Automatically increasing KiwiSaver member contributions each year and tripling the annual government KiwiSaver incentive are among a raft of recommendations from the Retirement Commissioner. In his 2019 review of retirement income policies, the Retirement Commissioner has also made a U-turn on earlier talk of raising the age of superannuation.
The commissioner says increasing the superannuation age would do more harm than good, and believes “raising the age of eligibility in the next two to three decades could significantly risk heightening equity issues for those groups of New Zealanders whose life expectancy means they’re not able to enjoy the benefits NZS [New Zealand Superannuation] delivers for comparable periods for New Zealanders generally”. Specifically, the commissioner points to Maori and Pacific populations, which have lower life expectancies than the rest of New Zealand.
The commissioner is recommending two significant changes around KiwiSaver, which could have a huge impact on investors.
The first is the concept of introducing a Small Steps default setting for KiwiSaver. Under this plan, new KiwiSaver members would see their contributions increase by 0.5% each year, starting at the current lowest contribution rate, 3%, and rising until they reach 10%. The incremental changes would be small enough not to cause “significant financial discomfort”, but grow to build a more sizeable retirement nest egg.
The Small Steps concept is mirrored on international Save More Tomorrow programs that focus on annual savings increases linked to workers’ salary increases.
The commissioner proposes that current KiwiSaver members would have the option to enrol in the Small Steps program. All KiwiSaver members would also have the option to leave once they’ve reached a contribution level they’re comfortable with.
As an example, for an employee earning $50,000 a year, their contributions would increase by $250 a year under the proposal, equivalent to around $10 per fortnight. While this doesn’t sound significant in terms of increased savings, in the long term savers would see a benefit.
Assuming the KiwiSaver member maintained their contribution rate of 3% until they reach the age of 70, they would have a baseline amount of $194,000, in today’s dollars, according to the commissioner’s report. Under the proposed Small Steps program, they’d have almost double that – $369,000 (in today’s dollars).
Importantly, this government recommendation is only based on incremental increases to employee contribution rates, not employer contributions.
Commissioner proposes increase to KiwiSaver government incentive
The commissioner believes the current government KiwiSaver contribution of a maximum of $521.43 per year is too low, and is proposing more than tripling the maximum incentive to $2000.
Currently, the government contributes 50 cents for every dollar a KiwiSaver member contributes, up to a maximum of $521.43 per year, based on the automatic deductions from the employee’s salary.
The commissioner recommends raising the government contribution to $2 for every $1 a KiwiSaver member voluntarily contributes to their KiwiSaver account, up to a maximum of $2000. However, to keep the costs down, the incentive would only run for 12 years, a dramatic cut from the current 47-year period.
“After that, the member would have become used to contributing, and would likely continue, even though the government incentive has ended,” the report states.
Putting a larger government incentive into KiwiSaver earlier on, would also help KiwiSaver members make the most of compounding returns, the commissioner says.
As an example, the commissioner says, under the current system of $521.43 per year for 47 years, a KiwiSaver member would end up with a final balance of $78,000. Under the new government incentive proposal of $2000 over 12 years, they would end up with $96,000, according to the commissioner’s calculations.
A key aim of the commissioner’s proposal is to encourage KiwiSaver members – regardless of their employment type – to make additional voluntary contributions to their fund.
The commissioner also believes this would encourage New Zealanders who are self-employed or contracting to sign up to KiwiSaver and to make regular contributions. Being in full-time and part-time employment – ie, not being in self-employment, contracting, or working in own business – are the greatest indicators of whether someone is contributing to KiwiSaver. Employment type is a stronger indicator than even age, gender or ethnicity, according to the report.
Based on Commission for Financial Capability surveys, 25% of KiwiSaver members have not received the government contribution in the past month and a further 27% do not know whether they received it – either because they haven’t checked their account, or they don’t know about the incentive.
KiwiSaver: You’ve got to be in it to win it
The Retirement Commissioner’s recommendations are far from a done deal. The government has to agree to them and model the changes, before anything can be rolled out.
But that doesn’t take away from the fact that you can’t get any benefit from KiwiSaver if you aren’t a member to begin with. It doesn’t cost you anything to join KiwiSaver and you need to be enrolled in a scheme to reap any rewards.
The right KiwiSaver scheme and fund type for you will vary, depending on how soon you expect to withdraw your savings, as well as your appetite for risk, so make sure you do your homework.
To help you out, Canstar researches and rates KiwiSaver providers and funds, so you can get a good handle of what is happening in the KiwiSaver market. While we can’t advise on exactly which option to go with – you need to talk to a financial adviser for that – we can help you compare your options and support your research.
As with our other comparison tools, our KiwiSaver comparisons are free to use, any time, just follow the link, below.