The Government is looking at extending the KiwiSaver's auto-enrolment provisions to include all employees not currently members. This "mopping-up" operation would enrol about one million employees - they could opt out if they really didn't want to belong.
Business writer David Chaplin noted that the six default KiwiSaver providers may be "gifted" perhaps as many as 100,000 new members each. That's not the only problem with the idea.
As of June 30, there were 1.75 million KiwiSavers. As expected, the number of new enrolments is reducing. In the 12 months to June 30, 296,000 joined compared with 359,000 the previous year.
We don't know what proportion of the 1.75 million current members are employees. About half were either auto-enrolled (37 per cent) or opted-in via their employer (13 per cent), so let's assume they are all still employees. The other half opted-in directly with a provider (including 17 per cent who were children) and many of those will be employees. Even if the 33 per cent "non-children" were all employees, that means at the most about 1.4 million members may be current employees. On that basis, about 1 million employees are not members.
If forced to join, they would have to contribute 2 per cent of pay; their employers would have to match that and the Government would add the joining bonus of $1000 plus the annual subsidy of up to $521 a year. What could be wrong with that?
Here are the main problems.
Cost to taxpayers. If, say, half the new members stayed in the scheme (and each was paid the national average wage of about $51,000 a year), the direct cost to taxpayers would be $500 million in joining bonuses and $260 million a year in annual subsidies on top of the $1 billion now being paid. The Government must borrow the extra $760 million in year 1. All taxpayers will have to service that debt.
Employers' subsidy. Employers must match employees' contributions to a maximum of 2 per cent of pay. This isn't "free" money. Employers have budgets for remuneration, as with everything else. If all current non-members become members, the employer's costs will increase by 2 per cent of their pay. Next year, there will be less available for pay increases so all employees, including non-members, will help pay for the members' subsidy. But if employers pass those extra costs on in prices, we will all help pay for the subsidy.
Which provider gets the new members?
The default provider arrangements are flawed, as Chaplin pointed out. If each provider had to pay for the new default enrolments, there would be fewer issues but there seems no business reason why each of the six current providers should be presented with 167,000 potential members at no cost.
Then there are some practical problems:
* Who is an "employee"? We don't know how the bulk auto-enrolment will work but to whom might it apply? There are many "employees" of family trusts who should be excluded. I assume that the 250,000 who have already opted out would be unaffected; also the 64,000 on a contributions holiday; and also employees who are over age 65. But what about employees on unpaid leave; "independent" contractors, multiple job-holders, part-timers and temporary, say, seasonal staff? Specifying the boundaries won't be easy. It's easier to catch new employees when they change jobs.
* Administrative issues: Several administrative issues are beyond the scope of this article to detail. Here is a list. Will employers be compensated for their costs? How will the bulk auto-enrolment cope with "exempt employers" and "complying funds"? What about employees who aren't in New Zealand on E-day? How will the Inland Revenue's systems cope? It already has trouble coping with KiwiSaver - adding another million members will magnify those problems. Finally, about 10 per cent of default providers' members are "gone, no address". The million new compulsory enrolments will add perhaps 200,000 to that list. Employers will still have to make deductions and subsidise those members and pass the money on but the members themselves won't know which scheme they belong to.
However, the most important problems are fundamental, public policy issues. The bulk auto-enrolment will send New Zealanders a powerful signal to emphasise the point already made by generous incentives. Why might a government say that saving for retirement is better than, for example, saving by repaying debt, buying and building a business or getting an education? Why should those who can't afford to join KiwiSaver help pay for those who can?
Are current subsidies working?
Before KiwiSaver started, there was no evidence of New Zealanders' under-saving for retirement. Subsequent research has confirmed this, undermining KiwiSaver's very existence as public policy. But there is actually a worse problem. A recent Treasury report suggests that only about one third of members' contributions are "new" money (that is, savings that may not have been made in the absence of KiwiSaver).
The report finds that, as expected, KiwiSaver should increase national savings in the short run, but "... given the extent of public contributions through tax concessions and direct grants, the net contribution to overall saving would be marginal at best in the longer term, and may in fact reduce national savings."
In other words, government subsidies of the KiwiSaver kind might not help improve the national numbers as many expect. If the present subsidies aren't working, why add to the problem with more borrowed money?
- Michael Littlewood is co-director of the Retirement Policy and Research Centre, University of Auckland.