Opinion: Amanda Morrall believes KiwiSaver funds should be opened up for education savings for under 18s. Your thoughts?

By Amanda Morrall

Since KiwiSaver was introduced, the Government (i.e. taxpayers) have forked over more than $300 million in kick-starts for kids. 

That 300,000 parents took advantage of this offer is hardly surprising. The worrying part for me, as a taxpayer, is that a good chunk of this money is at risk of disappearing. It won't be an overnight now-you-see-it now-you-don't act, more like a slow bleed or going nowhere fast situation.

Barring no additional contributions, such as is the case with the vast majority of these accounts, returns on these funds will, at best, pay for the providers and fund managers' fees on them and, at worst, start to slip backwards if their performance is lousy.

So for example, a parent contributing $10 a week, that's on top of the $1,000 kick-start, with an annual membership fee of $30, and investment management fees of 0.73%, (assuming an after tax return of 4%) would see that account grow over 15 years to $8,240. 

Conversely, with no further contributions, given the same fees and returns, that $1,000 over 15 years would shrink to $440. 

Sure, $8,240 might only cover a few university papers in 20 years time, but when you look at the alternative, it's still pretty attractive.

Stats vary from provider to provider but most will tell you those accounts for kids are languishing at the $1,000 mark because parents either can't, won't, or choose not to contribute. (See Amanda Morrall story here on non contributing KiwiSavers). The future doesn't look bright.

Presumably, when these 300,000 plus junior KiwiSavers reach working age, balances will start to take off but in the meantime they'll have missed out (if they started at birth) on 18-22 years worth of compound interest.

How do you repay a student loan, save for a house deposit and have a retirement plan?

By the time they join the workforce, a kid born today who is forced to borrow to fund their university education in 18 years time will be graduating with around $60,000 debt (that's based on the inflated cost of an undergraduate degree today in NZ).  How that kid can be expected to repay that debt, save for a deposit on a home, and put enough away for them to retire on in old age (because pensions clearly aren't going cut it) is beyond me.

So here's a thought: Why not allow KiwiSaver funds to be used as a form of education savings account for under 18s?

Considering that student debt from unpaid loans in New Zealand has reached a staggering $12 billion, this would appear to be an attractive option for the Government and taxpayers.

I think most New Zealanders would agree that an educated workforce is a good thing for this country, right up there with home ownership, which KiwiSaver was designed to encourage.  

But at the moment, there isn't a huge incentive for students and/or their parents to take a long-term view on education savings.

The borrowing route seems to be the most popular one.

Why? Because it's interest free.

Heavily indebted kids entering the workforce? No thanks

Personally, I don't want to see my kids graduate and enter the workforce being so massively disadvantaged and having to deal with a $60k debt before they get their first pay cheque.  At their current ages, 8, and 9, home ownership is a foreign concept. Even though university is still a way off, they get it.  They also get that it costs money.

Arguably, a lot of families are hard pressed to pay the mortgage and bills, let alone save for their kids' education but when push comes to shove, most will prioritise their spending to free up cash and exuberant first time grandparents love a good cause. 

I'm not suggesting binning the current student loan system. Because saving might be beyond the ability of some cash strapped families, it is important to maintain a facility to encourage and enable a higher education for a broad sector of the population.

But having a savings vehicle in place that makes it easy for parents, grandparents and students themselves to save, knowing that it will spare them a lot of financial grief down the track, seems a sensible thing to do.

The argument against using KiwiSaver as an investment for educational purposes might be that there is too much risk of capital loss when the time comes for the grown up child to head off to university. The diversity of funds available at present would allow parents to reduce the level of risk over time by actively switching to less risky options as their children approach university age.

Even without member tax credits being extended to under 18s, I'm willing to bet that if KiwiSaver was amended in this fashion you'd see a lot more contributions channelled into those dormant accounts, which apart from generating money for fund managers, are basically going backwards or just treading water. Shame that.