By Aaron Gilbert and Ayesha Scott
The findings of the ANZ research into KiwiSaver present some very interesting conclusions. First, 60 per cent of the respondents were in favour of making KiwiSaver compulsory. Second, participation rates for KiwiSaver are highest for the wealthiest households, with just under half of low income families not participating. The argument is that these low income families, who are most in need of retirement savings, are jeopardising their retirement position by opting out.
While this argument has merit, it perhaps ignores the financial reality for many households. Numerous reports have presented compelling evidence to suggest that there are a significant proportion of New Zealanders who are living in poverty, surviving hand to mouth. Taking $10-$20 out of the weekly budget for KiwiSaver is simply not viable for many of these families. This reality is compounded in many cities by the rising costs of housing.
The inequity of this situation is that these households are being punished not once, but twice. Not only are they not able to save for their own retirement, but because of the fact that the "free" money associated with KiwiSaver is linked to employee contributions, they also miss out on their employer's matching contribution, to a maximum of 3 per cent of their salary, and the government tax credits.
An alternative solution to compulsory employee contributions is two simple changes. First, make the employer contribution compulsory irrespective of whether an employee is contributing or not. There is precedent for this. Australian employers are required to pay 9.5 per cent of a person's before tax wage or salary irrespective of whether they themselves contribute. This also avoids another inequity where a person who can afford to pay into KiwiSaver may be earning 3 per cent more than someone who cannot.
The second change would be to make the government contribution dependent on the total amount contributed, rather than just the employee contribution. While this would cost the government more than it does currently, it would result in fewer people forgoing the maximum $521 government contribution. It will also allow low income earners to benefit from a tax credit which they currently do not get. This will aid people in saving more for retirement.
These simple changes would allow low income earners to build up something for their retirement. Currently they will retire with nothing, and be completely dependent on the government once they retire. This solution also provides more savings for low income families than suggestions such as a 1 per cent contribution rate. Unfortunately, the currently high (by international standards) fees charged by KiwiSaver funds would have a marked impact on future retirement savings if the contribution rate were too low.
- Associate Professor Aaron Gilbert and Dr Ayesha Scott, AUT Business School