We have too many boomers and not enough young workers to fund their retirements. National thinks its new KiwiSaver policy could be the answer.
Old people are really expensive for the government. They (mostly) don’t produce any income tax, and they consume a lot of resources in the form of superannuation, healthcare and RNZ Concert.
The cost of caring for the elderly is a long-established part of our social contract; people contribute to society and the government coffers all their lives, and they are, in turn, looked after by the next generation. But that social contract is being torn apart by demographic changes.
After World War II, New Zealand had the highest fertility rate of any developed country, averaging at least 3.5 births per woman from 1946 to 1965. Now, that rate is 1.57, below the replacement level of 2.1 needed to maintain a stable population without migration. That means we have more retirees than ever and a smaller proportion of the working population to support them.
Almost every first-world country is facing a similar financial crisis. In some, it’s being exacerbated by the rise of “boomer populism”. Politicians are incentivised to cater to boomers because they are a large and reliable population of voters. Like most people, they’ll tend to vote in their own self-interest. But a political system tilted too heavily toward those near death leads to short-term thinking.
In the UK, the Waspi campaign claims millions of women were given inadequate notice that their pension age would be rising from 60 to 65 and are demanding compensation – a direct transfer of billions of pounds from young workers to the elderly. In the US there is an increasing movement to end property taxes for seniors, prominently backed by Florida governor Ron DeSantis, which would shift tax burdens further onto income earners rather than asset-rich retirees.
This kind of politics sets the stage for a generational conflict. It builds resentment among young people who are struggling to get ahead and are forced to fund the lifestyles of the wealthiest generation in history. (Those born before 1966 currently hold 60% of New Zealand’s $2.29tn total individual net wealth).
If we maintain our current policy settings and assume current population trends, it would mean that by 2061, New Zealand would have to allocate half of its GDP annually to superannuation payments. There’s no way to run a growing economy under those conditions. The economy would become like a sickly blood boy, kept alive only so a weird billionaire could suck his veins of plasma.
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With that threat hanging over New Zealand’s future, it’s clear to every party in parliament that something needs to be done. Everyone seems to be eyeing up the same solution: KiwiSaver. If the government can get people to save more for their retirements, it won’t have to spend so much on superannuation. This is shaping up to be a major point of contention in next year’s election.
NZ First was the first to jump, with a policy of making KiwiSaver compulsory and lifting minimum contributions from both employees and employers to 8% of income, rising to 10% later. But it was National who really kicked things off, launching its first election policy on Sunday with a promise to raise the employer matching rate from 3% to 6%.
National framed this as matching the contribution rate of Australia’s super scheme (a total of 12%, paid directly by employers, while KiwiSaver is paid by both employer and employee) but it would still fall short. In Australia, the full 12% contribution is paid pre-tax, while in New Zealand, only the employer contribution is pre-tax; employee contributions are deducted after income tax. The tax rate on earnings in the scheme is also lower in Australia for most people. And importantly, Australia’s scheme is compulsory while KiwiSaver is not.
Plus, while Australia’s super scheme has been strengthened over time, KiwiSaver has been weakened, mostly by National (or National-led) governments.
In 2009, National cut the minimum employer contribution from 4% to 2%. In 2012, it introduced a tax on contributions and cut the annual government contribution from $1,040 per year to $521. It raised the employer contribution to 3% in 2013, but then removed the $1,000 kick-start for new members in 2015. In 2025, it cut the government contribution from $521 to $261, but increased the employer contribution to 4%.
National’s announcement on Sunday that it wants to raise rates to 6%, after pushing for cuts in the past, may seem like the arsonist returning to the blaze. The policy certainly represents a shift in thinking. Where previously National was more concerned about the costs to businesses of higher mandatory contributions, it is now worried about the costs to the government. National is fundamentally right about this; KiwiSaver is important because it gets people to save for their own retirement rather than having the government pay for it.
Labour was furious about the government contribution cuts earlier this year. Labour leader Chris Hipkins calculated that it would leave an 18-year-old $66,000 worse off at retirement. But it’s worth remembering that these contributions exist primarily as an incentive for people to save. If the government wants to make direct contributions to support retirement, the NZ Super Fund is a better avenue.
National also sees KiwiSaver funds as a useful source of capital for infrastructure investment, something prime minister Christopher Luxon and minister for infrastructure Chris Bishop have highlighted repeatedly. Viewed from that lens, it makes sense to boost contributions to those funds.
But there are catches. Raising the contribution rate could be a way of softening up the electorate for further policy changes, such as raising the retirement age or means-testing superannuation. It could potentially be a driver of inequality, as people on higher salaries get greater benefits, while people who are struggling are unable to increase their contributions so do not benefit from increased employer contributions, which only kick in to match the employees. It’s also less useful for self-employed people or anyone who receives their income as a “total remuneration package” because their overall contribution rate may not increase.
Still, Sunday’s announcement is significant because for the first time, we’re seeing National driving the conversation to expand KiwiSaver. It will likely kick off a race among parties to see who can offer more to the electorate. Hipkins will be under particular pressure; Labour is the party that established KiwiSaver, and it won’t want to be outflanked by its old rival.
Michael Cullen, architect of KiwiSaver. (Photo: John Nicholson/Bloomberg via Getty Images)
Economists have been throwing around ideas: Max Rashbrooke has proposed a Kids’ KiwiSaver scheme, where every child is enrolled automatically, and the government matches some contributions from their parents. Shamubeel Equab wants to make contributions compulsory, including for self-employed people, and simplify access to funds for those in financial hardship. Retirement commissioner Jane Wrighton released a report earlier this year with further proposals, including increased government contributions for people on paid parental leave, a “sidecar” KiwiSaver account for financial emergencies and banning total remuneration packages.
Only two of the six parties in parliament have released KiwiSaver policies so far, so this conversation has plenty more runway. But on the whole, the new focus is a positive sign. It shows that our politicians are taking the retirement crisis seriously rather than resorting to short-term boomer populism.