When it works, KiwiSaver is one of the best savings systems in the world. But it doesn’t work for everyone. With the government aiming to “refresh” KiwiSaver over the next year, now is the perfect time to weed out its flaws.
We don’t know when or how, but KiwiSaver is changing. The government has declared its intention to reinvigorate the New Zealand Savings Scheme as figures show low contributions.
KiwiSaver has been widely adopted by New Zealanders, but it still struggles to attract additional savings beyond the percentage deducted from their wages. Now the government is looking for ways to encourage higher savings, given the removal of its current grant in favor of one that applies only to voluntary contributions.
Nothing is finalized, but one thing is clear: the current system is not enough.
While the plan itself is strong, we’re just not saving enough, says economist Rosie Collins.
“People think 3% is enough,” she says. “Until [contribution percentages] are in the double digits, I don’t think we’re quite there. We need to increase up to 8-12% as normal range.
This lack of enthusiasm is partly due to the fact that many New Zealanders do not see KiwiSaver’s goals as achievable. As home prices continue to rise, the prospect of buying a first home, let alone retiring, seems far less realistic.
“If young people don’t even see the first obstacle as attainable, why on earth would they think the second one is attainable?” Collins asks. As examples, she cites Taiwan, Singapore and Korea, which have programs that focus on different goals throughout a person’s life.
“You start in a childhood account that becomes an education and health account in your 20s and 30s, then there’s an option for a first home deposit or mortgage, and then eventually it turns into a retirement savings plan,” she explains. “I think that’s the model New Zealand should be moving towards, so when you’re 25 you’re saving for goals that really matter to you.”
Additionally, the cost of housing must be factored in before many can even consider saving for one. “Until the housing situation is resolved, I think it will be more difficult for us to have comfortable retirements,” she notes. “After that, our systems equipped us well with our Universal Retreat and KiwiSaver. The tools are there to get us where we need to be.
But that’s only part of the problem. The biggest problem KiwiSaver faces is that it doesn’t work well for low-income people. Basically, KiwiSaver is most useful for those who are already wealthy.
“It’s by design,” Collins said. “When Kiwisaver was designed in 2007, there were Treasury documents saying ‘we don’t think retirement savings are worth it for the bottom 40% of households’ – that it’s economically irrational for these groups to save.
“Until it makes sense for someone on a low income to participate, then it’s just a program for the wealthy. That needs to change, and the goals need to be relevant to someone who lives paycheck to paycheck.
Last year, Te Ara Ahunga Ora, the Pension Commission, issued a follow-up report New Zealand pension policyand came to a similar conclusion.
While many of the indicators studied by the Pensions Commission, such as coverage and income replacement, were rated as excellent, the income gaps were quite large compared to the rest of the world. “Inequality is high,” the report notes. “It’s the result of differences in accumulated wealth and ability to work.”
In another article focused on KiwiSaverthe Pensions Commission notes that “due to ethnic and gender pay gaps and a gender-segregated labor market where female-dominated industries generally pay less, those with lower pay are more likely to ‘to be non-Pākehā and women’.
Because of the close link between KiwiSaver and participant earnings, the Pensions Commission suggests that the current setup “perpetuates labor market inequality into retirement.”
Fortunately, KiwiSaver is not the only retirement funding mechanism and works in conjunction with NZ Super to provide what is effectively universal income for older people. This system works very well for us at the moment and has reduced the poverty rate for retirees.
However, the Pension Commission fears that the effectiveness of NZ Super will diminish over time. “A major future risk to the performance of the New Zealand pension system is that the purchasing power of NZ Super would decline,” they note. If this were to happen, additional pressure on KiwiSaver could upset the balance.
“If KiwiSaver, with its current parameters, were to become a necessary component of retirement income, the transfer of risk from the state to the individual would be greater than in many other countries.”
“Any change that increases the role that Kiwisaver plays in retirement income poses a risk of less equitable outcomes,” the commission warns.
Collins suggests that KiwiSaver be modified to better support people throughout their lives, to minimize the inequities that currently plague the system. “The goal should be lifelong financial resilience, so by the time you reach the end of your life, you’re in the best possible position,” she says.
“This change would be drastic for some people. They say “but it’s a pension plan”, but who is this pension plan for? Are you comfortable with it being just for the rich? »