Feeling a bit richer? It could be your KiwiSaver
We’ve saved $57b, but it has yet to translate into a wider wealth effect, writes Tamsyn Parker
In just 12 years, Kiwis have accumulated more than $57 billion in their KiwiSaver accounts and experts say that money is making people feel wealthier and providing much needed capital to New Zealand businesses.
Nearly three million Kiwis are now members of the retirement savings scheme and in the past year alone first home buyers withdrew $953 million to buy a house and over-65s tapped into more than a billion dollars to fund their retirement.
Aidan Vince, head of KiwiSaver at ASB — one of the largest KiwiSaver providers — says it’s difficult to find hard data to prove the effect KiwiSaver has had.
“But anecdotally, it is overwhelming that people say they are wealthier because of KiwiSaver.”
Vince points to Reserve Bank data which shows in the past five years KiwiSaver has grown three times faster than bank deposits and is now nine times the size of New Zealand’s credit card debt.
While he doesn’t think it has yet grown to the point where it is encouraging people to spend more on a dayto-day basis, Vince says it has given people more confidence.
“For those people who don’t own their own home it has become their biggest financial asset.” Average KiwiSaver balances are nearly $20,000 — about the same as the cost of a good second hand car.
Annual returns have averaged more than 10 per cent for growth funds over the past 10 years and even lower risk conservative funds have averaged 6.4 per cent a year over the decade.
Martin Hawes, a financial adviser who sits on the investment committee for Summer KiwiSaver, says returns on KiwiSaver have been very strong.
“I think they have been downright excellent.” But he says awareness is still very low about those returns and where the growth has come from.
Hawes points to Australia, where savers’ balances had to get to more than $30,000 before they started to pay attention.
He says KiwiSaver balances could get there in the next 10 years.
“At some point within the next 10 years we will really see people sit up.” While some people already have higher account balances it still remains a small percentage of their total assets.
“Compare the $20,000 average balance to the value of an average house and KiwiSaver is still pretty small.” Aaron Drew, a consultant who undertook research on KiwiSaver and its wealth impact in 2015, has no doubt that KiwiSaver has boosted the net worth of Kiwis, particularly low and middle income earners.
“People would not have saved as much without it.”
Drew says that has on average made Kiwi households wealthier and better prepared for retirement.
“That is all positive for the long run view.” But it has yet to translate into a wider wealth effect.
Drew says research by the Reserve Bank shows housing has a predictable wealth effect — when the value of houses rises, people spend more and, likewise, when it drops they tighten the purse strings.
There hasn’t been any similar research on KiwiSaver.
But Drew points to Statistics NZ data which shows the average net worth of New Zealanders is around $300,000 and says with the average KiwiSaver balance at $20,000 it is still just a fraction of Kiwis’ total wealth.
Across the Ditch, the Reserve Bank of Australia found evidence that Australians are affected by sharemarket downturns and the impact on their superannuation savings. “For every 10 per cent the markets go down they found the medium term impact was consumption falling 0.8 per cent.
“The logic you can draw from that is as KiwiSaver balances grow here we will get some empirical impact on people. For the moment it is housing which is doing a lot more.”
Drew says it is hard to put a figure on how much it would take to shift the dial and get people spending more.
“If you had the average balance sitting at two or three times a person’s annual income . . .”
If the average household income is around $100,000 then household KiwiSaver balances would need to be around $300,000, he estimates.
“I would say it has to be a multiple of annual income and pay.”
For people joining KiwiSaver in their 20s and 30s it is quite feasible they will get to $300,000 or more by the time they get to their 50s.
If contribution rates are increased that could happen sooner.
Drew says the added advantage with KiwiSaver is that it diversifies people’s investments which means not all of their assets are tied to housing.
“At the moment we are a country where most money is still tied up in housing. It is healthy to have more diversification.”
Sam Stubbs, founder of non-profit KiwiSaver provider Simplicity, is adamant that KiwiSaver is having a positive effect on New Zealand’s economy as well as individuals.
“If you have a look at the statistics you can point to certain areas — look at first home buyer withdrawals. A very large number of people are using KiwiSaver to buy their first home.” He says if you look at the net contributions to KiwiSaver it is putting about $7 million a day into the capital markets.
“It is really hard to imagine that is not having an impact.” He believes KiwiSaver is at the forefront of turning New Zealand from a capital poor economy to a capital rich one, and points to Australia and Singapore as having gone down the same path when their private superannuation schemes began to grow.
“Australia has had 26 years without a recession and that is because of its $3 trillion (A$2.7 trillion) in superannuation.” Stubbs says the effects of KiwiSaver can even be seen in the cranes around Auckland.
“I can pretty much point to a thin layer of KiwiSaver money behind them all.” And what is really important, says Stubbs, is that KiwiSaver money will keep coming in regardless of what happens with the economy.
Last time New Zealand was in recession, New Zealand saw the collapse of the finance company industry which was used to fund many mezzanine property deals.
But when there is another downturn, he expects most of KiwiSaver money to keep flowing in.
“New Zealand has been a capital starved economy forever, except when the likes of Japan, China, Australia and US want to invest here.
“We are about to become a capital rich economy.”
New Zealand has been a capital starved economy forever . . . We are about to become a capital rich economy. Sam Stubbs, Simplicity