‘Essentially, which policy makes people better off comes down to the trade-off between current personal spending and saving for retirement – and lower-income people are likely to have less room in their budget for saving.’
KiwiSaver is on the table as a major issue of this year’s election. But would you be better off under National’s KiwiSaver plan, or Labour’s?
National is promising to make participation compulsory, with a 6% employee plus 6% employer contribution required by 2032.
Labour would make only the employer contribution compulsory, rising to 6%, and would remove any minimum employee contribution so that people could pause or reduce their payments.
National would automatically enrol babies at birth and give them $1,500.
Both parties would require employer contributions for people who are over 65. National would provide a government contribution for people who are on paid parental leave and not contributing to KiwiSaver. Labour would require employer contributions to continue when someone was off on parental leave.
Labour would ban new total remuneration packages.
As a general comparison and not including the impact of income tax over a person’s working life, a 25-year-old currently earning $60,000 a year and making contributions at the default rate could end up with $1.014 million in their account under Labour’s plan and $1.241 million under National’s.
The worker would have given up more of their own salary over their working life in the National scenario.
A 45-year-old earning $100,000 would end up with $340,000 under Labour’s plan and $424,000 under National’s. A 25-year-old not contributing themselves could still end up with $561,000 under Labour’s plan. National would require them to contribute. The $1,500 baby payment could grow to be worth about $8,000 over 25 years.
Infometrics managing director Gareth Kiernan said it was hard to compare the two policies. “We can effectively ignore the higher contributions being required of employers because they are set at 6% across both parties’ policies.
“The question then essentially becomes, are workers better off if they are forced to save 6% of their income rather than 4% of their income? If people were rational and planned appropriately for the future, the answer would be no – because allowing people to choose what to do with their income would enable them to make the best choices for their individual circumstances. For example, people with a mortgage could decide that the best way to improve their long-term financial position is to prioritise paying off the mortgage first rather than investing, and then save and invest at a faster rate later.
“However, it’s questionable whether many people act in this way. I won’t say they are irrational; rather, that they have a high discount rate, which means they place little weighting on events a long way in the future when making decisions. Put simply, spending money now is a more attractive option than saving money to use in 40 years’ time. Thus outcomes could be better from a broad societal point of view if the government legislates that people must save so that retired people are less of a drain on society in the future. The alternatives to legislating higher KiwiSaver rates now might be, in the future, higher tax rates or reduced levels of government superannuation – outcomes that might not be fiscally achievable or could provide insufficient support for future retirees.”
He said there would also be questions about whether forcing people to save more would eventually result in less universal government superannuation in the future.
“If that is the case, then a 25-year-old saving 6% now achieves a larger KiwiSaver balance at retirement but it might be offset by less government support after they retire.
“Nevertheless, even this part of the argument becomes nuanced when one considers what an appropriate level of retirement income might be. It could be argued that even the current superannuation rate of $44,400 per annum per couple after tax is not enough for a comfortable lifestyle, let alone any possible future reductions in support as fiscal settings become more stretched. In that case, some level of forced private saving by the government to top up this amount would improve people’s future wellbeing.
“Essentially, which policy makes people better off comes down to the trade-off between current personal spending and saving for retirement – and lower-income people are likely to have less room in their budget for saving.” It would also, he said, involve “how bad people are at planning for the future, and whether they need to be protected from themselves, and any differences in future government policy that might see higher-wealth people receive less government superannuation support”.
Pathfinder Asset Management founder John Berry said it was disappointing that KiwiSaver had ended up being an election issue rather than a wider discussion about retirement settings and where NZ Super would fit in.
“The bigger question for people in their 30s and 40s at the moment is what is NZ Super going to mean for them in retirement? Are the settings going to be the same or less? That impacts how much they need to save in KiwiSaver.”
But he said it was important that New Zealand moved towards matching Australia’s contribution rate of 12%.
“We’re not all saving enough for retirement. The Retirement Commission is saying 40% of people over 65 have virtually no other income besides NZ Super. That is quite astonishing. Forty percent of New Zealanders are relying on NZ Super for retirement. We need to fix that. The best way to do it and give people the sort of lifestyle they want from retirement is larger KiwiSaver balances, saving small amounts compounding over a very long timeframe.”
He said there needed to be cross-party support for a different approach. “People in their 20s are kind of in a difficult spot at the moment where they’re saving for their own retirement and their taxes are paying super payments to retirees, but they may not or are unlikely to get the same benefit when they get to retirement.”
Simplicity chief economist Shamubeel Eaqub said the difference between the two policies came down to National requiring people to save more, but that could mean people had less take-home pay.
“Under the Labour scenario you are going to save less but you have more flexibility. Those who can save more will save more.”
He supported delinking employer and employee contributions. “If you are going through a hardship, it doesn’t mean the employer should suddenly experience a lower cost of employing you. It doesn’t make sense.”
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