How big an impact would variable compulsory saving have?

The Herald reports:

More than 300,000 business owners and self-employed people would be exempted from Labour’s new policy to make workers pay more into KiwiSaver to dampen inflation in boom times.

Labour finance spokesman David Parker confirmed yesterday that his variable compulsory saving proposal would apply only to employee contributions to KiwiSaver – not to employer contributions, and not to self-employed people and employers who choose to pay voluntarily into their own KiwiSaver accounts.

This is a point I wasn’t aware of. The variable rate will only apply to employee contributions.

This means that the impact of a change of rate will be quite small. I’ve done some basic back of envelope contributions.

The current annual member contributions to KiwiSaver are around $1.8 billion. That’s based on a 3% minimum rate. So a 1% change in KS contribution rates would lead to $600 million more into KiwiSaver. However only around 40% of this will be increased savings (based on evidence to date) rather than transferred savings so the amount of money taken out of circulation (so to speak) will be $240 million.

Now the total amount of lending is currently around $330 billion. So a 1% change in interest rates would have an impact of around $3.3 billion.

So a very rough ballpark estimate is that you would need to increase the KiwiSaver contribution rate by around 14%, to have the same anti-inflationary impact as a 1% increase in interest rates.

Someone with better economic modelling skills than me can calculate a more precise figure, but the salient point is that any impact will be very small. It will not be a choice between interest rates going up or increasing the KiwiSaver contribution rate. Both will occur. Increasing the KiwiSaver contribution rate will have a small impact at the very margins.