Why are so many Kiwis walking past free cash?
The millions of us missing out on Kiwisaver’s tax credits are wasting our money.
There’s an old joke about a pair of economists walking down the street. The younger one happens to spot a $20 note on the pavement, and excitedly tells his companion.
‘‘Nonsense,’’ says his older and wiser colleague, without even bothering to look. ‘‘If there had been a $20 note lying on the street, someone would have already picked it up by now.’’
In the cloud cuckoo land of old-school economics, markets are perfectly efficient, and humans are clockwork machines who always act in their own best interests. Any low-hanging fruit is routinely plucked, and all opportunities are briskly taken advantage of.
Nothing punctures this fantasy quite like the KiwiSaver member tax credit. Every year, the government effectively offers up $521 of free money to almost everyone between 18 and 65. Every year, stupendous numbers of people leave it sitting on the pavement and walk right on by – over a million members, at last count.
This baffling phenomenon has a few possible explanations. First off, the name is stupid and confusing: the member tax credit has nothing whatsoever to do with taxes. It’s just a cute attempt to disguise its actual purpose, which is a blatant money-go-round for the middle and upper classes. 123RF
Secondly, the tax credit is automatically taken care of for some people, but not for others. If you earn more than $35,000 a year and make contributions at the minimum 3 per cent rate, your KiwiSaver provider will claim the full freebie on your behalf with no action required.
If you don’t earn that much, or you’re self-employed, or you’ve taken a contributions holiday, it’s up to you to get what you’re entitled to. First, you need to check how much has gone into your account since July 1 last year. To get the maximum benefit, you need to have personally contributed at least $1042.
If you’ve put in less than that, you’ve got until the end of June to contact your provider and make a voluntary lump sum contribution. Every dollar you chip in up to that $1042 threshold will effectively earn an instant 50 per cent return, which is unheard of in any other investment class.
This raises another obvious problem: most people don’t have a cool grand just lying around the place, and it’s not exactly easy to scrape that kind of money together in a hurry. A much less stressful option is to set up an automated payment of $20 a week to your KiwiSaver provider, then forget about it.
For some people living on the bones of their bums, even this is too much to ask. Our economist friends would point out that they’re making a rational decision, because it’s not much use planning a distant retirement when you’re hungry and have bills to pay right now. There are definitely some folks in this category, which is really sad, but the research suggests that most people are just oblivious.
Which is why you’re reading this perennial column. I’ve written about the member tax credit several times before, but have no choice but to keep labouring the point until everyone gets the message. If you’re a regular reader of the money pages, and you’re bored to tears of hearing about the member tax credit, please clip this out and pass it on to a friend or family member.
Spread the word far and wide: There’s $521 lying on the pavement, in the exact same spot, every single year, with a giant neon sign pointing to it saying FREE MONEY!!! – and a million people keep walking right on by. Got a burning money question? Email Budget Buster at firstname.lastname@example.org, or hit him up on Facebook, where you can also find links to previous Budget Busters.
Leaving your Kiwisaver’s tax credits unclaimed is like losing your cash out of your back pocket.