KiwiSaver guru Mary Holm believes some small steps could make KiwiSaver work even better – and be more affordable for more Kiwis.
I like most of the proposed changes to KiwiSaver suggested in a bill introduced to Parliament in July. But these changes won’t do much to help lower-income New Zealanders into the scheme.
The changes would:
· Let employees contribute 6 or 10 per cent of their pay – along with the current 3, 4, or 8 per cent.
· Reduce the maximum contributions holiday from five years to one year; and rename it a ‘savings suspension’.
· Remove the current five-year lock-in time for people who join KiwiSaver aged between 60 and 65.
The Commission for Financial Capability (CFFC) suggested these changes in a 2016 report.
But one suggestion wasn’t picked up – letting people set an accelerating contribution rate, which increases each year by a tiny amount up to a capped maximum rate.
The government still might introduce that option and if they do, I hope they add a feature I’d love to see – a 1 per cent starting point. Here’s my idea:
‘Small Steps’ KiwiSaver
One big reason people give for not joining KiwiSaver, or stopping their contributions, is affordability.
Employees start on a minimum 3 per cent contribution rate now, which sounds like a lot.
Under my idea, people could start out contributing just 1 per cent of their pay. Then, six months later, that would automatically increase to 1.25 per cent, and six months after that to 1.5 per cent, and so on.
Four years into their membership, they’d be contributing 3 per cent.
At that stage, they could choose whether to keep upping the percentage every six months, or stop increasing it whenever they wanted to.
For someone working a 40-hour week on the minimum wage of NZ$16.50 an hour, 1 per cent would be NZ$6.60 a week. It would be hard for many people to argue that was a hardship.
Even after three years, NZ$19.80 a week is not going to loom horribly large on most minimum-wage budgets.
Behavioural finance research shows gradual increases in savings usually work well for people, who barely notice them.
We could, in fact, also let people now contributing at higher levels sign up for similar small increases every six months. Everyone wins.
Beneficiaries on board
What about beneficiaries? Many face tough times in their later years. A KiwiSaver balance would be a great help as they reach 65.
But, for some, even 1 per cent of their income might be hard to give up. Here’s my solution:
The government gives all beneficiaries a special 1 per cent benefit increase at the same time it auto-enrols them into KiwiSaver – so the 1 per cent goes into their new KiwiSaver account.
Then, six months later, we raise benefits again, so beneficiaries can put 1.25 per cent into the scheme without reducing their take-home income. And so on, up to 3 per cent.
That would cost taxpayer dollars, of course. But many in the industry are calling for extra incentives for everyone in KiwiSaver, such as tax breaks on contributions or returns.
Instead of tax breaks, let’s put that money into getting people on the lowest incomes into the scheme.
Some people point out that New Zealand Super is higher than most benefits, so beneficiaries might prefer higher payments now over extra retirement income.
That’s a fair point. Many beneficiaries struggle to put good food on the table, and the last thing on their mind is saving for retirement. But let’s look at the longer term.
Most people don’t stay on a benefit their whole life. When they get back into the work force, if they already have a stake in KiwiSaver, they’re more likely to continue with it.
In any case, surely everyone gains from being able to look towards a more positive future.
Breaks from contributing
Instead of letting people put their contributions on hold, they could move to ‘Small Steps’.
Switching from contributing 3 to 1 per cent would give many the relief they need – and keep them in the ‘contributions habit’. And this way, they would still gradually build up their contributions again.
People who are in serious financial hardship could still apply to withdraw some of their KiwiSaver money, as they can now.
The scheme providers could also give them permission to stop all contributions for a period, but this would apply to a much smaller number.
The latest figures show just 210 people have stopped contributing because of financial hardship.
The trouble with calling a break a ‘contributions holiday’, is that it sounds too attractive. That’s why there’s a proposal to change the name to ‘savings suspension’.
If we went with my ‘Small Steps’ idea, we could call it a ‘savings reduction’.
But I think calling the government’s free annual bonus of NZ$521 a ‘member tax credit’ is a worse problem.
I quite often hear people saying they haven’t joined KiwiSaver because they’re not working, so they pay no tax. They think that means they couldn’t use a tax credit.
But this free NZ$521 has nothing to do with tax. It is a government gift, which is of equal value to both income earners and non-income earners.
If we just changed the name to government bonus, or just KiwiSaver bonus, everyone would know what it is.
Member tax credit: This is the amount the government puts in to your KiwiSaver account, while you contribute and provided you’re over 18. The government matches every dollar that you contribute with 50 cents, up to a maximum of NZ$521 every year. To receive the full amount, you need to put in NZ$1,043 each year.
Contributions: If you’re employed, you can contribute 3, 4, or 8 per cent of your pay to KiwiSaver. Your employer will also contribute 3 per cent – but can contribute more if they want to.
First published 20 August, 2018.
Story by Mary Holm.
Mary Holm writes in the Weekend Herald, presents a financial segment on Radio New Zealand, and is a best-selling author. She's a director of the Financial Markets Authority and Financial Services Complaints Ltd.
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