Cullen on KiwiSaver and superannuation

Vernon Small reports:

The architect of KiwiSaver, former finance minister Sir Michael Cullen, is proposing a revamp of the scheme to help cut the long-term costs of superannuation to the Government.

Under his plan KiwiSaver would be made compulsory in 2016 and contributions would rise to 4 per cent for employees and 4 per cent for employers, followed by further increases to 6 per cent or 8 per cent for employers.

But half of a saver’s nest egg would have to be used to buy an annuity.

If that provided an income lower than the current superannuation formula, the state would top it up to the guaranteed retirement income.

“In effect this means that for many people the shift from state funding to private funding would result in half of their retirement KiwiSaver savings being income-tested away,” Sir Michael said.

This approach has some considerable merit. We have not adjusted superannuation policy o take account of KiwiSaver. I recall when KiwiSaver came in, the projections were that someone who earned the average wage would receive in retirement a higher income from KiwiSaver and NZ Super combined that they did when working. This is clearly not sustainable.

Labour’s proposal to lift the age from 65 to 67, while a step in the right direction, is just tinkering. What Cullen proposes would make a huge difference to the long-term financial sustainability of retirement savings.