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 \u2013 an accounting and tax software tool for sole traders.<\/p>\n
They are also less likely than an employee to receive the full Government tax credit because they don\u2019t contribute enough and are more likely to receive no Government contribution at all.<\/p>\n
While some business owners might eventually sell their businesses to help fund their retirement, hundreds of thousands have no saleable assets and don\u2019t employ anyone else \u2013 they are their business.<\/p>\n
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.<\/p>\n
Why KiwiSaver doesn\u2019t serve those who work for themselves<\/p>\n
It\u2019s not solely the fact they don\u2019t have an employer to match the minimum contribution that sets them back \u2013 although of course that\u2019s part of it.<\/p>\n
So is affordability \u2013 although that is also the case for many employees right now.<\/p>\n
A huge part of the two groups\u2019 diverging retirement fortunes is baked into the design.<\/p>\n
KiwiSaver\u2019s most powerful feature for employees is that it does not depend on willpower or motivation. You\u2019re automatically enrolled when you start a new job. If you don\u2019t choose a provider, you\u2019re automatically assigned a default one. Your contributions are automatically deducted at a predetermined percentage, and the employer\u2019s contribution is added without you having to do a thing. In short: it\u2019s largely protected from the frailties of human behaviour.<\/p>\n
Not so for the self-employed \u2013 it\u2019s all on them. Like, all of it. They must \u201cchoose to join, choose a provider, choose an amount \u2013 in dollars, not a percentage. Set up an automatic payment and honour it in good and bad months\u201d, says Simplicity\u2019s chief economist, Shamubeel Eaqub, and they \u201cdo 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\u2019s poor policy design\u201d.<\/p>\n
Hnry\u2019s experience provides a great example of how automation can make a difference.<\/p>\n
While the average sole trader puts in just 2.6% of their income into KiwiSaver, Hnry\u2019s customers contribute 3.2%. The difference? Hnry offers an automated (albeit still optional) percentage through its platform.<\/p>\n
Behavioural economics \u2013 and common sense \u2013 tells you that it\u2019s harder to fail to do something that happens automatically, and it\u2019s harder to miss something you never see.<\/p>\n
There\u2019s another reason Hnry\u2019s model appears to work. It deducts a percentage, when most KiwiSaver providers require a fixed dollar amount, which simply doesn\u2019t work when you have lumpy income \u2013 which is something the average salaried worker seldom has to consider. If revenue falls or costs rise, that\u2019s a risk borne by their employer.<\/p>\n
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\u2019s much harder to commit to fixed retirement contributions when your income isn\u2019t fixed \u2013 especially since once that money goes into KiwiSaver, it\u2019s locked up fairly tightly.<\/p>\n
Is it any wonder that a group with unpredictable income, left to rely entirely on self-discipline, is falling behind?<\/p>\n
So, what could really shift the dial?<\/p>\n
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.<\/p>\n
Fuller also suggests allowing sole traders to contribute a percentage of their income rather than a dollar amount, \u201csidecar\u201d accounts \u2013 basically emergency funds that are more easily accessed than KiwiSaver in its entirety currently is \u2013 and exploring tax incentives.<\/p>\n
The only incentive offered to encourage the self-employed to contribute is the Government\u2019s tax credit, which was further watered down last year to a maximum of just $260.72\/year.<\/p>\n
Economist Shamubeel Eaqub. Photo \/ Alyse Wright <\/p>\n
However, Simplicity\u2019s Eaqub argues international evidence suggests tax incentives alone aren\u2019t enough. The countries that achieve high participation collect retirement savings through the tax system rather than relying on people to remember.<\/p>\n
The irony is that almost every political party\u2019s policy to strengthen KiwiSaver \u2013 higher contribution rates, compulsory saving, larger employer contributions \u2013 would widen the gap for the self-employed unless the scheme evolves for them too.<\/p>\n
KiwiSaver has become a great public policy success story precisely because it acknowledges human behaviour. It assumes we\u2019re busy, distracted and prone to putting off decisions, including ones that will benefit our future selves.<\/p>\n
We should not ignore that crucial, proven insight when it comes to the more than 420,000 New Zealanders who don\u2019t have a boss.<\/p>\n