But it would not impose compulsion on employees, preserving the agency and flexibility they have now. The employer’s contribution would continue to rise even if the employee pauses theirs.
Both National and Labour would have the Government provide employer contributions during paid parental leave, and remove the current provision allowing employers to stop their contributions for workers over 65 who are still contributing to KiwiSaver.
New Zealand First calls for compulsory membership, with contribution rates of 8 per cent for both employees and employers “initially” rising to 10% “eventually”. No timetable or other details are offered, apart from a plan to cut the corporate tax rate for SMEs – companies with revenue of less than $30 million a year – from 28% to 20%. That would offer some relief for what would be hefty increases in payroll costs.
All we can conclude is that NZ First would probably not block National’s plan, and would be content to say it didn’t go far enough.
Act proposes no changes to contributions, apart from the already legislated increase in the default rate to 4 per cent in 2028. It opposes compulsion.
Instead, it would stop taxing the investment earnings of KiwiSaver funds, allowing compound interest to work its magic. Last year, those earnings topped $10 billion. We are one of only seven OECD countries to tax the investment income of retirement savings.
Act reckons the fiscal cost would average about $1 billion a year over the next four years, but half of that would be clawed back by scrapping what remains of the Government contribution, which has been halved this year to a maximum of $5 a week.
Clearly, this tax change would benefit those on higher incomes most. Eliminating the Government contribution would make it even more regressive. But KiwiSaver is not really designed to address horizontal income inequality. You have to look elsewhere in the tax system for that.
The Opportunity Party’s “KiwiSaver 2.0” resembles National’s plan in being compulsory for both employees and employers and rising to a minimum of 6% for both. It would not allow withdrawals for first-home buyers, of which there were 50,000 last year. And it would phase in tax deductibility for contributions.
It is part of Opportunity’s radical tax reset, which includes a land tax (atop the one already funding local government) and universal basic income. So nothing would happen for the next three years. The ratcheting up of contributions to 6% and the phasing in of deductibility would happen – if at all – over the six years after that.
So how much money are we talking about?
KiwiSaver’s regulator, the Financial Markets Authority, reports that, in the year to March, $13.2 billion was paid into KiwiSaver. That equates to 2.9 per cent of GDP.
National’s plan would double that within the next six years. That’s while klaxons are blaring at Treasury and from much of the commentariat about projections that the fiscal cost of NZ Super might rise by 3 percentage points of GDP over the next 40 years. And that’s the gross cost; superannuitants pay tax.
National proposes a similar increase compressed into just six years. How would the cost of ramping up KiwiSaver be split? Less take-home pay for employees, and therefore less consumer spending? Lower profit margins for employers, with less hiring and business investment? Or, to avoid those outcomes, higher prices for consumers – a wage/price spiral raising the risk of higher interest rates and more fiscal drag? So far, so unappealing.
“Do I look like Brad Pitt?” Michael Cullen ruled out compulsory KiwiSaver contributions when he introduced the scheme in 2007. Photo / NZME
Then there’s the question, why go compulsory? Who would that affect?
I remember a press conference 20 years ago when Michael Cullen was laying out how this new scheme of his would work. I asked him then if it was a Trojan horse for compulsion down the track. “Do I look like Brad Pitt?” was his reply. The movie Troy had come out the year before. So no.
The main reason was that a compulsory deduction from people’s wages would feel like a new tax, even if, strictly speaking, it’s not, in that the money is not going to the Government.
But that distinction would not cut much ice with the people being compelled to pay it. Especially for those at the lower end of the wage distribution, it would be an unwelcome innovation. If that was true then, it is even more so today, when foodbanks are reporting more and more people with jobs still struggling to put food on the table.
So who is not paying into KiwiSaver, and why not?
The Retirement Commission put out an illuminating report last year on the demographics of KiwiSaver. A key group is the 782,000 people aged between 18 and 64. They account for most of the just over 1 million KiwiSaver members who were not contributing, and they represent about a quarter of the total resident population in that age range.
Nearly half of them had an annual income of less than $10,000. Another 35 per cent had incomes between $10,000 and $50,000, which is what a full year of 40-hour weeks at the minimum wage earns you.
So we are talking about people working part-time, if at all, or for only part of the year. It’s not clear whether this is a rich vein of potential contribution income for KiwiSaver funds to mine.
The other 15 per cent of that non-contributing age group, the commission says, includes self-employed people. For them, the employer contribution is irrelevant, and they might well prefer to keep that cash in their own businesses.
Then there are the growing number of people 65 or over who continue in paid employment. On the current rules, which both National and Labour plan to change, they are not entitled to an employer contribution.
So should Parliament look at these groups – the low-paid, the self-employed and working superannuitants – and say these people are feckless and improvident? If they won’t pay into KiwiSaver voluntarily, they must be compelled to?
More harm than good?
National’s answer to the obvious question about those who simply can’t afford to contribute is to say they can seek an exemption, but they will need to satisfy the conditions that already apply for KiwiSaver hardship withdrawals.
They don’t make it easy. Typically, the form you need to fill in about your financial circumstances is extremely detailed, and needs to be backed with documentary evidence. Then you need to track down a justice of the peace, or lawyer or other worthy, to witness you solemnly sign a statutory declaration.
The compliance costs of requiring perhaps hundreds of thousands of people to jump through those hoops, for an exemption of uncertain duration, would be horrendous.
So it looks like compulsion would do far more harm than good. Michael Cullen got that right.
The Treasury modelling that underpinned last month’s Prefu includes forecasts that the average wage after tax will rise to $1471 a week by fiscal 2031. That represents a compound annual growth rate of 2.6% from current levels. Lop off half a percentage point a year for rising KiwiSaver contributions under National’s plan and you are down to just over 2%. And that’s nominal. What are the chances inflation will average 2% a year for the next five years?
It would certainly be a change from the past five years, when it averaged 4.3%, for well-known reasons: Covid, Ukraine, Donald Trump’s weaponisation of trade, and now the Gulf war. What are the odds that New Zealand will be sideswiped by similar shocks from the other 99.8% of the world over the next five years?
If so, the growing exactions for KiwiSaver would come out of wages that, on average, after tax and inflation, are heading lower than even the current cost-of-living-crisis levels.
Brian Fallow is a former economics editor of the NZ Herald.
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