A critical view of KiwiSaver

The Centre for Independent Studies has published a critical analysis of KiwiSaver. I am actually a reasonable fan of KiwiSaver (but not of how they did it with no consultation with business), so disagree with the conclusions in the CIS analysis. However I support most of their analysis, which I will summarise here:

• Most people were already saving enough for retirement, with 80% of couples saving enough to maintain a level of consumption similar to or better than in pre-retirement.
• With KiwiSaver and New Zealand Super combined, it is now possible for a someone on the average wage to retire on a higher income than they enjoy during their working life.
• It is over the top to have a subsidised saving scheme on top of an age pension that is the most generous in the OECD.

This is a very strong point. People are being over-taxed and over-subsidised now. The NZ Super scheme is the most generous in the OECD as it is neither means nor asset tested. You combine that with a scheme that all bar the very stupid or very poor take part in with an average 10% of salary saved per annum, and you end up with higher incomes in retirement than during your working life.

• KiwiSaver largely benefits the wealthy, who can afford to save more.

Yep, and every wealthy person I know is making sure they get the maximum subsidy from the taxpayer, and self employed people are upping their salaries so they get to claim their employer contribution as a tax expense.

• KiwiSaver politically and economically threatens the future of New Zealand Super and makes means testing more likely in the future.

I reached this conclusion during the budget lockup, when it was announced. There is no way in 30 years time we will have both NZ Super (including Cullen Fund) and KiwiSaver. Dr Cullen has actually destroyed the consensus over publicly funded non means tested superannuation. If he was a National Minister, the left would be baying for his blood.

• Evidence from around the world suggests that subsidies for savings schemes do little to actually
  increase overall savings. Instead, people tend to shuffle around existing savings to take advantage
  of the subsidies.

Yep. Most incentives change individual behaviours rather than change the fundamentals. However as the incentives for KiwiSaver are so strong, and as you have to opt out of it in a new job, I do think it will have some impact on overall savings levels.

• It is now more rewarding for people to join KiwiSaver than it is to pay off debt or a mortgage, or
  to invest in business or an education.

The CIS paper actually quotes me as saying “You have to be very very poor or very very stupid to turn down an up to 2:1 subsidy”. And indeed, the level of subsidy is so high that it makes sense to borrow money so you can save it!

• The requirement for employers to contribute 4% of a worker’s salary will put downward pressure on wages and job growth.

Of course. Employers look at the total cost of remuneration. What is unfortunate is those that do not join KiwiSaver may be punished for the cost of those who do join.

• The total cost will rise to $2 billion a year, which is more than New Zealand spends on its entire defence force.

It is a lot of money, and not sustainable on top of the Cullen Fund and NZ Super. But it is not necessairly KiwiSaver which should go.

• The easiest way to fix KiwiSaver is to scrap the generous incentives to contribute,

That is one way to fix the problem, but not my preferred one.

CIS are looking at this in terms of what is best for New Zealand, and they may be correct. But first let us look at this from the view of the left:

1. Penalises poor people who can not afford to save
2. Gives the greatest advantage to richer people
3. Allows rich self employed people to avoid more tax
4. Pushes wages down
5. Undermines universal provision of superannuation
6. Privatises savings from the state to the private sector

KiwiSaver is everything the left should hate. I guarantee you if Bill English had introduced this, it would have been denounced.

Now CIS are saying this is bad public policy, even if it is something the right should love (which demonstrates that they are not as ideological as critics claim).

I support KiwiSaver because it is inevitable that it will lead to means (and maybe asset) testing of NZ Super. And I believe in means testing.

I support KiwiSaver because in 20 years or so (once takeup is near universal) the $50 billion or so in the Cullen Fund will be dished out into people’s KiwiSaver accounts. And after giving over $25,000 to each family, no future Government would ever take it out of their KiwiSaver account.

I support KiwiSaver as I would rather choose my investments manager, than have the Government do it for me.

I support KiwiSaver as it will lead to a reduction in the size of the state.

So while I agree with much of the analysis of the CIS, I disagree with their conclusion to scrap the incentives and subsidies. Instead just wait for the Cullen Fund to be privatised and NZ Super to end up means tested, and probably CPI adjusted instead of wage adjusted.