Anyone who decides to save is essentially taking a bet on future consumption being better than current saving.
That sort of bet requires trust in institutions and rules, confidence about the future, belief in investment returns and a willingness to sacrifice instant gratification.
That sort of trust and confidence is not easy to build up and should be protected at all costs.
KiwiSaver had become one of our loved institutions in a short period of time. We believed it would be there in future. We believed it made financial sense for ourselves and the country.
We welcomed the initial tax breaks and the plans to ramp up the savings Australian-style to something decent.
KiwiSaver has been a huge success so far in encouraging people to sign up to a scheme that actually makes them poorer now.
The government's announcement of cuts to the government's matching $1042/year tax credit to match employee contributions is another change that undermines confidence.
In 2008 the National government cut the minimum contribution to KiwiSaver to 2 per cent from 4 per cent, effectively reducing the 4 per cent contribution from employers at the same time.
Then it stopped contributing to the New Zealand Superannuation Fund or the Cullen Fund as it became known.
One of the reasons 1.7 million New Zealanders have opted into the scheme and now have $8 billion in there is they believe it will generate returns and they can get the money back when they retire.
Changing the rules every time the government wants to reduce the budget deficit simply erodes trust, which is the most ephemeral thing. Will the government confiscate the money at a later date? Will it tax it differently? Will it be there in 40 years? With so many changes in less than 6 years there's a tipping point we need to be careful about approaching.
Constant changes like this encourage people to disbelieve public institutions such as New Zealand's capital markets and encourages them to instead invest in 'things they know' such as bricks and mortar.
It is the wrong type of deficit reduction.
The right type of reduction
Prime Minister John Key is right on the face of it when he says that borrowing from foreign creditors to put money into KiwiSaver funds (most of which is then invested offshore) doesn't make financial sense.
Issuing government bonds at 5.5 per cent and then handing the money over fund managers who might get back 5-6 per cent after taxes seems marginal at best. Once fees are taken into account it seems counter-productive.
Key cited research from Treasury that cutting the budget deficit through such KiwiSaver tax credit reductions would cut New Zealand's net liabilities by 2 per cent of GDP over the next decade.
That may be true, but it's just as true for cutting spending elsewhere.
And those spending cuts, particularly on consumption spending such as Working for Families and Interest Free Student loans, would be sending a much stronger message.
That is: New Zealand prefers to save by spending less rather than investing less.
That money that would have gone into KiwiSaver and the NZ Super fund would have been invested, often in New Zealand, to increase our long term productive capacity.
Instead, most of the money now being borrowed is simply being spent by consumers on trips to The Warehouse, the cafe, the pub, the supermarket and the casino. None of it is boosting our production and reducing consumption.
John Key should have sent the message: we'll save money by spending less, not by investing less.