast period could lead to an estimated $9.9bn less in tax revenue by 2029 – the tax losses that it doesn't account for could dwarf the tax gains that it does account for. Granted, we're not able to infer how much wage suppression the Treasury estimates is necessary for the fiscals to square. The eventual balance depends in part on public sector pay negotiations.
In sum, the government faces two possibilities regarding the fiscal costs of its KiwiSaver policy. Either the impact is primarily on wage growth, leading to a potentially huge, but obscured, fiscal cost in the form of lower tax revenue due to depressed wages. Or, the impact is not entirely borne by wages, meaning a significant expense has been left uncosted and will inevitably strain future budgets or force further cuts. Either the government will aim to hold down the wages of people working in the public sector, bringing tax revenue down with it, or it is yet to account for a major cost.
