Many Happy Future Returns, KiwiSaver
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By David Boyle, CFFC
On the 10th birthday of KiwiSaver, David Boyle outlines changes to the savings scheme that will help Kiwis get rich faster.
The Commission for Financial Capability (CFFC) spent a year talking to New Zealanders about the future. It carried out surveys, commissioned reports from experts, encouraged public submissions and interviewed people up and down the country.
This work has fed into its three-yearly Review of Retirement Income Policies. This review has recommended to the government some policy changes around areas including NZ Super, our ageing workforce and how we can pay for retirees in the future.
Here, the commission’s Group Manager, Education and Retirement Villages, David Boyle, explains some of the thinking behind seven recommendations for KiwiSaver.
Can you remember what you got for your tenth birthday? I remember mine like it was yesterday. Turning 10 was pretty special. I was going back to Allenton School as a senior – top of the pile, so to speak – and getting into double digits felt kind of significant.
Given my birthday was in early January, I was still getting over the excitement of receiving a Dragster bike for Christmas and really didn’t think it could get any better. But it did. I woke early on my birthday to the sounds of slot cars zooming around a massive track. Life was great!
And now KiwiSaver is celebrating its first decade, too. At the commission, we’ve come up with some special gifts for KiwiSaver’s tenth birthday.
It’s not quite an adolescent, and we’re not actually the parents (in this case, more caring relations), but we think it’s a milestone. It’s also a great chance to give KiwiSaver members some gifts that will provide confidence and support to ensure the scheme reaches those tricky teenage years in style and confidence.
But before we look forward, it helps to look back to where it all started.
Where it started
KiwiSaver was put into law by the government of the day back in July 2007 to help all New Zealanders save for their retirement, mainly via the workplace.
Since then, 23 providers have set up schemes, more than 2.65 million New Zealanders have joined, and more than $35 billion of funds have been invested. Along the way, there have been some changes made to the original benefits of the scheme, but in lots of ways KiwiSaver has been a great success.
So, onto those gifts. The commission ran industry and government-agency forums during 2016 and talked with a wide range of groups. This helped inform the KiwiSaver recommendations we made to the government in our three-yearly Review of Retirement Income Policies. Most of these recommendations are yet to be accepted by the government.
Contributions may go up
First on our list, we recommended increasing employer and employee contributions from the minimum 3 per cent to 4 per cent each. Our thinking was that saving 6 per cent (3 per cent from both contributors) wasn’t going to get most people to a comfortable retirement. In Australia, for example, it is compulsory for employers to pay 9.5 per cent of an employee’s salary into a super fund – and that’s going up to 12 per cent.
Our idea was to introduce the increase gradually, rising by 0.25 per cent a year from 2018, reaching 4 per cent by 2021. For someone earning $40,000, it would mean they’d have to find an extra $2 a week. But thanks to the beauty of saving a little over a long time, this change alone would see a 20-year-old reach the age of 65 with an extra $83,000.
We’ve also recommended a change that would allow people to tick a box to increase their contribution rate automatically by 0.25 per cent, 0.5 per cent or 1 per cent a year.
Each member would decide the maximum rate they wanted to reach, and then their contributions would go up each year until they hit their target, without their needing to give it another thought.
More rates choices
While we’re talking about contribution rates, members can currently opt to contribute 3 per cent, 4 per cent or 8 per cent. We think 6 per cent and 10 per cent should be thrown into the mix to provide more flexibility. For many people, the gap between 4 per cent and 8 per cent is too large a jump, and for some 8 per cent isn’t enough.
Raising the age of eligibility
Elsewhere we’ve recommended that the age of eligibility for NZ Super should rise from 65 to 67. Currently, KiwiSaver is linked to the age of Super eligibility – you access both at the same age. We believe the two should be separated, and that there should be a discussion about the appropriate age at which people can receive their KiwiSaver funds.
This would give Kiwis greater confidence that accessing their KiwiSaver savings wouldn’t be affected by government decisions around NZ Super.
A no-brainer for us is allowing people over the age of 65 to join KiwiSaver, although they wouldn’t be eligible for member tax credits. As people work later in life or return to New Zealand from overseas with a lump sum to invest, it makes sense to give them access to lower-cost managed funds.
Employers wouldn’t have to contribute but, if they wished to, this would give them the opportunity to treat all their staff the same, no matter their age.
We also think an obvious change is to rename a ‘contributions holiday’ to a ‘savings suspension’. We think ‘contributions holiday’ is a terrible name because it gives the impression it’s a good thing. The reality is, saving too little for retirement could mean that people can’t do the things they’d hoped when they stop work, including having a real holiday.
We’ve also suggested reducing the maximum time you can suspend your payments from five years to one year.
That means contributions would automatically resume after a year, unless members renewed their opt-out. So, at least once a year, they would need to reflect on whether their financial position had changed, instead of ‘setting and forgetting’ about it, without considering the consequences a five-year break could have on their future.
Fees spelled out
Finally, to improve transparency, we recommended that KiwiSaver providers should disclose the exact cost of fees on annual statements in dollars, not percentages.
So, it’s not quite as exciting as a slot-car set, but these gifts will continue to keep giving, if accepted by the government. They’ll also help KiwiSaver members get a better return when they decide to hang up their work boots for the last time.