Why not use KiwiSaver to cover redundancy insurance?
Of all the big ideas spewing forth from the mouths of Government spokespeople, the proposed redundancy income insurance scheme is perhaps the most whiffy.
Privately, many in the investment industry are incredulous that Business New Zealand and the New Zealand Council of Trade Unions back an idea that at first glance appears counter to the interests of members of both lobby groups.
For business, the mooted income insurance levy of 2.8 per cent would incur both direct and indirect costs; while the scheme would offer outsize benefits to higher-paid individuals rather than those in typical unionrepresented jobs.
But whatever the merits of a Government-encouraged redundancy back-up programme, some argue a potentially more efficient one is hidden away inside KiwiSaver.
For example, the Boutique Investment Group notes in its submission on the income protection proposal that any pseudo tax increase could be directed to higher KiwiSaver contributions given almost one-in-four Kiwis will soon retire, compared to the 100,000 or so estimated redundancies each year.
No new wheel needed
“If Government believes that an additional 2.8 per cent cost (shared between employers and employees) is an acceptable burden to impose on society (at this point) then topping up KiwiSaver would be a better use of the money than creating an income insurance scheme,” the BIG submission says.
“. . . It is also worth noting that one dimension of KiwiSaver is the ability to make a financial hardship withdrawal.
“While this is not the same as income protection insurance, putting additional money into KiwiSaver does create some additional resource for redundancy eventualities.
“The KiwiSaver rules could also easily be tweaked to expressly allow for some form of withdrawal on redundancy (up to a capped amount).”
Of course, a funds management lobby group (albeit one focused on technical compliance issues) would push for higher KiwiSaver contributions.
Who doesn’t want Governmentguaranteed inflows directed to their business?
BIG, though, isn’t sure the Government should impose more tax imposts — including for KiwiSaver — at a time of high inflation, falling asset values and plummeting consumer confidence.
Why now?
“We have submitted above that a topup of KiwiSaver would be a better way to use the money if society is in a position to carry that burden. However, we query whether this is the case,” the submission says.
And fund managers aren’t alone in suggesting KiwiSaver could fill the redundancy income protection gap, anyway. Victoria University Institute for Governance and Policy Studies director Simon Chapple argues in a recent think-piece for treating KiwiSaver as an income loss-absorber.
Like BIG, Chapple notes the KiwiSaver financial hardship withdrawal option already operates as a de facto redundancy support vehicle.
“Significant financial hardship includes situations where a person cannot meet minimum living expenses, cannot pay the mortgage, needs to pay for medical treatment for themselves or a dependent family member, or has a serious illness,” he says.
“Because family circumstances are part of the reasons for access, all family KiwiSaver accounts are potentially accessible, not simply the account of the person who loses the job.”
To date, the financial hardship payouts have not proved much of a drain on KiwiSaver, especially compared to first-home withdrawals.
Over the 10 years to the end of June last year, annual financial hardship KiwiSaver withdrawals ranged from about $23 million to $145m and about 6000 to 22,000 members: by contrast, more than 52,000 members cashed-out a collective $1.7 billion-plus during the 12 months to June 30, 2021 from KiwiSaver to fund first-home purchases, according to Inland Revenue Department statistics.
Proper last resort
Admittedly, financial hardship withdrawal terms are somewhat variable and usually require real desperation rather than the threat of it implied by redundancy.
Chapple says KiwiSaver could be adjusted to more explicitly accommodate job-loss payouts, citing a long list of advantages of using the scheme to smooth income compared to creating another Government bureaucratic monster (costing more than $500m each year to run, based on official estimates).
For instance, he says KiwiSaver “avoids considerable third-party moral hazard issues plaguing social insurance”.
“The consequences of using savings for extended periods falls on the families concerned, not thirdparty levy payers as it does for social insurance. Thus, there are far fewer risks of people ripping off or gaming the system,” Chapple says.
On the other hand
There are a few flaws in the BIG/ Chapple vision of KiwiSaver as an income-provider-of-first-resort for the recently sacked.
Firstly, KiwiSaver has 3.2 million members but quite a number of employed remain outside the scheme. Also, with an average balance of just $30,000, it wouldn’t take long for many KiwiSavers to empty their accounts after a job loss.
Worse still, if there were to be widescale redundancies in the event of, say, a global recession triggered by high inflation, rising interest rates and war, KiwiSaver accounts would likely suffer too — leaving members prone to crystallising losses right at the bottom with little time to recover.
With an average balance of just $30,000, it wouldn’t take long for many KiwiSavers to empty their accounts after a job loss.