A critical view of KiwiSaver
May 7th, 2008 at 4:06 pm by David FarrarThe Centre for Independent Studies has published a critical analysis of KiwiSaver. I am actually a reasonable fan of KiwiSaver (but not of how they did it with no consultation with business), so disagree with the conclusions in the CIS analysis. However I support most of their analysis, which I will summarise here:
- Most people were already saving enough for retirement, with 80% of couples saving enough to maintain a level of consumption similar to or better than in pre-retirement.
- With KiwiSaver and New Zealand Super combined, it is now possible for a someone on the average wage to retire on a higher income than they enjoy during their working life.
- It is over the top to have a subsidised saving scheme on top of an age pension that is the most generous in the OECD.
This is a very strong point. People are being over-taxed and over-subsidised now. The NZ Super scheme is the most generous in the OECD as it is neither means nor asset tested. You combine that with a scheme that all bar the very stupid or very poor take part in with an average 10% of salary saved per annum, and you end up with higher incomes in retirement than during your working life.
- KiwiSaver largely benefits the wealthy, who can afford to save more.
Yep, and every wealthy person I know is making sure they get the maximum subsidy from the taxpayer, and self employed people are upping their salaries so they get to claim their employer contribution as a tax expense.
- KiwiSaver politically and economically threatens the future of New Zealand Super and makes means testing more likely in the future.
I reached this conclusion during the budget lockup, when it was announced. There is no way in 30 years time we will have both NZ Super (including Cullen Fund) and KiwiSaver. Dr Cullen has actually destroyed the consensus over publicly funded non means tested superannuation. If he was a National Minister, the left would be baying for his blood.
- Evidence from around the world suggests that subsidies for savings schemes do little to actually
increase overall savings. Instead, people tend to shuffle around existing savings to take advantage
of the subsidies.
Yep. Most incentives change individual behaviours rather than change the fundamentals. However as the incentives for KiwiSaver are so strong, and as you have to opt out of it in a new job, I do think it will have some impact on overall savings levels.
- It is now more rewarding for people to join KiwiSaver than it is to pay off debt or a mortgage, or
to invest in business or an education.
The CIS paper actually quotes me as saying “You have to be very very poor or very very stupid to turn down an up to 2:1 subsidy”. And indeed, the level of subsidy is so high that it makes sense to borrow money so you can save it!
- The requirement for employers to contribute 4% of a worker’s salary will put downward pressure on wages and job growth.
Of course. Employers look at the total cost of remuneration. What is unfortunate is those that do not join KiwiSaver may be punished for the cost of those who do join.
- The total cost will rise to $2 billion a year, which is more than New Zealand spends on its entire defence force.
It is a lot of money, and not sustainable on top of the Cullen Fund and NZ Super. But it is not necessairly KiwiSaver which should go.
- The easiest way to fix KiwiSaver is to scrap the generous incentives to contribute,
That is one way to fix the problem, but not my preferred one.
CIS are looking at this in terms of what is best for New Zealand, and they may be correct. But first let us look at this from the view of the left:
- Penalises poor people who can not afford to save
- Gives the greatest advantage to richer people
- Allows rich self employed people to avoid more tax
- Pushes wages down
- Undermines universal provision of superannuation
- Privatises savings from the state to the private sector
KiwiSaver is everything the left should hate. I guarantee you if Bill English had introduced this, it would have been denounced.
Now CIS are saying this is bad public policy, even if it is something the right should love (which demonstrates that they are not as ideological as critics claim).
I support KiwiSaver because it is inevitable that it will lead to means (and maybe asset) testing of NZ Super. And I believe in means testing.
I support KiwiSaver because in 20 years or so (once takeup is near universal) the $50 billion or so in the Cullen Fund will be dished out into people’s KiwiSaver accounts. And after giving over $25,000 to each family, no future Government would ever take it out of their KiwiSaver account.
I support KiwiSaver as I would rather choose my investments manager, than have the Government do it for me.
I support KiwiSaver as it will lead to a reduction in the size of the state.
So while I agree with much of the analysis of the CIS, I disagree with their conclusion to scrap the incentives and subsidies. Instead just wait for the Cullen Fund to be privatised and NZ Super to end up means tested, and probably CPI adjusted instead of wage adjusted.
Related posts:
- National on KiwiSaver
- Does KiwiSaver increase savings?
- Cullen on KiwiSaver and superannuation
- KiwiSaver v Parliamentary Super
May 7th, 2008 at 4:58 pm
I agree that the privatisation of the Cullen Fund and introduction of means testing for NZ Super are pretty much inevitable, but why will NZ Super be CPI adjusted instead of wage adjusted? I don’t see the pressure for it.
Vote:May 7th, 2008 at 5:02 pm
The NZ Pension scheme, typified by Kiwisaver, is an indication of the contempt Labour has for non-mendicants.
Compare it point by point to the genuine Superannuation scheme that operates in Aust.
Ever feel insulted?
Vote:May 7th, 2008 at 5:09 pm
Grant – CPI adjustment costs less than wage adjustment and is more sustainable. If you have most of the population getting their super privately, then the state super does not need to be so generous. You would only change it to CPI adjustments though if KiwiSaver became compulsory, which is probable one day.
Vote:May 7th, 2008 at 5:19 pm
“There is no way in 30 years time we will have both NZ Super (including Cullen Fund) and KiwiSaver.”
There was never going to be any way, as there is unlikely to be enough taxpayers to continue funding NZ Super once all the Babyboomers have retired. Someone described it to me as like an inverse pyramid. At the top will be all those eligible for a pension and at the bottom will be a small handful of taxpayers. The rest of the population either won’t exist (we’ve been having too few babies to fully replace the population), will be in prison (more kids are born below the poverty line than above it) or in hospital, suffering from obesity-related illnesses (I hope the Boomers aren’t counting on the public health system for their hip replacements). Unless we attract a mass influx of highly educated and productive immigrants (bearing in mind that we’re competing with the rest of the developed world for these people) then there are going to be some tough economic times ahead.
And, the biggest challenge for future governments will be to do anything about it. Unless, as Gareth Morgan cheekily suggested in Pension Panic, people lose their right to vote on retirement, the Boomers will continue to be the largest and most influential demograph for the next 20-30 years. AKA the “Me” generation, they haven’t previously shown any inclination to self-sacrifice for the sake of the greater good, so don’t expect that to change anytime soon (yeah, yeah gross generalisation I know, but mainly true).
Vote:May 7th, 2008 at 5:26 pm
Oh god, the Center For Self-Interested Corporate Welfare strikes again. How can anyone take this rubbish seriously?
[DPF: Roger as usual plays the man, not the ball.]
Vote:May 7th, 2008 at 5:28 pm
Kiwisaver is just a glorified, convoluted tax cut that I don’t get until I am 65. Nothing more, nothing less.
If the government really wanted a working superannuation scheme, they should have replaced the current scheme with Roger Douglas’s Unfinished Business plan, dreamed up 14 years ago. And yes, for all the dumb objectivists out there, that is a compulsory scheme, but so is taxing me to provide for today’s pensioners. I know what I prefer given that choice.
Vote:May 7th, 2008 at 5:38 pm
OK- I get the point DPF and yes, I think that it will be- after all, it benefits the middle classes, so I guess that the only question is: will Bill make Kiwisaver compulsory in his second or third term?
Vote:May 7th, 2008 at 6:10 pm
Put me down as one of the “very, very stupid” people who refuse to go into Kiwisaver. It’s a rort on the taxpayer, particularly those who cant afford to take advantage of it and can hardly support their own families.
It’s an unethical scheme because it and National Super are unsustainable in combo. It’s a shonky deal put out by crooks to rip off the country.
JC
Vote:May 7th, 2008 at 6:12 pm
There is no way that society can “save” for retirement… The key issue is the (reducing) number of workers who need to support each retiree. That ratio of workers to retirees remains the same regardless of how the transfer of goods and services from worker to retiree is financed. The only way this can not be true is if Kiwisaver and the Cullen fund are “invested” in physical goods that are produced now and stockpiled for retirees to consume in 30 years time.
I’ve not thought this through completely… But I don’t think that future retirees with large Kiwisaver incomes in 2040 are going to increase production to meet the needs of the increased numbers of those retirees. Instead, as with any situation when there is an excess of cash and full production, then that cash will just push up prices.
There is only one solution here, and that is to increase the size of the economy. With five percent growth a year, then we’d have no trouble going from a worker:retiree ratio of 3:1 to 2:1, just as we haven’t had a problem going from 10:1 in 1900 to today’s ratio. But in a no-growth economy, we’re going to be bankrupt no matter how much cash retirees have in hand.
Vote:May 7th, 2008 at 6:13 pm
I have a comment at Whale Oils on how I think KiwiSaver should have been structured. If someone thinks it makes sense and has the skill to move it to here feel free if that is ok with DPF.
Vote:May 7th, 2008 at 6:18 pm
“The NZ Super scheme is the most generous in the OECD as it is neither means nor asset tested”
This must be a Dave joke.
What he really means is “The NZ Pension scheme is…”
Superannuation schemes, as in Aust., aren’t “generous” in terms of means testing because they are INDIVIDUAL private investment vehicles and NO MEANS TEST ever applies.
Better NZ stops bullshitting about “NZ Super” and call it what it is…a pooled pension scheme.
Vote:May 7th, 2008 at 6:53 pm
PDM – cut and paste should work.
Vote:May 7th, 2008 at 6:58 pm
Dave…how can you post and not be embarrassed re my 6:18 post?
Kiwis confusing Superannuation with Govt Pensions…. it’s not something I expected you to be touting.
What gives?
Vote:May 7th, 2008 at 7:00 pm
The subsidy will be gone at the first crunch or political opportunity.
Asset tested pension schemes are not efficient to administer and that is why National Super has stayed free. It gets included in regular taxable income so some recipients are paying 60% of it back. The alternative is to have to deal with a a lot of elderly filling in more forms. It is hard enough their complying with the current WINZ paperwork without extending it. As a one-time IRD public counter clerk I came to the conclusion then, that all past a certain age should be exempted from any tax.
The Cullen Fund raises a set of issues. Is the fund under the control of the state or the individual participants? The Rowling fund of 1972 was a state creature which was to be invested in NZ. The affect of that meant that its scale of increase and operations would have made it the dominant investor in the economy. With 10% of the national payroll coming in relentlessly It had to be invested in productive assets or ventures otherwise the interest expected to be paid was going to have to be met from taxation. Government control was essential as government had the responsibility of overall economic management, else the tail could have been running the dog.
The Cullen Fund is a curious creature, being included in the public accounts, yet invested by semi-independent managers. It could be argued that the government has appropriated the whole of the employee’s contribution and income arising from it. In other circumstances, including someone else’s asset in your balance sheet would be regarded as fraud. The property right in the accounts would follow the individual’s own contributions; these would appear to vest when IRD pays the monies to the contracted manager. The Employer contribution seems to vest likewise. Initial joining payment by the government contingently vest. The $20 weekly subsidy is not of the employee but of the employer to partly offset his required payments. That subsidy is not paid to the fund managers although they are paid separately up to $40/account per year to offset their charges to the account holders. Who owns this fund is highly problematical. It would not be difficult to close it as it is essentially a set of private contracts and the government subsidies could be withdrawn at any time.
Vote:Wisdom has been that National Super should stay because of it efficiency, but its adequacy and affordability has been questioned because of changing demographics. Historically though key dependency ratios will remain unchanged and the lack of affordability will be more apparent than real. There are ILO papers dealing with the funding of state superannuation. Funded schemes over time move to pay-as-you-go because of efficiency. If the state is the primary investment vehicle, as is usual, the tax burden of the annual interest payments can be 50% of the budget.
May 7th, 2008 at 7:39 pm
I think means testing of Super or pension or whatever would be immoral.
Through a combination of good management and fortune (a.k.a hard work) you manage to set yourself up for retirement, having paid much more than your fair share of tax along the way. Then you are faced with losing your pension as punishment for this.
You propose punishing people who get the equation right by removing their pension. It’s just another way of punishing people for succeeding. Not a good incentive scheme if you actually want people to succeed and pay tax. Otherwise, bring back window tax!
[DPF: I would rather people save for their own retirement, and NZ Super be only for those who can not save enough. Why pay more tax than you need to all your life, to then get some of it back. It is inefficent and everyone would be better off in the long run not relying on the state]
Vote:May 7th, 2008 at 7:48 pm
Don’t forget this scheme was created by that financial fuckwit Micky Cullen who also used his powerful skills in buying a shonky trainset off the canny Aussies. They know a dickhead with a huge ego when they see one. I’ve bought three kiwis for my (poorer) grandchildren (11 to 3). Your a mug if you don’t. Where else will you get an investment scheme that if you put in a grand some other dickhead will match it doubling your initial investment. Don’t make the mistake of putting in more than that though unless the leftie financial fuckwit decides to up the ante to say 2 grand if so get yur checkbook out again.
Vote:What a tosser. No wonder he paid twice what the rail is worth. Shit they should make him the CTU treasurer the bastards would be toast after the first audit. Don’t suppose he did the NZRFU accounts did he?
May 7th, 2008 at 8:26 pm
You guys are not short in the brain cell department but as far as I can see not even you lot can come to any consensus on where this will all end. Call me stupid but when a government offers free money to sign up to any thing I become suspicious. I think I will take my chances and back myself and my family over anything offered by this lot. I don’t expect a pension when I’m old enough, I doubt if anything will be left. Farming can be a tough job so I hope and plan that I will have hung up my gumboots when I want to, not when the state makes me.
Vote:May 7th, 2008 at 8:38 pm
Hell side show bob — as a farmer you must know that old rural adage–”Make hay while the sun shines” —- when Micky Cullen bent over and I saw the light well I knew I was venal and I knew I was greedy so I said to myself what would Paul Little do and I said “He would take the money and laugh all the way to the Aussie press knowing he had shafted a fuckwit”. Seeing we have CER I just thought I would do almost the same as my Aussie mates (Take the money that is. Fuck the press).
Vote:May 7th, 2008 at 8:39 pm
davidp; You are correct if you consider that the “population” saving for it’s own retirement exists in isolation (from the rest of the world). This is why it is important for Kiwisaver (and the Cullen Fund) to have overseas investments (say Canadian Airports). So while we may have less “workers” we still have incomes from other economies with more workers. Sure, taking the extreme example where there are very few able bodied left, the price of getting your lawn mowed may go up. Well before this, in reality, what will happen is that (as happens now to harvest grapes) we will open up the doors to foreign workers. So we actually can save for retirement.
KevOB – Don’t you mean Kiwi Saver when you say “The Cullen Fund is a curious creature”?
JC, It may be everything you say but can you do anything about it. Play the hand you are dealt the best you can. It’s almost too good to be true and as KevinOB says the subsidy will be gone at the first crunch. The irony is that this is a scheme introduced by the labour party (and that it will be investing in strategic assets in foreign economies).
Edit: Go on SSB take the handout and choose a fund that invests in agriculture, it may come back in your direction.
Vote:May 7th, 2008 at 8:42 pm
A few wee facts that Dave, our resident NZ Govt Pension supporter, may not be telling you.
The Nats seem to have a vested interest in this Pension scam for reasons inexplicable.
With the Aust. Superannuation scheme what you put in and how you choose to invest that money over your working life determines what wealth you own.
In NZ it doesn’t matter a stuff…..the average payout for NZ ” Super” is yours by decree.
In Aust employers contribute 9% today, not a possible NZ 4% in 5 years, you can top that up at 15% tax to whatever you like (nearly), multi sector funds are available at professionally sized gross levels, not the 20 cent bullshit operations being offered to Kiwi consumers by the Mister 10%s.
And zero tax on nearly any amount on the way out.
Means tested?
You must be joking.
Guess you want socialism…..well, enjoy.
Vote:May 7th, 2008 at 8:55 pm
Fred>You are correct if you consider that the “population” saving for it’s own retirement exists in isolation (from the rest of the world).
The rest of the world is aging as well and so the problem is a global one. Japan has a shocking retiree to worker ratio already, because they’re all too sad to reproduce and have been for a long time. They’re relying on NZ workers to produce goods for their retirees, making our retiree:worker ratio problem worse, not better.
Vote:May 7th, 2008 at 8:56 pm
Alces, please expand “In Aust employers contribute 9% today, not a possible NZ 4% in 5 years, you can top that up at 15% tax to whatever you like (nearly), multi sector funds are available at professionally sized gross levels, not the 20 cent bullshit operations being offered to Kiwi consumers by the Mister 10%s”.
Vote:May 7th, 2008 at 9:04 pm
David
I’m wildly disappointed by your arguments for KiwiSaver. I’m very sorry to say this but they are rubbish. Can some economist who happens to be reading this entry please explain to David what’s wrong with his arguments?
Vote:May 7th, 2008 at 9:23 pm
Fred…into the Dalwhinnie and Becks chasers as we speak.
Vote:These deer hunting types are a bad influence.
Will translate tomorrow.
May 7th, 2008 at 9:32 pm
Thanks,
Davep – We’ll need to invest in another country then.
Vote:May 7th, 2008 at 9:35 pm
While it is justifiable to be skeptical of Kiwisaver on a political level, DPF is correct in saying that, on a personal level, you’d be mad not to sign up. My maxim in life is: If the government are stupid enough to offer me money, I am smart enough to take it.
Vote:May 7th, 2008 at 9:47 pm
Oh dear, Fred… it’s much more serious than that.
Your retirement wealth is being reduced /restricted/eliminated by socialist politicians who have a religious interest in keeping their clients poor.
And they love the fact that none of you poor bastards get it…………..yet.
Vote:May 7th, 2008 at 9:51 pm
“The rest of the world is aging as well and so the problem is a global one. Japan has a shocking retiree to worker ratio already, because they’re all too sad to reproduce and have been for a long time. ”
Time we increased the deer velvet exports then.
Vote:May 7th, 2008 at 9:59 pm
So National should look at adopting some of the Aust features (to be translated), and the conclusion from what you are saying, under a socialist government, is that eventually it will become compulsory.
Vote:May 7th, 2008 at 10:07 pm
Yeah, take it Blair….
But realise….it’s beer money…..
Taxpayers should be demanding the NZ Govt gets out of their private investment decisions in a real Super system.
And leaves them alone tax wise.
The Aust system is nearly perfect…..
Your Govt hates the Aust Superannuation system because it lets ordinary people live without their grace and favour.
Micky Cullin will be frothing at the mouth at the very thought.
Vote:May 7th, 2008 at 10:13 pm
Errr…Fred?
Under the Aust system , don’t contribute….. don’t benefit.
There’s a bottom line pension for scumbags who pissed their incomes off in a urinal…..
But not for you.
“Compulsory” is Pension time…… in NZ
Vote:May 7th, 2008 at 10:34 pm
Alces, when you have time, would be good to get a bit of detail about the Aust system, it’s being going longer obviously successful, and a comparison to what we have here. One of them is tax credits vs handouts.
Vote:May 7th, 2008 at 10:58 pm
Ok…tomorrow Fred.
But you better have a strong stomach.
The socialists lost the argument in Aust years ago …….any Govt claiming the right to invest your money in your best interest would be laughed out of its taxpayer funded limos from Esperance to Bamiga.
I made 27% on my DIY Super Fund last 12 months.
Clearly your genius money manager, Micky Cullin or designated affiliate, claims the right to manage your “Super” money without him ever asking you whether you agree to that appalling arrrangement.
Micky can hardly tie his shoes without adult supervision, how come he gets to make investment decisions for you?
Vote:May 7th, 2008 at 11:45 pm
A lot of people have been saving for their retirement by buying heavily geared rental properties. They might not be much of an investment if they bought them in the last few years! All they have succeeded in doing is pushing up the price of property for first home buyers. Those studies that show how people had largely been saving enough rely on them banking real estate gains.
By the way, I can’t see how anyone can justify that Judges, MPs and the like who already have generous state subsidised super schemes should get NZ super as well! Similarly, the really well off shouldn’t get NZ super as a right. I say make people apply for it. Another idea that has been mooted before is to allow people to defer receiving it, with the annualised amount increasing each year you defer – so if you want to keep on working past 65 you can in the knowledge that when you do stop you will get a higher income.
Vote:May 8th, 2008 at 7:29 am
BlairM said:
May 7th, 2008 at 9:35 pm
While it is justifiable to be skeptical of Kiwisaver on a political level, DPF is correct in saying that, on a personal level, you’d be mad not to sign up. My maxim in life is: If the government are stupid enough to offer me money, I am smart enough to take it.
In situations like this, I’m happy to pass up $1000 for the opportunity to see what happens over the next year or so. From my point of view, if a government, or anyone, offers me free money that appeals to a base human quality, I stand back and take another look. Bit like a grown man giving you a child’s toy train during a business negotiation. It’s not just $1000 that’s on offer. It’s $1000 x every person who signs up, plus contributions. That kind of money attracts certain wider outcomes, and given the trend of our governments, a certain skewed social outcome. If you think you’re smart enough to beat the odds of this game, since the rules will change everytime it looks like the dealer will lose, and you truely are the kind of altruistic rightwing individual you pose as and can hold those values intact, then go for it.
Vote:May 8th, 2008 at 9:30 am
“By the way, I can’t see how anyone can justify that Judges, MPs and the like who already have generous state subsidised super schemes should get NZ super as well! Similarly, the really well off shouldn’t get NZ super as a right. I say make people apply for it.”
If you have ever had to deal with the elderly and their tax affairs you would be pleased to exempt them all from any taxes. NZ compromised by making the super payments universal and without means testing, because of the high cost and nuisance of administration (there was plenty of experience available from IRD and Social Welfare of the difficulties). The means testing is indirect through including the payments in assessable income so those who are considered not in need it may be repaying 60%. What is need is relative, and I have known retired major company executives distressed on high pensions in retirement and unable to cope. Means testing is only satisfying ideology not minimising costs.
In my previous comments I did confuse the Cullen Fund and Kiwisaver as someone rightly pointed out. From experience in the field of state super I don’t believe the Kiwisaver scheme to be politically viable in its present form in the long term. Future governments will not be bound by their predecessors. I expect it will be wound up in time.
Vote:May 8th, 2008 at 10:12 am
The Money Tree fertilised by the taxpayer
Vote:May 8th, 2008 at 1:18 pm
Means testing is deceitful – you pay your taxes large or small and are entitled to the benefits those taxes confer. Otherwise allow opt outs but then you open the door to opting out of public health care and schooling and what a mess that would produce. Best leave pensions as they are and be satisifed that Cullens “rich pricks” pay an increased slice back in tax and their high total income precludes their qualifying for other social benefits.
Vote: