Treasury wrong about KiwiSaver, says finance lobby

Stay aware - but don't be too concerned about share market falls, say KiwiSaver fund managers.

Treasury analysis claiming that the KiwiSaver scheme doesn't add to national savings rates is wrong because it used data from a short period affected by the global financial crisis, compares the wrong groups of people, and ignores evidence that young and low income people tend not to save without incentives, says the New Zealand Institute for Economic Research.

In a paper prepared for the Financial Services Council, which represents the savings industry, the independent economic consultancy also says the base data, had also been shown to be "unreliable" because of large changes in financial position reported by some participants in the survey.

Lessons from behavioural economics have also been ignored. Many individuals will not adequately save for their retirement. KiwiSaver overcomes some of these effects.

Financial Services Council executive director Peter Neilson.

The Treasury analysis was used to justify the government's decision in the budget, in May, both to end the $1,000 one-off kick-start contribution for new KiwiSaver scheme entrants and halving the value of the annual employer subsidy from $1,042 to $521. The moves will roughly halve the value of a retirement nest-egg built up over a lifetime, with the difference for a low income earner being a drop from around $250,000 to around $125,000, said Neilson.

The Survey of Family Income and Employment (SoFIE) ran from 2007 to 2010, covered a period in which major changes to the value of capital assets occurred because of the 2008 global financial crisis.

Even so, KiwiSaver funds earned more than interest income or labour during that period, said FSC executive director Peter Neilson. "This is likely to continue."

KiwiSaver funds also assisted New Zealanders to diversify their investment risk over a lifetime, away from the current situation where some 95 percent of New Zealanders' investments are in local rather than offshore assets, leaving retirees highly exposed to the fortunes of the New Zealand economy.

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"There is a large concentration of risk in financing retirement given the composition of wealth in New Zealand, which is highly concentrated in real estate and New Zealand assets," said Neilson.

"Lessons from behavioural economics have also been ignored," he said. "Many individuals will not adequately save for their retirement. KiwiSaver overcomes some of these effects" with steps such as auto-enrolment and kick-start subsidies, such as the $1,000 offered until it was withdrawn in the May Budget, helping low income and young savers particularly to begin saving.

The government has said it will consider auto-enrolment when the government's finances return to surplus, which is forecast to occur in the current fiscal year.

Another "potentially serious problem" with the Treasury analysis was the creation of a false dichotomy comparing low and middle income earners' savings behaviour with the actions of beneficiaries and the very wealthy, neither of which group is likely to save for retirement, albeit for different reasons.

"The analysis simply compared the results for the people in KiwiSaver with those who were not, as opposed to those in the target audience who joined KiwiSaver compared with those in the target audience who did not," said Neilson.

See the NZIER report here: