Counting Change

KiwiSaver: a success story?

Compare the almost $100 billion we’ve saved so far to the NZD $3.8 TRILLION Australians have saved. With five times our population but 38 times our retirement savings, the gap continues to widen thanks to some key differences between our scheme and Australia’s. With the recent changing of the guard, what positives can we take away from the previous government’s policies around KiwiSaver, what might be coming up with the new coalition and, ideally, what could potential positive future changes bring?

KiwiSaver was established in 2007 by the legendary Sir Michael Cullen to address a growing retirement gap. In the early days, KiwiSaver included a raft of added incentives that have since been removed: a $1000 “Kick-start payment” just for signing up, an annual government contribution which was double what it is now, and minimum employee contributions at 4%, alongside an annual fee subsidy from the government of $40.

Not all changes to the scheme have been negative. In 2021, the latest 7-yearly review of the governmentappointed ‘default providers’ panel reduced the number of default providers from nine to six (two of these new), with default funds moved from conservative to higher risk balanced settings, and provider selection prioritising low fees. The changes were made to enhance the financial wellbeing of KiwiSaver members in retirement and in the words of Te Ara Ahunga Ora | Retirement Commission, “More money stays in your KiwiSaver account,” something that we at Simplicity are passionate about, and a key reason for being appointed one of the current six default providers.

Another recent change from Labour was the introduction of a 3 percent government contribution for new parents taking paid parental leave (PPL), provided they continue their own KiwiSaver contributions. This change recognised the lack of employer contributions received while on PPL which has a knock-on effect for future savings and is likely a significant contributor to the gender savings gap.

The changes to the scheme proposed by the National-led coalition so far are in my opinion a bit of a mixed bag. This July, the National party announced a proposed policy to allow renters under 30 to tap into their KiwiSaver savings for a tenancy agreement bond for up to five years. Although this was proposed to “free up cash” for young people, it doesn’t take into account either administration costs (which are ultimately borne by savers) and the compounding impact that diversion of even a small amount for a small period can have on long term savings.

Another National proposal would allow members to split their KiwiSaver account between more than one provider. While this could drive innovation and boost competition (especially from smaller, more boutique providers), the level of complexity this change would introduce for the IRD and providers could actually increase costs per member. And where will those costs be passed on to?

ACT have proposed decoupling KiwiSaver from the Superannuation age, meaning that if the qualifying age goes up, KiwiSaver funds could still be withdrawn from age 65. This seems a logical move which would allow people to use these savings until they qualify for NZ Super.

It’s NZ First’s proposal to remove the ability to opt out of KiwiSaver and make it mandatory from 18, that makes the most sense to me. I believe that being able to opt out of the scheme likely perpetuates the wealth gap because the more financially literate and wealthy contribute, so end up with more wealth, whereas those who are neither of these things end up with less.

Increasing minimum contribution rates is another important change. There seems to be a common belief that if you’re in KiwiSaver, you’ll “get by just fine” in retirement. The reality is that 6 percent combined contribution from employees and employers (three percent minimum from each) will probably fall short of even a “no frills” lifestyle in retirement. Many financial experts agree that total contributions need to be 10 percent or higher to create a sufficient nest egg. Australia is again a good example to follow here, with their current 11 percent minimum contribution rate moving to 12 percent from 2025. They also incentivise employees to contribute extra from their wages, via a lower tax rate on these contributions (at 15 percent).

This brings me to my third wish list item: removing employer superannuation contribution tax (ESCT) from employer contributions. While the tax deducted from employer contributions is broadly equivalent to PAYE tax brackets, imagine the incentive for employees (and employers, in terms of employee ‘benefits’) to stay opted in and keep contributing if they received up to 39 percent higher employer contributions every payday.

We can learn from our OECD counterparts who are well ahead of our retirement savings scheme. With some key tweaks, Kiwis could grow a significantly larger nest egg to support their golden years — with broader flowon benefits for NZ as well. Hopefully, governments can move away from the short-termism that can dominate politics and step up with some long-term policies ensuring Kiwis save a little more now, in order to be a lot better off in the future.