Interim Retirement Commissioner Peter Cordtz is considering whether government contributions to KiwiSaver could be changed to incentivise more self-employed people to contribute to the scheme.
Currently the government contributes $521 a year to the accounts of members who make contributions of at least $1043 a year.
The set-and-forget nature of the scheme makes it easier for the employed, than the self-employed or unemployed, to reach this $1043 threshold, as their incomes are less likely to fluctuate.
The scheme also benefits the employed more, as they receive contributions from their employers.
Cordtz is looking at evening the playing field by changing the rules so that KiwiSaver members can only receive government contributions if they make additional voluntary contributions.
The sweetener would be a much greater government contribution.
A KiwiSaver working group, led by the managing editor of the Sorted website, Tom Hartmann, suggests the government could contribute $2 for every $1 of voluntary additional contributions.
Government contributions would be capped at $2000 a year.
In order to keep the cost to the government at bay, the incentive would only being available to a member for 10 years.
So the structure of the KiwiSaver scheme would stay the same; a member contributes at least 3% of their pay, and if they have an employer, they contribute 3%.
But if a member makes additional contributions voluntarily, the government matches this two-fold, up to $2000 a year.
The Commission for Financial Capability (CFFC) notes that only 40% of self-employed/contractors/business owners contribute to KiwiSaver, compared to 73% of workers employed full time.
One in 20 employed New Zealanders contracts, one in 10 has more than one job, and 38% of employees have been in the same job for five or more years. Many workers take breaks from employment to go on their OE, raise children or due to redundancy or ill health.
“This has an impact on long-term retirement savings, as KiwiSaver was designed to be a workplace savings scheme,” the CFFC said.
Hartmann said that as well as evening the playing field between employed and unemployed people, the proposed tweak includes enough of an incentive to encourage people to put more towards their retirement savings.
The change could essentially see KiwiSaver members invest an extra $3000 a year - $1000 from them and $2000 from the government.
Asked whether this would disadvantage low-income earners, unable to find extra money to put towards their KiwiSaver, Hartmann maintained getting $2 from the government for every $1 contributed should be enough of an incentive to encourage even a small amount of savings.
A member could contribute an extra $200 a year and still get $400 from the government.
The idea is for this to establish a savings habit and make the most of compounding interest for the remainder of the member’s term.
The cost to government is difficult to estimate. Hartmann said it could be cost neutral, as after receiving government contributions for 10 years, a member wouldn’t receive any more. Whereas currently, they could get $521 a year until they’re 65.
“We’re keen to find ways to make the KiwiSaver structure as fair and attractive as possible to all New Zealanders, whether they’re in paid employment, self-employed or taking time out of the workforce,” Cordtz said.
“This suggestion could encourage a wider range of people to save more towards their retirement.”
Cordtz is consulting on the issue as a part of the Commission for Financial Capability’s (CFFC) three-yearly Review of Retirement Income Policies.
The public has until October 31 to make submissions.
Cordtz will deliver his recommendations to the Government in December.
Work and the workforce Review of Retirement Income Policies 2019 from CFFC Media on Vimeo.
48 Comments
Too complicated for the uninterested?
Probably makes sense for those 55 and over - get the $20k instead of $5,210 - but for those who have 45 years to go; the young, it makes very little difference, given the $23k ( 45 years @ the present $521) versus $20k, and they don't have to make additional contributions to get it.
Why on earth is everyone bagging on this guy by literally acting rationally.
He simply pointed out that he isn't incentivised to put anymore than the minimum in and he's right! Like he said he puts the rest of his money elsewhere... That's exactly what a rational actor would do, especially with kiwisaver providers like Simplicity. Simplicity allows you to contribute to your kiwisaver fund then to make additional contributions to a mirrored fund that holds the same positions as your kiwisaver fund with the additional advantage of being able to withdraw them at any time
Where's the money going to come out from?
How much money would that mean in taxpayer money?
Why doubling the contribution from 0.5 to 1 or 2 , instead of lifting the cap from 521 to something greater WITHOUT increasing the ratio of 0.5 per dollar..
We need to be very cautious with Tax payer money going into the WRONG places.
This is the Commission for Financial Capability's most horrible idea since their last lunatic brainwave, a couple of weeks ago, to allow KiwiSavers to withdraw their money early to become landlords because property investment is where the real money is made.
The government subsidy, happily reduced by National to $521 a year, ought to be abolished. That has been an imperative since the day KiwiSaver was perverted to allow that subsidy, paid by my taxes, to be withdrawn so that aspiring homeowners could use it to get into the housing game and further inflame New Zealand's madly overpriced housing market.
To level the visible playing field between the self-employed and the waged, the present compulsory employer subsidy ought to be abolished as such, and rebundled into the employee's overall remuneration so that the employee has the same net benefit and same net contribution to KiwiSaver, at the same overall cost to the employer. Having disposed of that accounting fiction, it may be more apparent to everybody, but particularly the self-employed, that waged and salaried people are investing (compulsorily) a minimum of 6% of their income in their KiwiSaver retirement scheme.
Beyond that, it is the self-employed person's own responsibility to save. It is not for my taxes to subsidise him or her. My taxes are better spent being invested in the NZ Superannuation Fund so that in years to come when these self-employed retire old and penniless, NZ Super will be there to help them. That's its purpose.
I take your point. But isn't the $521 just substantially reimbursing tax-paid to those who are part of the Scheme, instead of making the contributions deductible from the top line of any Total Salary Package (which is what employers consider anyway)?
An alternative would then be to make contributions to KiwiSaver pre-tax; tax-free - like other schemes in the World - and then scrap the $521 per annum. That might see an increased contribution to any retirement saving scheme ( with a cap, of course; say $10,000 per annum?! We wouldn't want people putting in 100% of the Salary Package to avoid total tax)
My taxes more than fund any Government contribution. The $521 is just the tax back that's already been paid for most who are self-employed. Not so much for those that work as contractors in the movie industry where their hourly pay isn't great and are forced to be self-employed. Their chances of being poor by the time they reach 65 is likely.
I agree that the tax credits should not be going into housing. That is ridiculous, but so is sabotaging retirement savings to buy a poorly built or maintained building. I'd be fine with the tax credits and no drawdown other than retirement or hardship/serious illness. Although it could be tackled using the US approach where the money taken out of Kiwisaver is taxed. The Government would get more tax revenue than the contributions by benefiting from the compounding gains.
For those that are self-employed it's often not worth the time to go through all the paperwork to do this as the time is far more profitable completing contracts. I got around to setting it up and got the $1000 before it was taken away and only contribute marginally above the monthly amount to get the tax credit.
If the tax credit was taken away after 10 years I'd stop contributing as there would be no good reason to lock away my small contribution. The limit appears to disadvantage those on low incomes too. If someone contributes $20 per month, or $240 per year, for 10 years they only get 1/4 of the amount of a higher income worker that can easily afford the contribution. That's inherently unfair.
The majority of the population won't know the details or any complex mechanics so this scheme would need to be simplified, and made more fair. Note that criticism of the MTC for Kiwisaver has been that it is a benefit for high income earners. While I would appreciate a larger contribution I would want to know what the consequence is for others on lower incomes.
You or I may not find it to be complex. However we are a tiny minority with respect to understanding retirement savings. Unless people focus on it they will not take advantage of it. It needs simplification and improved fairness. Although the Retirement Commission should be focused on objectives rather than ineffectively dangling carrots. With only 40% taking advantage of the existing credit, having more of the same is unlikely to be effective.
Ok, I'm not trying to argue with you Dictator but I really see it quite differently.
1) It's the easiest investment of them all, put money in and forget about it, the whole thing is managed on your behalf, I cannot think of an easier investment.
2) Also this proposition of more government contribution is precisely to level the playing field for self-employed who do not get employer contributions, so YES I think offering more free money is a great, actualy the best, incentive to get more people investing in KS
In practice the barrier to entry is too high, otherwise there wouldn't be a 40% participation rate. Another way of looking at it is that the reward is too low for the time taken. I don't see why this is too difficult to understand and it is the reason for offering more incentive (that's unlikely to work as it is more of the same).
The barrier is too high??? Anybody who can apply for a credit card can apply for a Kiwisaver account anytime. The bank is probably more than happy to help if you really can't do it. It is the mentality that people want to spend their money now and don't care what happens in 30 years. Well they will be sitting in a cold damp pensioner unit and the ones that worked the Kiwisaver well will have a nice little home and a campervan to travel. Everybody to their own. I will have a campervan and a nice warm home.
Yes you would. But I doubt you need to be incentivised to save for your retirement.
As for the average Joe who lives day to day - they probably don't want to contribute any more to KS. They may just give up on it altogether.
Sounds like upper class welfare to me...
I wouldn’t. I’d reduce my contribution percentage to the minimum (currently 8%) and make a $1000 voluntary contribution once a year. It’d work out around the same amount invested but I’d be contributing less. I’m fine with that, but suspect it’s not achieving what it intended to.
I suspect you are in a very small minority, most people I know put in the minimum, just to get the employer match and the govt money. I certainly wouldn't be putting in any more than that, there are other investments that I could direct the money too that don't have that locked in disadvantage of kiwisaver.
I think that's a great idea to level the Kiwisaver investment field. Self-employed people don't enjoy the benefit of the employer contributions, that's why there are less self-employed enrolled in Kiwisaver. This proposed government contribution will help increase the number of self-employed enrolling into Kiwisaver
Just imagine the savings down the road 20-30-40-50 years in the future when people can rely more on savings then on pension.
I seriously don't know why any NZ political party does not use Kiwisaver as a sweetener. The potential long term benefit to NZ could be huge.
Because just like in the 1970's, when Labour introduced a Contributory Superannuation Scheme the opposing National Government of the time campaigned on reversing it. e.g. "Dancing Cossacks". They were subsequently voted in and within 3 weeks the scheme was abolished.
Thankfully we're a little too far gone now with Kiwisaver to abolish it, however that still hasn't stopped National from removing the $1000 kickstart, taxing employer contributions and halving the Tax Credit. It wouldn't surprise me if Simon came out with his own "anti-communism superannuation propaganda".
My biggest issue with Kiwi Saver is that in the last 30 years or so successive Governments have worked to create a low wage economy, which has resulted in the majority (Middle and low income earners) struggling to make ends meet. This is especially on top of them failing to properly regulate the housing market resulting in accommodation costs being exorbitant, and now they are moaning because not enough people are saving for their retirement? When will we see a Government who will genuinely acknowledge the multi-generational betrayal of their constituents, and actually start to do something meaningful to right those wrongs and act in the genuine interests of the people? Instead they recruit intellectuals and academics who either don't know or have forgotten what it is like to not have any formal qualifications, or to be restricted on income opportunities, but who are happy to discuss strategies on how to screw a few more dollars and cents out of the masses! It is alright when you earn over $80K, but below that things get tight very quickly.
@youngdumbandbroke. You are describing yourself. You can't see past the subsidies. Others think differently. There are very good reasons to plow money into Kiwisaver, subsidy or not. It's an investment you need to make irrelevant of subsidies.
Or, some might dislike Kiwisaver, but subsidies are near irrelevant to that view.
You are the one besotted with thinking about subsidies, and don't see the bigger thing.
Here's a mathematical way of looking at it. Treating retirement as a game where your kiwisaver contributions constitute you stake, the government contributions constitute the odds ratio, and winning means living long enough to receive a payout. The Kelly formula is used to maximise your winnings by telling you how much you should stake. Here's a worked example based on this longevity table https://www.ssa.gov/oact/STATS/table4c6.html
Male age = 41
Non kiwisaver net worth =300K,
current kiwisaver investment =60K,
probability of living to 68 (according to above table) ie probability of winning = 78%
net odds ratio with current govt contributions = 0.5 ie (521.43 return for every 1024.68 invested) you get 0.5 dollars back in addition to your $1.
According to Kelly formula this male should invest (0.78*(0.5+1)-1)/0.5 = 34% of his net worth in kiwisaver. But he's currently only 60/360=16% invested. Should he increase his stake? Yes!!!! But what if the net odds ratio changes to 2 as is suggested by this article? Then the Kelly formula says he should have 64% of his net worth in kiwisaver. Should he increase his stake? Yes indeed!!
I think that math is correct - feel free to correct me anyone
Frankly I don't trust 30 years worth of future govts not to expropriate that very tempting large wad of cash sitting where they can easily get their hands on it (like Muldoon did) via all sorts of means - taxes, redistribution from richer savers to poorer, using it to pay for idiotic 'investments' like rail or other 'emergencies'. As a result I will be keeping my contribution to a minimum and making other arrangements for providing for my retirement. Most/many entrepreneurs and business owners will be getting better returns from their businesses (and reduced borrowing risk) than what kiwisaver yields anyway.
Yes of course, I would be happy if the government matches every 1$ by 50c up to $4,000 a year. Means saving $6,000 a year and THAT will make a huge difference when retirement comes. And even if young people can't afford to save $4,000 a year they can still save less and increase this every year. The problem in NZ is the lack of financial knowledge and the lack of teaching your kids from a very early stage. Mine knew from the age of 5 to always put 50% of every Dollar they receive into savings and today they are 13 and if Grandma gives them $100 for their birthday they ask me whether they have to put 50% of that away as well. Needless to say they have a Kiwisaver with $1,500 in it and a savings account with $3,000 and this is not money coming from me as I am a single mother and can't afford to give them much just the usual pocket money and what they earn on top. They are set up for life.
It's becoming clear that many here can't see past the subsidy. When the important thing actually is your investment. Possibly it's a good reason to remove the subsidies altogether, as it's just confusing those who have no idea of investing, compounding and the usefulness of time. (probably they never will)
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