The Government is investigating a proposal that would see new KiwiSaver members and those who opt into it increase their contributions from 3 per cent up to 10 per cent in half a per cent a year increments.
But the move could hit workers in the pocket by reducing their take home pay packet andthe union believes employers should shoulder some of the rise rather than it coming all from workers.
Australia will next month lift its compulsory employer superannuation contribution rate from 9.5 per cent to 10 per cent of a person’s wages or salary and will increase it by 0.5 per cent a year for the nextthree years until it reaches 12 per cent.
Australia’s superannuation scheme began in 1992 with a 3 per cent contribution rate or 4 per cent for employers with an annual payroll above A$1m.
It was gradually increased to 9 per cent by 2002, and to the current rate of 9.5 per cent in 2014.
New Zealand’s minimum KiwiSaver contribution began at 1 per cent for employers in 2007 and then rose 1 per cent each year to 3pc. The employee contribution began at 4 per cent but then dropped back to 3pc in 2010 and has been stuck there since.
Plans to increase both the employer and employee contribution to 4 per cent were scrapped.
In 2019 New Zealand’s Retirement Commissioner warned in a three yearly report on Retirement Income policy that the 3 per cent minimum was resulting in some savers assuming that was the “right” level required to prepare for retirement.
“This can have the perverse effect of reducing overall accumulation of savings for those who may have been prepared to save at a higher rate than the default.
“At a 3 per cent contribution rate, they risk arriving at age 65 with a shortfall in accumulated savings to fund their intended lifestyle.”
An 18-year-old earning the current median income of $54,080 would have around $374k in their KiwiSaver account by age 65 if they invested 3 per cent in a growth fund and didn’t take any money out for a house.
That would be enough to meet the lump sum requirement of $275,000 for a single person living in a major city for a “no frills” retirement, as defined by Massey University’s Retirement Expenditure Guidelines.
But it would fall far short of the “choices” retirementwhich would require around $562,000.
The commissioner recommended the government introduce a small steps approach with new KiwiSaver joiners seeing their contribution rate rise automatically at 0.5 a per cent a year until it either hit 10 per cent or they stopped it. Existing KiwiSaver members would also be given the option to do this.
Tom Hartmann, personal finance lead at the Commission for Financial Capability which is headed up by the Retirement Commissioner, said there was a lot of work going on behind the scenes on KiwiSaver.
“Those recommendations have not fallen off the table by any stretch.”
Hartman confirmed the small steps approach was being looked at. “That is one of the proposals that is on the table.”
He said easing people up a scale of increased contributions could have dramatically different results and that was the model which Australia had also used.
“It works even better when it is tagged to people’s pay raises because they don’t feel it at all.”
Hartmann said contribution rates were a big determiner of the outcome when it came to how much people could save for their retirement.
“It’s not the biggest driver.” Hartmann said the biggest driver over the long term was investment returns but without bigger contributions savers could not leverage those investment returns.
He said the policy was largely sitting with the Ministry for Business, Innovation and Employment.
An MBIE spokeswoman said officials were looking to prepare advice to ministers on the recommendations from the Retirement Commissioner’s Report from 2019.
“A government response is due this year. This includes identifying recommendations which need more detailed consideration.”
She said there was no set timeframe for this work.
Ayesha Scott, a finance professor at AUT, said while the 3 per cent rate was too low she was cautious about increasing it and the impact it could have on lower paid workers.
“I think that we need to have a serious conversation about a pathway toward a higher amount. However my caveat here is that there are a couple of things that probably need to happen for KiwiSaver first before we start talking about a higher rate.”
She said she believed member contributions needed to be separated out from employer contributions. “I think your employer [contribution] should be compulsory.”
She said the Australian system was employer paid. “In New Zealand this idea of the employee having to make their contribution before the employer comes to the party – I don’t love that – I think we need to separate those things. It shouldn’t be a choice, particularly for the lower income.”
She said lower earners were currently being forced to choose between paying a bill or putting food on the table today or saving for their retirement.
“I think that would go a long way toward it.”
“Yes we do need to raise it but we can’t necessarily without detailed thought, raise the out of pocket today expense for individuals.
“We need to make sure it is not just members paying, because that will just hurt the lower income bracket who really need those funds and for whom KiwiSaver is a really important vehicle for higher wellbeing in retirement.”
Craig Renney, economist at the Council of Trade Unions, said increasing the contribution rate was probably the right thing to do but he questioned the extent of which it should all fall on the employee.
“We would want to see a bit more cost sharing on that basis.”
Renney said right now employers paid 3 per cent and more generous employers paid a little more but that was entirely a function of the generosity of the employer.
“I think we want to see much more of a 50-50 split on that.”
He said more research was needed into the best way of doing that.
Renney said the more that was saved into KiwiSaver the more fund managers had to invest in businesses while more affluent pensioners in the future would also reduce the Crown’s core risk by reducing the amount paid out in accommodation supplements or other benefits.
He said New Zealand needed to be asking what the right contribution rate was to allow people to have a decent quality of life and one that doesn’t just heap costs onto the state.
“This is really important because more and more pensioners in the future will be renting and the welfare state was prefaced on pensioners owning their own home.”
National’s shadow finance spokesman Andrew Bayly said he would personally love to see the minimum increase but smaller businesses were already struggling with higher costs under this government.
“The only trouble I have got right now is with all that this Government has imposed on small business – with holiday pay, sick pay, minimum wage rises that have slugged small business with $2.8 billion worth of costs.
“The question is not whether we should, it is how and when. What we don’t want to do is see small businesses bearing unnecessary burdens.”
Bayly said one way to do it was instead of having a minimum wage increase that could be offset with KiwiSaver contributions with either part of all of it going into KiwiSaver.
“There are options of how you could do it in a way that benefits both the employer and the employee.”
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