Cullen on KiwiSaver and superannuation

December 12th, 2012 at 1:00 pm by David Farrar

Vernon Small reports:

The architect of KiwiSaver, former finance minister Sir Michael Cullen, is proposing a revamp of the scheme to help cut the long-term costs of superannuation to the Government.

Under his plan KiwiSaver would be made compulsory in 2016 and contributions would rise to 4 per cent for employees and 4 per cent for employers, followed by further increases to 6 per cent or 8 per cent for employers.

But half of a saver’s nest egg would have to be used to buy an annuity.

If that provided an income lower than the current superannuation formula, the state would top it up to the guaranteed retirement income.

“In effect this means that for many people the shift from state funding to private funding would result in half of their retirement KiwiSaver savings being income-tested away,” Sir Michael said.

This approach has some considerable merit. We have not adjusted superannuation policy o take account of KiwiSaver. I recall when KiwiSaver came in, the projections were that someone who earned the average wage would receive in retirement a higher income from KiwiSaver and NZ Super combined that they did when working. This is clearly not sustainable.

Labour’s proposal to lift the age from 65 to 67, while a step in the right direction, is just tinkering. What Cullen proposes would make a huge difference to the long-term financial sustainability of retirement savings.

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Labour’s wage reduction policy

October 27th, 2011 at 4:12 pm by David Farrar

The other part of Labour’s policy is to make KiwiSaver compulsory and lift the employer contribution from 3% to 7%. This is dumb for two reasons.

First of all it removes all flexibility and choice for employees. They may wish to pay their mortgage off rather than pay into KiwiSaver. National’s policy opts then in, but allows them to opt out. Labour will remove any choice from the employee. They may wish to save to start their own business, but Labour knows best and will force them into a default KiwiSaver fund – one which incidentally has the fund fees chew up close to 50% of the income in the first few years.

The decision to lift the employer contribution to 7% flies in the face of their campaign for higher wages, and helping struggling families. Most Labour MPs have never been in business, but let me explain how things work. Employers factor in the total cost of labour when they make hiring and pricing decisions. For example in my business I don’t just work out my labour cost as someone’s hourly rate. I add on 8% for holiday pay, 2% for ACC levy, 2% for KiwiSaver costs. So if someone is on $25 an hour the cost to the employer is really $28.10. One might factor in public holidays and sick leave also.

Now if you lift the employer contribution to 7%, it will mean that pay rises in future will be smaller, because otherwise the total cost of labour gets inflationary. Anyone who thinks this won’t happen, is not an employer I suggest. So what Labour’s policy will mean is that over the next few years employees will earn up to 4% less than otherwise would be the case. No, not every employee, but on average. So this is in fact a policy to reduce wages.

The other impact of their policy will be on jobs. You put up the cost of labour, and there are less jobs. Well in this dimension anyway.

UPDATE: Labour admit their policy will lower wages:

We recognise that the 0.5 per cent annual increase in the employer contribution could be taken into account as part of wage negotiations.

So Labour are officially campaigning for lower wages.

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Compulsory Super?

August 15th, 2010 at 10:10 am by David Farrar

The SST reports:

Kiwis could soon be made to save for their old age, with compulsory savings back on the political agenda.

The government will put compulsory retirement savings on the table as part of a review to boost Kiwis’ retirement nest-eggs and reduce New Zealand’s dependence on overseas borrowing.

The fate of the Cullen superannuation fund, KiwiSaver and tax breaks for savings – which could halve the tax paid on some bank deposits and other investments – will also be in the mix.

A working group, based on last year’s Tax Working Group, is close to being finalised, and ministers plan to use its findings as a centrepiece of next year’s Budget, and for the election campaign.

Government sources said PricewaterhouseCoopers tax expert John Shewan would be part of the group, possibly as its chair.

I am not a fan of compulsory superannuation, as it forces people into superannuation funds, when a better investment for them may be paying off the mortgage or investing in their own business.

However KiwiSaver is close to de facto compulsory as it is opt out, and the subsidies are so great you have to be very poor or very stupid not to take them up.

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