“Compulsory Kiwisaver” is bubbling up on the agenda, the latest being a call for it at the recent stock exchange AGM. It is easy to see why the NZX wants it. Not only does it add liquidity to the capital market, but somebody else (the government) does all the hard work – and carries all the cost – in raising the capital, collecting it, distributing it to investment agencies and regulating providers. The quintessential “free lunch”!
There are four strong reasons to resist making Kiwisaver compulsory:
- If the government is going to tell people how to allocate a part of their incomes, compulsion would almost certainly have to be backed by some form of compensation and protection, either through extended tax concessions and/or capital guarantees, and intrusive regulation and supervision of providers. This increases the chances that a larger proportion of Kiwisaver balances will simply be savings transfers (as savers chase the bigger subsidies and extended protection), not net new savings.
- There is a risk that with compulsion, savings levels could actually be artificially capped. The government is telling me to save, therefore it is also by implication telling me how much to save. (It knows better than me).
- With compulsion, rules are required for withdrawal (emigration, hardship, matrimonial property settlements, ill-health etc). These become incredibly complex and arbitrary, and tend to generate resentment, which works against promoting a savings culture.
- Compulsion tends to be inequitable because it captures a portion of savings that some people make reluctantly (otherwise a voluntary system would be sufficient) and transfers it to preferred providers, who are typically quite well paid: it takes money off people who don’t want to use it that way to support the earnings of finance industry employees.
The net effect is a small – or potentially minimalist – increase in savings levels, won at considerable fiscal cost, excessive regulatory prescription on both saver and provider, and much more complexity.
Worse though, it sets up the pre-conditions for ending or scaling back the flat rate, universal New Zealand Superannuation. If people have to save, there is a perception that this is because NZS is on the way out. There can be no other legitimisation of compulsion. If people want to save (to augment NZS) that is entirely a private matter. The perceptions and the politics work to divide opinion and diffuse commitment to defending NZS.
Remember that NZS is fundamentally equitable: it does not try to replicate in retirement the inequities that emerge during working life, it protects those (typically women) who live longest, it fences inflation risk off and it compensates (in part) for the fact that some retirees leave paid work with few financial assets. It is though, barely adequate as a retirement income. It is not generous.
Augmenting it is an entirely legitimate choice, but it is a private choice.
Last week, my son had a letter from his KiwiSaver provider reminding him that as a part time worker (he is a student) he had not qualified for his full tax credit, and that if he wanted it he would need to make an additional contribution before the end of the tax year. Sadly, his response was that he had better do that because the whole point of KiwiSaver was to replace the existing pension!
This compulsion thing is corrosive. NZS is worth saving.
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Peter Harris is an economist who specialises in public policy, the labour market, and primary industry issues. He has been Economist for the Council of Trade Unions (CTU) and economic adviser to Dr Michael Cullen. Peter was also chair of the Savings Product Working Group, whose report was the founding document for what evolved into the KiwiSaver scheme. Further biographical details can be found here.
Peter’s previous post for Policy Progress was Good policy process – the case of New Zealand Superannuation.
Tags: KiwiSaver, New Zealand Superannuation
While Kiwisave has no government guarantee etc, to what degree do you believe the public infers a guarantee or partial guarantee? I would be very interested in some polling on this as I suspect there is a high, but not universal perception of partial guarantee. I think this is likely to have been strengthened by the guarantee for banks that operated (still operates?) and the government partial contribution to leaky homes. I find it hard to believe that a future government would let a large kiwisaver provider fail and for thousands to go without their savings carefully put aside over decades.
What is the research on the perception on the implied contract and to what degree do you think it constrains future governments?
I am not aware of any research into whether or not savers think there is an implied guarantee of KiwiSaver balances. The start-up $1,000 and the roughly (up to) $1,000 annual tax break (plus compulsory employer contributions) provide a buffer rather than a guarantee, but make it very unlikely that there will be actual capital losses on personal contributions. It would have to be a very poor performing fund manager to lose all of that buffer! Having said that, there are a number of small KiwiSaver providers, so it need not be a big fund that fails. We have already seen some dodgy practice by one small provider through a “loss leader” type of pricing practice to get a marketing advantage, which shows that there is a degree of looseness around the regulation of providers. Near term, tighter regulation and more transparency are likely to be the areas that are likely to be advanced.
It would be interesting, though, to speculate on what the government would do in the event of an actual collapse.
A thoughtful piece and I agree with your basic argument. I hope Sam did manage to contribute up to the maximum $1043 as one of the key messages I get from Kiwisaver is where else can you get 100% return on your investment? I have never thought of Kiwisaver schemes as having any other Government guarantee over and above this generous subsidy and agree with your observation that it is very unlikely that anyone will suffer capital losses.
Given the Treasury long-term forecasts indicate NZS in its current form is just not affordable for New Zealand (because of the increase in the proportion of our population who are retired), would you support some kind of means testing of NZS? This seems sensible given so many people over 65 remain in the workforce anyway.
Conceptually, if there is a universal retirement income, it should only be paid to those who are retired. Any abatement system should exclude returns on investments, because including them would be a strong disincentive to savings (people saving for the government not themselves). It should also allow a modest exemption for earned income so that people who are in effect retired but do some intermittent or part time work are not captured. In practice, though, this has been a political bridge too far. It is just such a big target for single issue voters, and has not been politically sustainable. At the margin, it probably doesn’t matter too much: the savings, net of tax are probably in the fiscal noise.
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