Not only do they contribute less, but fewer also contribute at all. Just 44% of people who work for themselves contribute to KiwiSaver, compared to 78% of employees according to research from the Retirement Commission and Hnry – an accounting and tax software tool for sole traders.
They are also less likely than an employee to receive the full Government tax credit because they don’t contribute enough and are more likely to receive no Government contribution at all.
While some business owners might eventually sell their businesses to help fund their retirement, hundreds of thousands have no saleable assets and don’t employ anyone else – they are their business.
With contribution rates rising, the divide between employees and the self-employed will grow. National has suggested making KiwiSaver compulsory for everyone, including the self-employed, but no party has made any substantive suggestions to address the structural disadvantages they face.
Why KiwiSaver doesn’t serve those who work for themselves
It’s not solely the fact they don’t have an employer to match the minimum contribution that sets them back – although of course that’s part of it.
So is affordability – although that is also the case for many employees right now.
A huge part of the two groups’ diverging retirement fortunes is baked into the design.
KiwiSaver’s most powerful feature for employees is that it does not depend on willpower or motivation. You’re automatically enrolled when you start a new job. If you don’t choose a provider, you’re automatically assigned a default one. Your contributions are automatically deducted at a predetermined percentage, and the employer’s contribution is added without you having to do a thing. In short: it’s largely protected from the frailties of human behaviour.
Not so for the self-employed – it’s all on them. Like, all of it. They must “choose to join, choose a provider, choose an amount – in dollars, not a percentage. Set up an automatic payment and honour it in good and bad months”, says Simplicity’s chief economist, Shamubeel Eaqub, and they “do all that with no incentives, for people whose incomes are volatile and unpredictable. Then we condemn them for poor savings behaviour, rather than admit it’s poor policy design”.
Hnry’s experience provides a great example of how automation can make a difference.
While the average sole trader puts in just 2.6% of their income into KiwiSaver, Hnry’s customers contribute 3.2%. The difference? Hnry offers an automated (albeit still optional) percentage through its platform.
Behavioural economics – and common sense – tells you that it’s harder to fail to do something that happens automatically, and it’s harder to miss something you never see.
There’s another reason Hnry’s model appears to work. It deducts a percentage, when most KiwiSaver providers require a fixed dollar amount, which simply doesn’t work when you have lumpy income – which is something the average salaried worker seldom has to consider. If revenue falls or costs rise, that’s a risk borne by their employer.
But for the self-employed, late-paying customers, gaps between contracts, tax bills or rising costs all eat into the amount left over to pay themselves. It’s much harder to commit to fixed retirement contributions when your income isn’t fixed – especially since once that money goes into KiwiSaver, it’s locked up fairly tightly.
Is it any wonder that a group with unpredictable income, left to rely entirely on self-discipline, is falling behind?
So, what could really shift the dial?
The common thread running through almost every proposal is the same: stop expecting sole traders to remember to save, and instead build retirement saving into the systems they already use.
Fuller also suggests allowing sole traders to contribute a percentage of their income rather than a dollar amount, “sidecar” accounts – basically emergency funds that are more easily accessed than KiwiSaver in its entirety currently is – and exploring tax incentives.
The only incentive offered to encourage the self-employed to contribute is the Government’s tax credit, which was further watered down last year to a maximum of just $260.72/year.
Economist Shamubeel Eaqub. Photo / Alyse Wright
However, Simplicity’s Eaqub argues international evidence suggests tax incentives alone aren’t enough. The countries that achieve high participation collect retirement savings through the tax system rather than relying on people to remember.
The irony is that almost every political party’s policy to strengthen KiwiSaver – higher contribution rates, compulsory saving, larger employer contributions – would widen the gap for the self-employed unless the scheme evolves for them too.
KiwiSaver has become a great public policy success story precisely because it acknowledges human behaviour. It assumes we’re busy, distracted and prone to putting off decisions, including ones that will benefit our future selves.
We should not ignore that crucial, proven insight when it comes to the more than 420,000 New Zealanders who don’t have a boss.
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