KEY POINTS:
KiwiSaver appears too good to miss. Everyone who can afford to join should. KiwiSaver isn't just for employees. All under-65s should join, including children, beneficiaries, stay-at-home parents and even visiting Australians (they are entitled to work in New Zealand indefinitely).
All locals over 18 should contribute $20 a
week, even if they aren't working, because that will be doubled by the tax credit. If they can't afford it, perhaps their spouse, parents or grandparents can.
So what could possibly be wrong with this rosy picture? Won't we all be better off in retirement and isn't that a good thing?
Like any major complex policy change, there are worrying unintended consequences.
One of these is policy instability. Even if a new government doesn't abolish it, KiwiSaver II will be changed. KiwiSaver I lasted 8 months. Perhaps KiwiSaver II will last less than 18 months. National isn't saying.
Policy instability also relates to unclear links between KiwiSaver and the problem it is supposed to solve. Is it a national or retirement saving problem? For retirement, the best data we have is that New Zealanders are generally saving enough.
Even if Kiwis weren't, Budget secrecy is no basis for such initiatives. It is simply unproven that the KiwiSaver changes will do anything but shift money from one pot into another. That's what overseas evidence suggests will happen.
The national saving problem is a different issue. Increasing saving to facilitate increased consumption in retirement will not reduce our overseas indebtedness, nor correct our propensity to spend more than we earn as nation.
There is a long list of further worries. First, borrowing to invest in KiwiSaver can now make sense. It's possible, in limited cases, to justify credit card loans to finance contributions. So, while KiwiSaver balances rise, we may also see rising household debt.
Anyone with a home can put the contributions on the mortgage. Suspending capital repayments to free up money is one way. After 12 months, they can also reduce mortgage payments further through the mortgage diversion scheme.
Students should think of using their interest-free loans to finance their contributions. And they will get most of it back soon enough to help pay for their first home.
The help for first home-buyers may have unintended consequences. Demand (and prices) for bottom quartile housing will go up and help intended for buyers will be partly captured by sellers. High valuations will be placed on chattels to slide the house price into the subsidised zone. Salary sacrifice arrangements may be used to lower pay (but not remuneration) to qualify for the Government's subsidy.
However, the biggest issue concerns New Zealand Superannuation's future. The Government says NZ Super will be unaffected. Really?
On reasonable assumptions, a KiwiSaver on the national average wage for 40 years will end up with about $320,000 in today's money. That's the annuity equivalent (for a male at 65) of about $22,000 a year after-tax for life (inflation-proofed). Of that, about 33 per cent has come from taxpayers. Using today's NZ Super, our KiwiSaver's total income will be $36,407 a year or 105 per cent of after-tax, pre-retirement pay.
Future governments could say taxpayers have helped pay for the KiwiSaver nest egg so why should the full NZ Super be paid?
Employers' contributions from April 1, 2008, are not more money. They will be part of employees' pay but locked up until age 65.
If employees' future incomes reflect KiwiSaver's compulsory, deferred pay, we will see a permanent reduction of 4 per cent in members' wages and that will affect the national average. NZ Super will rise less quickly (because the rate is based on the average wage) affecting all superannuitants, including the retired. Indirectly, they will help pay for KiwiSaver II by reducing NZ Super's future cost.
Tax incentives are distortionary, regressive, expensive and complex. But those are not their worst faults. Overseas evidence shows they may not increase national saving and might reduce it once the costs are taken into account. The Government has not justified tax breaks for KiwiSaver II and probably can't.
There is one silver lining with KiwiSaver II. Our sudden shift from a voluntary, unsubsidised system will produce a fascinating experiment of international significance.
For 20 years, New Zealand had a simple retirement income system that seemed to be working well. In the past year it has become complicated. Until 2006, we had two regulatory definitions of a superannuation scheme. Now, we have eight. Is that really progress?
* Michael Littlewood is co-director of the retirement policy and research centre at the University of Auckland.
