Making KiwiSaver compulsory and requiring a higher contribution rate should make New Zealanders better off at retirement – but can they afford to do it?
By Susan Edmunds of RNZ
That's a question raised by several KiwiSaver providers in the wake of National's announcement on Sunday that it planned to shake up the savings scheme.
Prime Minister Christopher Luxon said, if re-elected, National would automatically enrol children in KiwiSaver from birth, with a $1500 kickstart. It would require everyone to be contributing to the scheme from mid-2028, or another comparable savings scheme, and it would increase contribution rates to a combined 12% by 2032.
It would also continue employer contributions for people on paid parental leave, even if they were not contributing themselves, and require employers to continue to contribute when people turned 65.
'How are people going to afford that?'
Rupert Carlyon, founder of Koura Wealth, welcomed the move to get children saving early. "It's good to instil saving at an early age, teaching people the value of compounding interest."
Carlyon said an increase to a contribution rate of 6% from employers plus 6% from employees needed to happen.
"That brings us in line with Australia. I guess the slight issue I have with the 6% plus 6%, and particularly around compulsion, is how are people going to afford that?"
He said total remuneration packages would have to go. People who are being paid via total remuneration pay their employer and employee contribution out of a set total amount of pay, rather than receiving the employer contribution on top.
"If you think about people who are today paying 7%, if we're going to go to 12% over the next few years, that's an extra 5% of salary, potentially. That's going to have to come from somewhere. That's my concern. I think when you put that together with compulsion… my view would be to do one, not both at the same time. Give people more choice."
Carlyon said compulsion would be hard because there were no incentives for people. Some countries offer tax benefits for superannuation saving.
"Internationally they've used incentives and tax breaks for everyone to contribute to superannuation to make people feel good about it, but here we're saying there's no real incentive, it's just you have to do it."
He said people might ask why it was needed. "Is this actually the first stage of means testing? We all know that's the answer... I don't know that they will ever admit it but then why If NZ Super is not disappearing, we potentially don't need to do this."
Luxon said people would be able to stop contributing if they met the criteria that is currently used for a financial hardship withdrawal. Carlyon said that would be very difficult to manage. "Administratively, that's too hard. That's going to be a nightmare if they're expecting providers and supervisors to do that."
Bottom 60% of incomes 'are going to struggle'
Simplicity chief economist Shamubeel Eaqub said a lot of people would not be able to afford the contribution.
There currently almost 3.5 million KiwiSaver members, and Eaqub said those who can afford to contribute are generally already doing so.
"My idea always was to make the employer contributions compulsory and the employee contribution voluntary. If you unlink those two things immediately this impact on people's incomes, on take-home pay, disappears," Eaqub said.
He said research by Simplicity showed there was support for making KiwiSaver stronger for children, increasing contribution rates and making it compulsory. "But our compulsion question was focused on the employer contributions because we think that's the only way you can do it that's fair and manageable for where we are today.
"Coverage rates are really high, it's just there is a persistent group who's missing out. More often than not, it's because they're earning low income… or because they're self-employed and have unstable jobs.
"For the bottom 60% of incomes, they are going to struggle if they have less take-home pay."
Eaqub said if compulsion was introduced, access to money would have to be made easier. "If we start children off at birth, in the not-too-distant future we're going to ask ourselves, shouldn't they be able to access that money for their education? Or entrepreneurship?
"I think we should be looking more towards Singapore in terms of that whole-of-life regime where they do allow you to take money out for health, for education, all those bits and pieces."
Compulsory contributions 'not practical'
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Dean Anderson, founder of Kernel, said he was not a fan of compulsion. "If you're on a low income, dollars in hand matters most. Especially if they have any high interest personal debt. Losing 10% to 12% KiwiSaver is a nice-to-have, but not practical."
He said the extension of contributions for people over 65 was interesting. "Why is the government now not looking at changing the access age – potentially lowering it to 60 – and then proposing an increase of the access age to superannuation?"
Matt Macpherson, general manager of funds at Sharesies, said it was hard to say whether compulsion would benefit everyone.
"There is potential that these changes… which have been proposed to come into effect quite quickly, could cause a middle-aged New Zealander to have less spending capacity before retirement and put them at a financial disadvantage."
He said an alternative would be to require enrolment from people's first job.
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