Diana Clement: It's worth counting actual cost of KiwiSaver

People happily spend now on what used to be considered luxuries, so a bit of effort can soon create the savings to support KiwiSaver. Photo / APN

The naysayers are out in force. The Budget 2011 cuts to KiwiSaver have the usual bunch of pessimists saying: "That's it. I can't afford it anymore".

The reality is that they have no idea how to fight the financial flab in their budgets.

The main changes have been well covered in the media. They include the following, which come into effect over the next two years:

* Employer and employee contributions raised to 3 per cent

* Member tax credits halved

* Tax imposed on employer contributions.

True, the Government has slashed the tax breaks for investing. Instead of a 100 per cent return on your investment from the Government (up to $1040 and before employer contributions and investment growth), there is now 50 per cent, which isn't bad for an instant return on any investment.

Or, if you include employer contributions, that's 150 per cent before the money even hits a stock market.

As Mary Holm has written, the changes mean KiwiSaver is no longer gold-plated. But it is silver-plated and not relegated to $2 Shop junk yet.

Memories are short. There has been quite a bit of whining about the changes this week on some of the forums I read.

It's worth reminding the naysayers that most of those on low incomes haven't been affected by the Working for Families (WFF) cuts. Some will even receive an increase. The cuts were aimed at people earning more than $60,000, who should be able to afford KiwiSaver.

Another group of better-off people had already lost their WFF payments before the latest Budget because the way family income was calculated had already changed.

Retained earnings from a closely held company are taken into account for family income. Also included from April 1 was attributed trustee income, PIE income, passive income of children, pensions, annuities and other payments.

This stopped small business owners and certain people with family trusts from artificially deflating their incomes to get WFF. Last year's Budget also removed the ability of property investors to use rental losses to reduce income for calculating WFF credits.

The changes to WFF for higher earners in Budget 2011 are very minor by comparison and some of those people whingeing on forums also seem to have forgotten that last year's personal tax cuts mean they're still in a better position financially.

Small employers and self-employed people may struggle the most from next year. In the case of small employers, the combination of additional KiwiSaver contributions and last year's GST increase, which not all have been able to pass on to customers, has the potential to hurt the bottom line.

To put it in perspective, employer contributions were originally 1 per cent, rising to 4 per cent, before the present Government capped them at 2 per cent. A rise to 3 per cent is still a bonus, but tell that to a struggling Christchurch business owner.

Self-employed people lose half of their government kickback and don't benefit from the increase in employer contributions, unless they're willing to turn themselves into companies and pay themselves PAYE, so that they can pay employer contribution, which reduces their profit and overall tax bill. That's a lot of work.

It's worth considering KiwiSaver's real cost. At 3 per cent of the average wage ($40,000), it's $23 a week, or less than two packets of cigarettes.

Including the government and employer contributions, that adds up to $2920 a year, which over 30 years grows to $53,841, assuming 4.5 per cent inflation, a 6 per cent average growth rate and 19 per cent marginal tax rate. Most calculations don't take into effect inflation. I've used the current rate from the Reserve Bank of New Zealand's website.

Even if inflation was only 3 per cent on average, the total would be $83,077 at today's spending power. Everyone should be aiming for greater retirement savings than that.

I would very much doubt that readers of this column could not afford to up their retirement savings by 1 per cent.

From a personal finance perspective, the world is changing rapidly. Petrol will continue to rise in price, which will make food and virtually any product that requires fuel for its manufacture or shipping more expensive. There is no guarantee that our wages and salaries will keep pace with these changes.

It's our budgets that must change, and our mentality. It would be easy to make a big list of wants dressed up as needs that people of all walks of life could cut from their budgets, such as, dare I say it, cigarettes.

The trouble is that those people on the average income from salary and wages don't believe they can afford to save anything.

One reader summarised the cost of KiwiSaver for individuals very well recently. She said KiwiSaver costs the equivalent of one DVD hire and a McDonald's visit a week. It's not hard to cut that sort of flab out of most people's budgets.

Or, if DVDs and takeaways aren't your poison, try walking your shopping trolley past the wine aisle in the supermarket or, God forbid, cycling to work.

The bigger picture of how we spend our money points to a couple of huge black holes: houses and cars.

Our expectations for these two budget items have changed. In the case of housing, those expectations have grown out of all proportion. We've supersized our houses.

According to Statistics New Zealand data, the average new house in 2010 was 198sq m. In 1974 it was 119sq m. The number of bathrooms is growing rapidly as well. Yet we're not having larger families.

New bathrooms and extensions may be the stuff of middle-class dinner parties. But they're not contributing to long-term wealth in many cases. Just ask a registered property valuer about the cost versus return of some of these building works. They don't all stack up. The money would be better off invested elsewhere.

The focus on judging our personal wealth on our house values is going to need another shift in thinking come retirement: downsizing.

Another big change in our expectations over the past generation is the number of cars we own and the distance we drive. It's arguable that New Zealand's public transport hasn't worsened over that time. Our expectations regarding ownership and use of vehicles have.

According to the Ministry of Transport, total household travel in New Zealand increased by 13.5 per cent from 1998 to 2008. Yet the population increased by only 10 per cent over this period.

Likewise, in 1974 we had 490 vehicles per thousand people, and by 2009 that was 746, with falling vehicle occupancy rates.

Vehicles cost less now in relative terms than they did in 1974, thanks to cheap imports. At the same time, the total cost of car ownership is rising more rapidly than income.

That true cost of ownership includes additional fuel, consumables and repairs for our increased mileage; insurance, depreciation, finance charges, the added cost to goods and services we travel to buy.

A radical solution may be to ditch the second car and funnel the expenditure into retirement savings. We survived with fewer cars in the past, and around 43 per cent of Auckland households still survive with one or no cars - although some of those won't be working.

Another bit of financial flab to dedicate to improved retirement savings is our individual analysis of what we consider to be "the basics" at the supermarket.

Those changing "needs" are highlighted in Statistics New Zealand's food price index. Over the years, certain erstwhile luxury items have entered the index. For example, long-life fruit juice has been in the basket for a long time, whereas chilled fruit juice was added to the FPI in December 2008.

Finally, KiwiSaver may not be gold-plated anymore. By contributing to it, however, you're still saving, still getting a tax break and getting a free contribution from your employer, which, hopefully, won't impede pay rises.