Has KiwiSaver led to greater savings?

November 20th, 2014 at 10:00 am by David Farrar

An interesting working paper by a couple of Treasury staff:

Results of the DiD analysis suggest the accumulation of net wealth by members of KiwiSaver was some $16,000 less than the comparable accumulation of non members.

Further, in an attempt to hold some of the other factors likely to affect net wealth accumulation constant, the DiD analysis was repeated by age, gender, education, income, wealth, partner and home ownership status. There was a positive effect in only five of the 28 cases examined. In three of these cases the estimated effect was small. In one case, however, the estimated effect was relatively large, at $20,000 in favour of KiwiSaver members. All other cases indicated KiwiSaver members’ accumulated less than nonmembers.

The DiD analysis only holds one factor constant at a time however. To address limitations of the DiD technique various fixed and random effect panel regression models are estimated in which changes in net wealth are related to many factors simultaneously. These include: KiwiSaver membership; income; net wealth; age; gender; partnership status; home and investment property ownership; ethnicity; if the respondent was born in New Zealand; education; labour force and health status. With four observations over time on assets and liabilities in SoFIE it is possible to measure three changes in net wealth for each of approximately 10,000 individuals. This provides nearly 30,000 observations for inclusion in each regression. 

The effect of KiwiSaver on net wealth accumulation is estimated to be negative in all model specifications examined, although the coefficient estimates are typically not statistically significant at conventional levels.

This is very significant. The evidence to date is that KiwiSaver has not increased the level of net wealth overall in NZ. It has merely transferred savings from one form of investment to another- but at a huge cost to the taxpayer in subsidies.

Labour say KiwiSaver must be compulsory, as if that magically will make everyone wealthier. It won’t. People are best left to make their own decisions about how to save.

 

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VSR vs OCR

September 15th, 2014 at 9:00 am by David Farrar

The Herald reports:

National’s Associate Finance Minister Steven Joyce said in May that the VSR wouldn’t be very effective. His rough calculations showed KiwiSaver contribution rates would have to rise six percentage points – say from 9 to 15 per cent – to have the same effect as a one percentage point rise in the OCR. …

However, Labour’s finance spokesman David Parker says he estimates that KiwiSaver contributions would have to rise just two percentage points to equal a one percentage point rise in the OCR.

This comes close to an outright lie by Parker.

A change to the KiwiSaver contribution rate will impact around $600 million a year. By contrast the OCR affects around $330 billion of lending. There is not an economist alive I reckon who would agree with Parker.

Again I remind people Labour deliberately declined the offer of a Treasury secondee who could professionally assess stuff like this.

Here’s what the Westpac Bank Chief Economist said:

However, we suspect that the VSR would not be particularly powerful. Our back-of-the-envelope calculations suggest that a one percentage-point hike in the VSR would reduce household consumption by just 0.2% of GDP. And in terms of the impact on inflation, a one percentage-point hike in the VSR would be equivalent to an OCR hike of between 10bp and 15bp.

David Parker is claiming an impact three to five times greater than Westpac has calculated. This is not a minor difference. This is a 300% to 500% difference. And this is not a complex calculation. The amount of money paid into KiwiSaver and generally on loan from banks is a known quantity.

I do not believe Parker’s figures are made in good faith. I bet you he can not produce a shred of a calculation to back them up. It is a con.

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The Press rejects KiwiSaver compulsion

June 20th, 2014 at 3:00 pm by David Farrar

The Press editorial:

The Labour Party yesterday announced that if it were to win the next election it would seek to change that. It would make KiwiSaver compulsory for all employees aged between 18 and 65. …

It is more likely that those who are not part of the scheme at this point are those who have decided, for good reasons of their own, not to participate in it. Some may, for instance, have decided it makes more sense for them to pay off debt – student loans, mortgages and the like – than to save through a super scheme. Others may not be able to afford to enter it. Forcing them to do so will require them either to borrow or forgo other spending. The spending is likely, at this point in their lives when they are younger, to be more valuable to them than a larger payout would be in old age.

Whatever the situation, it is their own choice not to enter a superannuation scheme. Compulsorily enrolling them is almost certainly going to make them worse off than if they were left to decide for themselves.

It’s patronising big government. Labour is telling people they are incompetent and can’t decide for themselves how best to save for their retirement.

Labour’s proposal is designed to increase what are said to be “chronically low savings rates”. Whether KiwiSaver does that is open to debate. It appears more likely it simply redirects saving rather than increasing it.

The evidence to date suggests exactly that.

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Labour’s KiwiSaver policy

June 18th, 2014 at 3:00 pm by David Farrar

David Cunliffe announced yesterday:

“Under a Labour government all employees aged between 18 and 65 – with the exception of students, beneficiaries and the self-employed – will be automatically enrolled in KiwiSaver. The opt-out provision will be removed.

This means that people will lose the ability to choose how to invest their money. Some employees may have a very rational reason not to invest in KiwiSaver. They may be saving for a major purchase, or to buy into a business. They may want to pay off debt. Instead Labour is going to force them all into a savings scheme.

“Labour will retain the $1000 kick-start and government contribution of up to $521 a year.

That’s stupid. If it is compulsory, then you don’t need the kick-start or a government contribution. That’s just taxing people more to give it back to them. Those attributes were only needed to encourage people to enrol, but with compulsion makes no sense.

We will also increase the employer and employee minimum contribution rates gradually by 0.25 per cent a year over six years; rising from the current 3 per cent each to 4.5 per cent in 2021.

Which means the same drop in take home pay. That may be fine for some or most – but who force that on everyone.

 

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How big an impact would variable compulsory saving have?

May 1st, 2014 at 12:00 pm by David Farrar

The Herald reports:

More than 300,000 business owners and self-employed people would be exempted from Labour’s new policy to make workers pay more into KiwiSaver to dampen inflation in boom times.

Labour finance spokesman David Parker confirmed yesterday that his variable compulsory saving proposal would apply only to employee contributions to KiwiSaver – not to employer contributions, and not to self-employed people and employers who choose to pay voluntarily into their own KiwiSaver accounts.

This is a point I wasn’t aware of. The variable rate will only apply to employee contributions.

This means that the impact of a change of rate will be quite small. I’ve done some basic back of envelope contributions.

The current annual member contributions to KiwiSaver are around $1.8 billion. That’s based on a 3% minimum rate. So a 1% change in KS contribution rates would lead to $600 million more into KiwiSaver. However only around 40% of this will be increased savings (based on evidence to date) rather than transferred savings so the amount of money taken out of circulation (so to speak) will be $240 million.

Now the total amount of lending is currently around $330 billion. So a 1% change in interest rates would have an impact of around $3.3 billion.

So a very rough ballpark estimate is that you would need to increase the KiwiSaver contribution rate by around 14%, to have the same anti-inflationary impact as a 1% increase in interest rates.

Someone with better economic modelling skills than me can calculate a more precise figure, but the salient point is that any impact will be very small. It will not be a choice between interest rates going up or increasing the KiwiSaver contribution rate. Both will occur. Increasing the KiwiSaver contribution rate will have a small impact at the very margins.

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Reaction to Labour’s monetary policy

April 30th, 2014 at 10:00 am by David Farrar

The Dom Post is supportive:

 Unlike its recent pronouncements on trucks in highway fast lanes, or the flagging national demand for wood, Labour’s ambitious new monetary policy has real heft.

The idea is first to make KiwiSaver compulsory, with payment levels about 9 per cent of income. That’s not monetary policy per se, but it’s a good idea – our savings are chronically low, which pushes up our interest rates.

Compulsory savings are also necessary for Labour’s next big idea – making KiwiSaver payment rates adjustable. Under the plan, the Reserve Bank could recommend increasing savings rates as a way of slowing the economy – or, conversely, lowering them to heat things up.

They have some reservations:

What about low-wage workers, who don’t have mortgages and can’t afford unpredictable shifts in income? Labour is considering exceptions for them, but that poses its own problems.

What about the wisdom of constantly mucking around with people’s retirement savings? Isn’t that an odd message to send, that they are subject to the whims of the economic cycle?

And will such adjustments be as effective as interest rate hikes in cooling the housing sector, the most inflationary part of the economy?

So Labour has some more explaining to do. But the questions should not puncture the idea – some might be unanswerable until the policy is tried.

The Herald is also supportive:

The Labour Party has done well to come up with a constructive monetary policy for the coming election. Its proposal to make KiwiSaver compulsory and use its contribution rate as an alternative to interest rate rises is imaginative and reasonable.

But also a reservation:

But if the bank can merely recommend that a government increase the KiwiSaver levy, the tool might seldom be used. If Labour leads the next government it might welcome recommendations, at least until the combined contributions of employers and earners rise from the current 6 per cent to 9 per cent.

Even Labour, though, would be reluctant to raise the levy in normal economic times, and would make exemptions for the lower paid. The bank would usually have to resort to the official cash rate.

This is a key point – that the Government would make the decision on changing the contribution rate. It means that political considerations will be placed ahead of monetary considerations. The reality is that changing the level of contributions will not be a tool that will be used often – which means interest rates would by far remain the dominant tool.

The Reserve Bank considers changing the OCR every six weeks or so. One could not cope with having the KiwiSaver contribution rate changing more than once a year. Employer software needs to change. Employees need certainty over their take home pay, and employers need certainty over their costs.

So while the proposed tool is not without some value, it is not a tool that can be used frequently or immediately.

Brian Fallow sums up some reaction:

Labour’s proposal to introduce a variable contribution rate to compulsory KiwiSaver as a counter-cyclical tool has received mixed reviews from bank economists.

Most were tepid: It can’t do any harm, it will probably be less effective than Labour hopes.

Probably a fair summary.

But ANZ chief economist Cameron Bagrie was unimpressed: “It has political bun fight written all over it.

“Will a Government really step up to the plate and alter KiwiSaver contributions [if] asked to by the Reserve Bank? Imagine the bank asked the Government of the day to alter tax rates to help with monetary policy. This would alter public saving as opposed to private saving, but would have similar economic effects. What do you think the response would be?” Bagrie said.

“A change in take-home pay is highly personal. For low-income earners in particular the fact that they will get the money back in several decades’ time will be to all intents and purposes irrelevant.”

Indeed. A low income earner needs the money now – not in 30 years.

And this is one of the problems of universal KiwiSaver – it means the state is making decisions on behalf of each individual family as to how much they need to save – and when. For many New Zealanders it can be more sensible to put surplus funds into a business or paying off a mortgage quicker.

The Herald also looks at winners and losers:

Households struggling to keep on top of their mortgages would be the winners under Labour’s proposed interest rate shake-up, but at the expense of those who can’t afford to get a foot on the property ladder, a budgeting service warns. …

But New Zealand Federation of Family Budgeting Services chief executive Raewyn Fox said the policy to keep interest rates low while forcing everyone to save more raised issues of fairness.

“The people who don’t have mortgages will be in effect subsidising the economy for the people who are obtaining an asset by buying a house.”

Yep – the biggest winners will be those with the biggest mortgages.

Bernard Hickey also looks at the pros and cons:

The Pros

The VSR would allow the Reserve Bank to remain independent and give it another way to slow or speed up the economy. There would, of course, be a Policy Targets Agreement between the Minister of Finance and the Reserve Bank Governor to govern how the VSR could be tweaked, but the decisions on when and how to use it would be made by the Governor.

Politically, the idea of increasing the KiwiSaver contribution rate seems more attractive than raising interest rates, at least for exporters and mortgage borrowers. It means the extra savings are kept by the wage or salary earner, rather than being ‘lost’ to the bank and term depositers.

In theory, raising the VSR would allow the Reserve Bank to avoid putting up interest rates and therefore take pressure off the currency.

The other parts of the policy that didn’t get as much attention may be just as important. Labour is saying the Reserve Bank could use macro-prudential tools such as capital requirements to limit lending growth or pressure on the currency. The Reserve Bank has already partly gone down this path with higher capital requirements for high LVR mortgages and the speed limit.

This wider use of macro-prudential tools could also help reduce the reliance on the OCR.

The Cons

Simply imposing KiwiSaver compulsion and a higher contribution rate may not necessarily improve national savings. The Australian experience has been mixed at best. It turned out Australians felt richer as their superannuation pots got bigger, which encouraged them to borrow even more against the value of their houses.

Compulsion in tandem with Labour’s policy of gradually increasing the retirement age to 67 is controversial within Labour and on the left of politics. There are plenty who argue poorer manual workers are discriminated against. There’ll be some tricky questions around who gets exemptions because of ill health and who can ask to be exempted on the grounds of hardship.

The other risks with compulsion are around the issue of Government guarantees, funds management fees and means testing. If you are forced to save by the Government you could argue your funds should be guaranteed by the Government.

The Australian scheme has become notorious for high fees and compulsion has become something of a subsidy for the funds management industry, and ironically, the banking sector. There would have to be some tough conversations and negotiations around fees. Here’s an excellent Grattan Institute report about Australia’s fees mess.

And finally there is the argument against compulsion that used to be made by the ‘Father’ of KiwiSaver, Michael Cullen, which is that once these funds get very big political pressure will build for means testing, as is the case in Australia. That would rob the current NZ Super scheme of some of the simplicity and fairness behind the universal pension.

I think the policy probably won’t achieve a lot, but it could be a potentially useful extra tool for the Reserve Bank. However to be truly effective you need the Reserve Bank able to decide – not just recommend to the Government.

But one should be aware that monetary policy is ultimately about reducing demand in the economy, and hence inflation. Now increasing KiwiSaver rates could reduce spending by households. But if Government spending is not restrained, then the overall impact on the economy will be insignificant. Fiscal policy and mometary policy need to work together. Just reducing household spending will not work, if government spending is not restrained.

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Labour proposes a cut in everyone’s after tax income

April 29th, 2014 at 2:00 pm by David Farrar

David Parker has announced:

Introduce a new tool – a variable savings rate or VSR – allowing the Bank to vary KiwiSaver savings rates (which would be universal under Labour) as an alternative to raising the OCR to take the heat out of the economy. This VSR would mean Kiwis would pay money to their retirement savings instead of higher mortgage payments to overseas banks.

Something that people should be aware of is that only a relatively small proportion of households or earners have a mortgage. While a VSR will impact every single person who earns money, by lowering their take home pay to reduce inflation.

What this means is that the Reserve Bank could lift the employee contribution rate to KiwiSaver from 3% to 4.5% (it will be compulsory). If you’re earning $40,000 a year then your take home pay will drop by $600 a year. The biggest losers in this policy are likely to be low and middle income earners who don’t currently have a mortgage. They will face a reduction in their after tax income.

This doesn’t mean the policy is a bad one, just that it creates both winners and losers – and the losers are low to middle income earners without a mortgage.

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Dom Post on Planet Peters

October 24th, 2013 at 1:00 pm by David Farrar

The Dom Post editorial:

Things are simple on Planet Winston Peters. There, all that is necessary for something to happen is for Mr Peters to declare it to be so.

Hence, delivering inhabitants of Planet Peters a higher rate of return on their retirement savings is simply a matter of him promising a “world class model unsurpassed by anything in the world”. Protecting those savings from sudden market drops is an equally simple matter of guaranteeing the capital invested in the scheme. No downside, no need for individuals to monitor the performance of their investments. Just leave it all to Mr Peters. In fact, vote for Mr Peters and you can have your cake and eat it too.

Unfortunately, Planet Earth orbits a different sun from Planet Peters. In this universe, the value of investments is determined not by political decree but by events beyond the control of individuals and governments. The price someone is prepared to pay for a hectare of land in Dannevirke, 500 grams of butter in Paris or a shareholding in Air New Zealand is influenced by the weather in southern Europe six months ago, the progress of negotiations over the debt ceiling in the United States, the political situation in China and a thousand and one other imponderables.

Mr Peters, for all his claims to omniscience, does not control those things. Markets go up and markets go down. What was a solid investment last week is a poor investment this week and vice versa.

The only way Mr Peters can guarantee the capital invested in any particular fund is to require those who have not invested in it to foot the bill if its managers misjudge the market. The only way he can guarantee a superior return for his “KiwiFund”, especially when he proposes to handicap its performance by directing where it invest its funds – “substantially in New Zealand” – is by pumping public moneys into it when the inevitable happens and other funds outperform it.

The editorial is spot on. Peters is proposing that taxpayers underwrite $20 billion dollars or more of investments.

As I said earlier this week, Peters should set up his own KiwiSaver Fund and lets see how many people actually trust him enough to invest in it.

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Winston should set up his own KiwiSaver fund

October 21st, 2013 at 12:00 pm by David Farrar

Hamish Rutherford at Stuff reports:

Winston Peters is proposing to establish a new state-owned KiwiSaver fund, saying private schemes were a “pot of gold” for providers, but not savers.

Speaking at the NZ First conference in Christchurch today, Peters said KiwiSaver providers had extracted excessive fees from savers. Since it was formed five years ago, providers had “sucked off $325 million from the people paying into the scheme”.

According to Peters, an “independent source” had told him that over the next 30 years, the amount of fees would climb to $22 billion.

“KiwiSaver is a pot of gold – for the providers – not the savers.”

Peters today proposed that a scheme on the same footing at the New Zealand Superannuation Fund, called KiwiFund, which would be government guaranteed.

Return would be “a lot higher” than they were in private providers, Peters said.

“Our plan is to change KiwiSaver so that it is a truly Government backed and managed retirement fund. 

I’m in Carmel Fisher’s KiwiSaver Fund and very happy with the returns thank you.

If Winston thinks KiwiSaver Funds are not delivering a good enough return, then there is a simple solution.

Winston should set up his own KiwiSaver Fund. This would allow all those who believe in the financial genius of Winston to invest their life savings with him, and get this guaranteed higher return he talks of.

The Herald reports that Winston’s policy may cause problems with Labour:

New Zealand First has put a potential roadblock between itself and a post-election coalition deal with Labour by setting a bottom line on retirement savings that Labour is lukewarm on at best.

Leader Winston Peters told NZ First’s annual conference in Christchurch yesterday that the party wanted to effectively nationalise KiwiSaver by putting it “on the same footing as the New Zealand Super Fund”.

So many politicians wanting to nationalise so many things – it is like being back in the 1970s.

The KiwiFund policy was “most definitely” a bottom line for any post-election coalition talks next year.

But while Labour leader David Cunliffe said his party was happy to look at the policy in more detail, “we don’t think that the KiwiSaver industry is fundamentally broken.

Some sanity from Labour. Yay.

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Minimum wage and KiwiSaver

August 22nd, 2013 at 11:00 am by David Farrar

Stuff reports:

An employment case that could effectively raise the minimum wage for workers enrolled in KiwiSaver is being “watched closely” by employers, a lawyer says.

The case, which was heard in the Court of Appeal yesterday and could mean an extra $450 a year for those on the minimum wage, was described as of “considerable public interest” by one of three judges assigned to make a final ruling.

Lower Hutt caregivers Vasivasi Faitala and Dalrene Goff took employer TerraNova Homes & Care to court last year, arguing it was unfair that they had to pay their own and TerraNova’s KiwiSaver contributions under their employment agreement.

At the time, the women earned the minimum wage of $13.50 an hour, made up of $13.24 plus 26c for TerraNova’s KiwiSaver contributions.

Most employers pay the contributions on top of an employee’s salary, but some favour a “total remuneration” approach that includes their contribution, on the grounds that it treats all staff equally.

Although that approach was legal, Ms Faitala and Ms Goff argued it was a breach of the Minimum Wage Act, and the Employment Court agreed, ordering TerraNova to pay any compulsory contributions in addition to the workers’ gross salaries.

TerraNova’s lawyer, Elizabeth Coats, told the court yesterday that although the KiwiSaver Act said compensation should be paid on top of a salary, there was a provisional clause that allowed it to be included if both parties agreed.

It will be interesting to see how the Court of Appeal rules. For my 2c I think the employees are in the right, and likely to win.

While you can agree for KiwiSaver to be based on total remuneration, and hence deducted from what would be your gross salary, I don’t think such an agreement can over-ride the minimum wage requirement.

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Competing for the most lunatic policy

April 22nd, 2013 at 9:00 am by David Farrar

Just as I thought you couldn’t get a crazier policy that Labour and Greens on energy, Winston has upped the stakes and is basically proposing to steal money from all our retirement accounts.

NBR reports:

New Zealand First is proposing the Cullen Fund and Kiwisaver funds be used to re-nationalise Mighty River Power and possibly Contact Energy. …

But speaking on TV3’s “The Nation”, Mr Peters said the Government had the ability to access the Cullen Fund. 

You’ve got the ability to access Kiwi Saver in the short term,” he said.

He said buying back Mighty Rover Power would be bottom line for NZ First support for any Government.

You’ve also got the ability to internationally access the market and borrow, which as you know according to Treasury, because this is a high yielding asset, that makes economic sense to do that, he said.

Mr Peters said to use Kiwisaver funds the Government would need to change the investment rules.

“You could quite easily do that in the short term …

This shows what happens when politicians start competing for the most extreme policy in order to win votes.

KiwiSaver funds do not belong to the Government. They are the private property of those who have one. My KiwiSaver fund is just as much my private property as my bank account, my shares, my house, my car etc.

Winston has said that he wants to forcibly legislate to force anyone with a private KiwiSaver account to purchase back Contact Energy and MRP shares on behalf of the Crown.

That is outrageous. This is like saying we will force every homeowner to take on an additional mortgage, so the Government can build a new office block.

If you elect a Government that treats your private retirement savings as a play-thing for the Government to take over, then the boundaries between public and private will be shattered for ever.

These crazy policies will see us become a banana republic. Who the hell would invest in New Zealand? Why would I keep my money in a KiwiSaver account if Winston and his allies plan to take control of it after the election?

3 News reported last week:

JBWere has sent a strong message that it and other investors will flee the New Zealand stock market if the state intervention signalled by Labour and the Greens this week comes to pass.

“The steps the Labour/Greens are suggesting, if enacted, are significant enough for JBWere to consider a reduced allocation to the local share market,” the firm which oversees $1 billion of client funds in the New Zealand share market said.

“We doubt we would be alone in making this judgment.”

Of course they won’t be alone. We live in a globalised world where capital and labour are highly mobile. The combined policies of Labour, Greens and NZ First will send investment fleeing. And it is investment that creates jobs.

Labour and Greens want to nationalise the electricity industry. NZ First want to nationalise KiwiSaver. How confident are you that is where they’ll stop?

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Hypocrisy

April 2nd, 2013 at 1:00 pm by David Farrar

Radio NZ reports:

Budgeting services and opposition parties say struggling workers will be hit hard by increased costs that came into effect on 1 April.

Minimum KiwiSaver contributions rose from 2% to 3% …

The Labour and Green parties say some workers already struggling financially may choose to opt out of KiwiSaver rather than make the higher payments.

Again, such hypocrisy. Labour not only bitterly complained about National dropping the minimum contribution from 4% to 2%, they also have a policy of making KiwiSaver compulsory so struggling workers get no choice about contributing!

Would be nice if the media reported their policies, not just their releases!

 

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Trying to have your cake and eat it too!

March 27th, 2013 at 10:00 am by David Farrar

David Cunliffe blogs at Red Alert:

Next week thousands upon thousands of New Zealanders will wake up to a cut in their take-home pay because of policy decisions by the National/United Future government.

From 1 April 2013 the minimum KiwiSaver contribution is increasing from 2% to 3%, while the Student Loan compulsory repayment jumps a whopping 20% to 12 cents in every dollar earned over the repayment threshold.

Just a second. A Labour MP is complaining that KiwiSaver contributions are going from 2% to 3%?

Under Labour the minimum contributions were 4%, and they complained bitterly when national reduced it to 2%.

Now Labour stands for a gradual move to universal, employment-based KiwiSaver contributions over time, because that will grow the economy and secure savers in retirement.

And while KiwiSaver is currently voluntary, meaning those who can’t afford a drop in the take home pay don’t have to join, Labour propose to make it compulsory to force every worked to take a drop in their take home pay (to use DC’s rhetoric).

There are valid arguments for and against compulsory KiwiSaver, but it is a bit rich to criticise a KiwiSaver contribution increase as being a cut to take home pay, when your policy is to make it compulsory!

But with unemployment today at record levels, and with so many families only just getting by, it’s crucial that changes which hit people in the pocket are well-signalled and well-understood before they take effect.

Umm, the policy was announced well over 12 months ago. And if you are unemployed you are not contributing a portion of your salary to KiwiSaver.

Unless Labour is proposing that KiwiSaver not just be made compulsory for employees, but also for beneficiaries?

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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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10% KiwiSaver

June 18th, 2012 at 1:00 pm by David Farrar

Stuff reports:

 Politicians are divided over a suggestion by the Financial Services Council for an increase in KiwiSaver contributions to 10 per cent of incomes to help pay for Superannuation.

The council, which represents investment and life insurance companies, says raising KiwiSaver contributions by 1 per cent a year will enable people to still retire at 65, despite the growing costs of the scheme because of the ageing population.

There may be merit in an increase in KiwiSave contributions, but it is important to note the not inconsiderable self-interest the FSC has in the proposal. It would see KiwiSaver funds and revenue for their members triple.

Chief executive Peter Neilson said New Zealanders surveyed by the council said they could not live on the current Super payment of $349 a week.

Expanding KiwiSaver would enable them to use that saving to pay for their retirement at 65 until the future eligibility age, of perhaps 67, kicked in.

It would also enable people to double the amount they received in Super.

The trade off is not that simple. First of all, we do need to look at retirements savings as a whole. You should not treat superannuation and KiwiSaver separately. What no politicians have done is look at whether the current floor for super should be lower in future – in recognition of the level of private savings in KiwiSaver.

For someone on the average wage, they would under this proposal have a higher net income in retirement than they would have had while working. Now that is actually nuts, as when you are working you have the greater expenses, and are raising a family etc.

This is why we need a first principles review – what is the minimum and what is the desirable level of retirement savings, and how much should come from public super, from workplace super and from private super.

NZ First leader Winston Peters said the council’s call was “hopeless”.

“We offered people a straight tax-break so they could painlessly save.”

The crisis in Super was “manufactured” by certain elements in the finance sector, he said.

The council’s idea was the first step in privatising Super, Mr Peters said, but would not elaborate how.

Now this is ironic, as Winston championed the 1997 referendum which would have essentially privatised superannuation entirely.

It was fair that over 65-year-olds who were still working received the pension.

“For decades we all believed in a universal scheme whereby if you worked hard and you saved, you should not be punished.”

Why should Winston get public superannuation while an MP? That’s outrageous. And when he leaves again, he’ll get his gold plated parliamentary pension plus his public super.

Public superannuation should be used to assist those who do not have adequate savings of their own. It should not be used to give Winston an extra $15,000 a year income.

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Kiwisaver returns

June 7th, 2012 at 1:00 pm by David Farrar

The Herald reports:

A retirement policy expert says KiwiSaver providers should not be allowed to publish investment performance returns based on gross figures because they are “meaningless” and cannot be easily compared.

Finance Minister Bill English announced as part of the Budget that all KiwiSaver providers will have to produce quarterly reports from April including information on investment performance, fees and assets.

A report gives an example of how the information would be set out, placing the gross return percentage at the top of a table, which would also include dollar figures on the gross return based on a $10,000 investment, as well as dollar figures for the tax and fees paid and an explanation of how much in the hand investors would get.

But Retirement Policy and Research Centre director Michael Littlewood said publicity that emphasised gross returns should not be permitted or, if published, they should be given a lower prominence over the net return.

“Gross returns are almost meaningless and are certainly not comparable across providers,” Littlewood said.

“Providers will naturally want to emphasise larger numbers, even if they are not meaningful.”

There is a lot of crappy info about KiwiSaver returns – especially from the self-appointed champion of transparency, and commentator on everything (you know who I mean).

Net returns are harder to do, but should be the default information provided. One can show them for various tax rates if necessary.

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Does KiwiSaver increase savings?

December 19th, 2011 at 10:00 am by David Farrar

Stuff reports:

KiwiSaver has been only “modestly successful” at getting poorer people to save for their retirement, a new Treasury report says, warning that the scheme “may in fact reduce national savings”.

The working paper on the initial impact of the scheme on retirement savings argues that, because of the subsidies going to those who would have adequately saved anyway, the government may be paying out $13,000 a year for every person at whom KiwiSaver is aimed.

That does not surprise me. Those better off and already saving are the ones most likely to take advantage of 2:1 and 3:1 subsidies for saving.

The Treasury report said as many as 93 per cent of those in KiwiSaver were outside the target group, so the vast majority of the public cost of the savings scheme leaked away from those who may be poor in retirement.

A brave Labour Party would perhaps say we do not believe in middle class welfare where huge tax subsidies go to those who don’t need it, and we’ll restrict savings subsidies to low income NZers only.

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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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KiwiSaver to have auto-enrolment

October 18th, 2011 at 3:00 pm by David Farrar

Bill English has just announced that when the Government returns to surplus (in 2014/15), they will run an automatic KiwiSaver enrolment campaign for employees. This will apply in the same way as when you get a new job – you can opt out within a month.

The estimated cost (based on 55% of those auto-enrolled staying enrolled) is $550 million over four years. They will not do the auto-enrolment before the return to surplus as this would mean the Government is borrowing to pay for the savings subsidy, which mean overall national savings do not increase – you just increase private savings and public debt.

English has said National will not make KiwiSaver compulsory as some peeple prefer to save for retirement in other ways.

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KiwiSaver v Parliamentary Super

May 13th, 2011 at 7:50 am by David Farrar

Vernon Small reports in Stuff:

MPs’ generous superannuation schemes will not be cut, despite Government plans to slash the subsidies paid to KiwiSaver accounts. …

Since 1992, MPs have been entitled to a subsidy of up to 20 per cent of their salary, receiving $2.50 for every dollar they put in. Those elected before 1992 receive a subsidy equal to 23 per cent of their gross salary.

Asked why taxpayers should subsidise MPs up to 20 per cent when he was winding back KiwiSaver subsidies, Mr English said they were different schemes.

“The MPs’ scheme has been wound down over the last 20 years to something that is pretty similar to what everyone has available to them. In fact, I think a number of MPs are probably members of KiwiSaver.”

There is a vital fact missing from this article. The Remuneration Authority operates on a “total remuneration” basis and the value of that 20% superannuation subsidy is effectively deducted from their salary. If the subsidy increases 5%, then their salary drops around 5%. If the subsidy is decreased, then the salary increases.

Personally I would just pay MPs the full remuneration for their jobs (which would see their pay increase 20%) and leave it up to them to decide whether they put some of it into a savings scheme or not.

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Dom Post on Savings

May 12th, 2011 at 11:51 am by David Farrar

The Dom Post editorial:

The $10 billion deficit for the first nine months of this year confirms, if confirmation was needed, that the last government made bad choices. At a time of plenty it chose to buy popularity rather than to save and invest for the future. Worse still, it created an expectation that the bounty would continue to flow in bad times as well as good.

Yep. Labour thought that the economy would never go into recession, ignoring that the tradeable sector had in fact been in recession since 2004/5.

It cannot – a point Prime Minister John Key and his ministers have been trying to get across in advance of next week’s Budget. New Zealand has to get back to living within its means. There are a number of obvious targets for a government looking for what Finance Minister Bill English has quaintly termed the “nice-to-haves”. They include the extension of welfare to families with incomes far in excess of the average wage, interest free student loans and the 65-year age of entitlement for superannuation.

I support increasing the age of eligibility for superannuation. It will happen one day also. But any increase would have to be signalled a good decade or so in advance, so don’t think any change to the age will help get the books back into surplus in this decade. Lifting the future age of retirement is important for the long-term sustainability of superannuation, but again that is a different issue to the shorter-term fiscal challenge.

Instead, Mr Key’s Government is taking aim at the KiwiSaver scheme introduced by its predecessor to tackle New Zealand’s chronically low savings rate.

Under the scheme, people who agree to set aside a percentage of their income for their retirement receive a one-off Government grant of $1000 and tax credits worth up to $1040 a year. The scheme has proved remarkably attractive. It now has almost 1.7 million members. However, Mr Key has classified it among the “nice-to-haves” and is signalling that the annual Government contribution will be reduced, probably halved.

He and his finance minister appear to believe the public will not be deterred by the change. If so, they are graduates of the same University of Spin and Hope as their Labour predecessors, who believed that scrapping interest on student loans would not increase the take-up rate. New Zealanders are not stupid. The year before loans were made interest free, 53 per cent of eligible students borrowed from the Government. By 2009 – the last year for which figures are available – that figure had increased to 71 per cent.

KiwiSaver membership involves sacrifices. Contributing the amount required to secure the maximum Government contribution means many members have to make choices between other “nice-to-haves” and even some essentials. However, they calculate that, together with employer contributions, the Government top-up makes the sacrifice worthwhile. Reduce the top-up and many will review their participation.

For most employees, they will still be getting a massive subsidy. Someone on $28,000 will still get around $2.50 into their KiwiSaver account for every $1 they put in. That’s a 150% return on investment compared to 10% most funds deliver. I doubt too many people will dump KiwiSaver becuase their return on investment is 150% instead of 200%.

Those who get most hard done by the Government’s changes are self-employed like me. As I pay both my employer and employee contribution, then I’ll personally be quite a bit worse off by the Government’s proposed changes. But I had been saving plenty anyway, prior to KiwiSaver, so to some degree the KiwiSaver subsidies were just a way to maximise my return. And the Government should be focusing its scarce tax dollars on those who most need it, not people like me.

The Government has a choice. It can encourage the current generation of workers to save more, or it can pander to the “grey” vote by maintaining the pretence that superannuation for all at age 65 is affordable when it is patently not. It cannot do both.

It has made the easy choice, not the right one.

The reality is the age does need to increase, but not until around 2025 by my calculations.

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A speech by John Key

May 11th, 2011 at 12:36 pm by David Farrar

John key’s speech is here. Key points:

  • WFF, interest free loans and KiwiSaver costing $5b a year, and why we now have a structural deficit, and all has to be borrowed from overseas
  • All changes will take place after election, so there is a mandate for them
  • KiwiSaver will be changed so that over time employees and employers contribute more, and the Government less
  • KS changes will lead to an improvement in the rate of national savings and reduce foreign debt by 2% of GDP over the decade
  • Will reduce amount spent on WFF, but target a greater proportion at the most vulnerable families
  • For every $100 of student loans, taxpayers get only $55 back
  • Half of the overdue student debt is students living overseas – will make sure they live up to their responsibilities

The exact details will be in the budget. To me it looks like a good step in the right direction.

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KiwiSaver

May 10th, 2011 at 7:58 am by David Farrar

I like KiwiSaver, as it provides an incentive for people to save. In fact you have to be very very poor or very very stupid not to go into KiwiSaver as you effectively get a 200% subsidy for the first $30,000 of income you earn. For every dollar you put in, the employer puts in one dollar and the Government one dollar.

The Government is signalling that the Government contribution may be removed or reduced. This is not entirely surprising as when Labour established KiwiSaver there was huge surpluses. KiwiSaver was set up to reduce that surplus.

Today the Government is borrowing $300 million a week. Borrowing money to save money has never been a sustainable strategy, so the changes are not unexpected – especially as there is doubt if KiwiSaver has increased overall savings.

What I would love to see going forward is a co-ordinated approach and policy around retirement savings – looking at public superannuation, workplace superannuation and other private superannuation schemes.

How much of someone’s retirement income should be funded by public super, and how much by KiwiSaver or other private savings?

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How do you define success?

August 16th, 2010 at 3:00 pm by David Farrar

The Herald reports:

Labour leader Phil Goff said yesterday that KiwiSaver – which workers can opt out of – had been a great success, but had had little impact on overall net savings.

Well then, how can you claim it was a great success? Was that not the entire purpose of KiwiSaver?

This was what many people said at the time – KiwiSaver will not increase overall savings – it will just lead to people moving them into KiwiSaver due to the subsidies.

“We absolutely have to increase our savings as a country. If we want to own our own future we’ve got to have the money to invest,” he told TV3’s The Nation.

“We’re looking to have a universal KiwiSaver programme. Now how we do that, the details of how we do that we’re still working through.”

So because KiwiSaver has failed to increase the overall savings rate of the nation, we will make it compulsory?

Here’s what will over time impact the savings rate – lowering the tax rates on earning and investing, and increasing the tax rate on consumption – the very stuff just done by the Government but opposed by Labour.

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Editorials 11 March 2010

March 11th, 2010 at 12:00 pm by David Farrar

The Herald approves of mooted KiwiSaver changes:

Commerce Minister Simon Power deserves praise for his decision to fast-track tougher reporting requirements for all KiwiSaver providers.

Not so David Ireland, the chairman of superannuation industry body Workplace Savings, who described the move as a “knee-jerk reaction”.

Like some other near-sighted individuals in the funds management industry, Mr Ireland seems to be struggling to come to terms with the idea that investors’ interests must come first.

When the subject is the integrity of KiwiSaver, which holds the investments of 1.3 million New Zealanders, there is every reason to move quickly to plug any gaps in regulation.

What scares me is the poll showing around half of KiwiSaver investors think their fund is government guaranteed.

The Dominion Post wants the public service reined in further:

The public service is a dollar-devouring behemoth that has thwarted many attempts to rein it in.

Prime Minister John Key will need to do better than he has so far, if he is going to succeed in slipping on the halter. It is vital that he does. …

Now the Government is treading so carefully it risks making no progress. Mr Key, through a spokeswoman, has denied there is any proposal that might be described as “radical reform”. Instead, all indications are of a process that smacks of the ad hoc, and of being driven by fear of public reaction as much as by any coherent strategy.

That is not good enough. Despite improvements in government finances, the Treasury is still forecasting deficits will continue to 2016. Finance Minister Bill English rightly wants the focus to remain on getting out of deficit as quickly as possible.

Once we are out of deficit, then we get far more palatable choices. We get to decide whether surpluses are spent on reducing debt, cutting taxes or increasing spending. But until we get back into surplus, it is all fairly unpalatable.

The Press looks at the progress in Iraq:

With so much attention focused on the violence in Afghanistan, there is a risk of downplaying significant events in Iraq, notably its recent election.

The result of this election, in terms of the shape of the coalition which will govern the nation, is likely to take weeks or even months of deal-making.

But the manner in which the election was conducted is one of the most positive developments in Iraq since the United States and its “coalition of the willing” allies toppled Saddam Hussein in 2003. US President Barack Obama could ultimately be proved correct when he declared that the election was an important milestone in Iraq’s history.

The most notable feature of the election was the turnout which defied many observers’ expectations by reaching 62 per cent. This figure might not seem high by New Zealand standards, but it is worth reflecting that it is comparable to the most recent US election.

In a decade or so, Iraq may be doing relatively well.

And the ODT commemorates International Women’s Day:

New Zealand has much to be proud of in its gender equality record, and with the marking on Monday this week of International Women’s Day, there is cause for celebration.

In the most recent Global Gender Gap Report of the Geneva-based non-profit World Economic Forum, New Zealand is ranked fifth out of 134 countries in an index that assesses countries on how well they are dividing their resources and opportunities among their male and female populations – regardless of the overall levels of these resources and opportunities. …

But not so good:

In New Zealand, one in five women will be subjected to violence in their lifetime, compared to one in 20 men.”

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