Treasury estimates only 30 cents in every extra dollar put into KiwiSaver is actually new savings

By Amanda Morrall

Early and "limited evidence" on the effectiveness of KiwiSaver as a national savings tool suggests the retirement scheme has so far increased savings by only 30%.

According to Treasury KiwiSaver documents made public Thursday (containing recommendations adopted in Budget 2011 urging subsidy cutbacks) roughly 30 cents of every KiwiSaver dollar channeled into the savings scheme could be constituted as new savings, "a lot less than 1:1 for every dollar contributed by members.''

While Treasury acknowledged the unreliability of the estimates given the complexity around savings calculations, it nonetheless cast doubt on whether the "considerable cost of KiwiSaver subsidies" represented "value for money.'' 

From inception of KiwiSaver in 2007 to 2009/2010 alone, Government paid just under NZ$2.4 billion*.

Treasury recommendations in its Jan.28, 2011 report, formed the basis of changes announced by Government in its May 11 Budget. In cutting Member Tax Credits from a maximum of NZ$20 a week (or $1,043 a year) to $10 (or $521 a year) and introducing a tax on employer contributions, Government anticipates annual savings of NZ$500 million a year.

If it doesn't spend those savings, it will have the effect of reducing New Zealand's net foreign liabilities by 1-1.15% of GDP in about 10 years time.

The savings forecast for KiwiSavers was a bit murkier.

While employees and employers are expected to make up the shortfall from reduced incentives from Government (through compulsory contributions changing from 2% to 3%) there are indications that many employees were already saving at the level.

Separate documents released by Treasury suggested that more than half of KiwiSavers were already contributing to their retirements savings account at a rate of 4% of gross pay.

'We set and forgot'

That's because a huge swathe of KiwiSavers enrolled into default schemes when the programmes was first introduced in 2007 and set their contributions on the basis of the then nominated amount of 4%. National later changed it to 2%, but vast numbers were already in the "set and forget" mode.

The bigger impact would be for employers. Treasury notes in its documents that 90% of employers are currently paying at the minimum mandatory rate of 2%.

So what are the implications for savers? And what effect will it have on long-term savings rates?

Treasury isn't forecasting grand changes on that front - at least not for a while.

Based on its modeling, it anticipates that 30% of new savings will come from the segment of 60% of new members earning less than NZ$40,000, the most hard pressed to meet the savings pressures imposed on them by KiwiSaver. And the evidence suggest that this demographic is "likely to be adequately provided for in their retirement via New Zealand Super.  And further that good numbers of them are really not in a position to save anyway.

'Against KiwiSaver compulsion'

For these reasons, Treasury isn't pushing for compulsory KiwiSaver. While KiwiSaver might have the appearance of boosting national savings overall, it would come at the expense of those individuals least able to afford to set aside money for retirement that they need for daily living.

In a executive report to Finance Minister Bill English, it wrote: "We consider that the key judgement is how an increase in national savings (and the associated signaling of a commitment to reduce our vulnerabilities) is weighed against the negative welfare impact for a group of people, likely concentrated at the lower end of the income distribution, who would be better off not saving or saving outside of a long-term savings vehicle. "

Further, it stated, "The fiscal costs of compulsion would also be significant unless subsidies could be eliminated, which may prove difficult in practice.''

As of the end of December, 1.6 million members had joined KiwiSaver with members and employers contributing more NZ$1.6 billion (NZ$1 billion from members and NZ$626 from employers).

Other places

A Colmar Brunton survey referenced by Treasury is its report to Finance Minister Bill English suggests 71% of that money would have been channeled into savings of another form in the absence of KiwiSaver.

So is New Zealand better off with KiwiSaver? By Treasury's own estimates only marginally so, at least according to their models. 

"The generous subsidisation of Kiwi Saver means that it is in many people's financial interests to join it early in their working lives, compared to the option of first paying down their mortgage and then starting to accumulate financial assets," Treasury.

"However, it is worth noting that compared to a world where there was no KiwiSaver and individuals captured the full amount of the subsidies via lower taxes and higher wages and applied this to paying down their mortgage and then started to accumulate financial assets," it said.

"In this scenario, our modelling shows that individuals would have saved around 25 per cent more financial assets at retirement under reasonable assumptions. This result is driven by the interest rate spread between borrowing and investing rates, and tax issues related to housing. While this estimate is subject to uncertainty, it serves to illustrate the point that Kiwi Saver subsidies could significantly skew investment decisions relative to a no-KiwiSaver world."

*Corrected from earlier amount of NZ$2.4 billion as a cumulative figure to date.