Missed KiwiSaver opportunity costly
In 2016, the Government’s retirement policy experts called for higher contributions into KiwiSaver. The advice of the taxpayerfunded Commission for Financial Capability was to increase the 3 per cent employee and 3 per cent employer minimum contribution rates to 4 per cent in a series of 0.25 per cent jumps over four years, taking people’s total contributions to 8 per cent of their gross pay.
Chris Douglas from investment consultancy MyFiduciary said that small shift would result in middleincome earners in their 30s getting to 65 with close to $60,000 extra in their KiwiSaver accounts.
The National-led Government of the day, under Sir John Key, said there was limited evidence that the move would raise savings rates.
‘‘It could also make it more difficult for low-income workers to contribute to KiwiSaver.’’
Douglas crunched the numbers on the short and longterm impact the shift would have made on balances.
For someone earning $55,000, who was in a balanced fund and had saved at the minimum contribution rate since
KiwiSaver was launched in 2007, a ratcheting up by 0.25 per cent a year would have so far added just over $1675 to their KiwiSaver balance. The extra amount would have been even higher in a growth fund.
Douglas calculated that a 35-year-old with a starting balance of $20,000, saving at the commission’s final recommended combined 8 per cent employer and employee contribution rate, and earning a projected balanced fund return of 3.5 per cent (the FMA’s KiwiSaver projections for a balanced fund investor), would reach the age of 65 with an estimated lump sum of $317,000.
The same person contributing at the current minimum 3 per cent employee, plus 3 per cent employer, rate would have about $260,000, he calculated.
People saving into a growth fund would be expected to reach 65 with even larger sums, Douglas said.
The 0.25 per cent savings ratchet would result in a person earning $55,000 go from contributing $275 a month to $366.67 over four years.
David Boyle from Mint Asset Management, who was with the commission when the recommendation was made in 2016, said it was aimed at improving retirement, not replacing NZ Super.
‘‘We have got to remember
that we have got a brilliant first pillar pension being NZ Super,’’ he said.
‘‘It is a core fundamental for New Zealanders as a foundation. It’s simple, and easy to administer, and it is inflationadjusted.
‘‘KiwiSaver was to help build the momentum to deal with not only the bubble of baby boomers moving through, but also because people were living longer.’’
But higher KiwiSaver balances might encourage future governments to cut NZ Super, which Boyle said would be unfair.
Douglas said the Key Government made the wrong call, for two reasons.
The first was that KiwiSaver had made saving, and investing easier, and opened new options to obtain financial advice. The second was that it was lifting financial competence, and more people were realising how much they needed in retirement.
It was now easier to save for retirement, but most of us were not saving enough, and lifting KiwiSaver contribution rates would be a good move.
‘‘The number is more like 10 per cent than 8 per cent. It’s pretty clear we should be moving contributions up,’’ he said.
Douglas was cautious about the future of NZ Super, saying there was a risk that in 30 years’ time it would look different, including the possibility that the age of eligibility would move from 65 to 68, or even 70.
Saving more now would give people a greater ability to absorb such changes, but he acknowledged it might also make it easier for politicians to decide to make the change.
‘‘That’s why this is not an easy decision to make,’’ Douglas said.
The Commission for Financial Capability’s 2019 recommendations have not been dismissed by the Government. Former commerce and consumer affairs minister Kris Faafoi wrote to the commission in July saying the Government would work with it on the recommendations.
They included a ‘‘small steps’’ suggestion, which would have new sign-ups to KiwiSaver automatically having their employee contributions rate rise at 0.5 per cent a year until it reached 10 per cent, or they chose to freeze their contributions rate.
Other recommendations included a ‘‘care credit’’ so those taking a break from work to look after children or sick relatives would not miss out on the benefits of KiwiSaver.