Pay more to save the same, workers told

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Workers and employers will contribute 50 per cent more to KiwiSaver under changes announced in the Budget, but Kiwis' savings at retirement will be only 10 per cent higher because of lower government contributions.

The Government has also put workers on notice that if they are not in the scheme they may be enrolled automatically within the next year.

As indicated recently, the Government's contribution to individual KiwiSaver accounts - the member tax credit which is equivalent to $20 a week or $1040 a year - was halved in the Budget.

The $1000 government-funded kickstart for new accounts remains.

Another well-flagged change was increases in minimum contributions for employees and employers.

Both will rise from 2 to 3 per cent of pay from April 2013 onwards.

But hopes that cuts to the Government's ongoing contribution to KiwiSaver accounts in yesterday's Budget would be accompanied by tax sweeteners proved misplaced as it instead dumped tax breaks on employer contributions.

From April next year employer contributions will be subject to tax at the employee's top marginal tax rate.

A Kiwi on the average wage of about $50,000 who is making the minimum payment into the scheme will end up paying an additional $19.18 a week and while their employer's contribution will increase by the same amount, $5 of that goes to the Government via the new tax.

With the member tax credit halved, the net effect is a 75 per cent fall in the Government's contribution.

According to the Government's figures, that means someone joining the scheme aged 20 will have total savings of $292,500 by the time they reach retirement age - 10 per cent more than they would have enjoyed under the previous settings for a 50 per cent increase in their contributions.

The increase is less the older the saver is when they join the scheme - someone who joins at age 35 will have an increase of 7 per cent to $150,000 for their increased contribution.

The savings for the Government are more impressive - it expects the changes will slash spending on KiwiSaver by $513 million in the 2011/2012 tax year rising to $720 million by 2014/2015 or $2.6 billion over the next four years.

Finance Minister Bill English said the new tax on employer contributions, which was one of the Savings Working Group's recent recommendations for the scheme, would make KiwiSaver fairer.

"Currently, 50 per cent of this benefit goes to the top 15 per cent of income earners due to their higher marginal tax rate."

But NZ Council of Trade Unions economist Bill Rosenburg said the tax was "another gotcha which reduces the benefit to the employee".

Mr Rosenburg said the 10 per cent increase in savings at retirement for a 50 per cent increase in contributions was "remarkable".

"It doesn't sound fair to me."

For people on low incomes, even someone on $50,000 with a family depending on them, a 50 per cent increase in KiwiSaver contributions "could be quite a burden, especially in current times".

Officials estimate the changes will improve the national savings rate by about 0.2 per cent of GDP a year and in turn reduce overseas debt by about 2 per cent of GDP over the next decade.

Although it was not set out in the Budget, Mr English said the Government would also look at other KiwiSaver recommendations from the Savings Working Group, including a "a one-off KiwiSaver enrolment exercise where over a short period of time everyone is enrolled in it".

Employees would still be able to
opt out of the scheme after such an exercise.

He said the Government did look at making KiwiSaver compulsory but did not see good enough reason to do that.

Many of those not already enrolled could not afford it or may have chosen to invest in their own businesses or in other forms of investment instead, he said.

Changes to the way KiwiSaver employer contributions are made by Government departments are an important part of the $980 million in "efficiency savings" for the state sector announced yesterday.

Government departments will now have to pay employer contributions to KiwiSaver, the state sector retirement savings scheme and the teachers' retirement savings scheme out of their own budgets rather than from a central pool that has until now been provided for this purpose.

KIWISAVER: THE GOVT'S BILL

2010-2011:

* $880m member tax credit.
* $293m kickstart payments.

2011-2012:

* $444m member tax credit.
* $209m kickstart payments.