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KiwiBaggers scrapping Savers

Friday, May 9th 2008, 10:12AM 9 Comments

by Philip Macalister

It's getting harder and harder to ignore KiwiSaver as the months roll on. Currently 600,000 people have signed up – two thirds more than predicted, when it started 10 months ago. That's pretty impressive. As often happens when something like this grows successfully, we see the opponents come out with so-called "research", bagging the policy. This week it was the turn of right-wing think tank, the Centre for Independent Studies in a paper called KiwiSaver or KiwiSucker - A Critical View. Frankly the paper and the quality of its analysis was poor and subjective. However, it does raise some valid points about the overall cost of the scheme – the Retirement Commissioner has raised these too – and the "equity" issue. That is, it favours those who sign up. Unfortunately, unless you move to compulsory savings, that is an issue which we have to live with. I would suggest that another example, or way of looking at this is with GST. While it is a universal tax, it benefits the rich. People on lower incomes have to spend all their income to get by and pay GST on all that money. People on higher incomes don't spend everything and save some of their money. On this "unconsumed" money, they don't pay GST. One of the strange comments in the report was that some advisers suggest it is logical that people borrow on their credit cards to invest in KiwiSaver. I find this hard to believe – maybe someone can enlighten me here? What is useful to watch is how KiwiSaver is changing the funds management industry. The latest numbers from FundSource, which we have on the site, show that money is starting to flow into these products and that other parts of the industry are seeing outflows. To me, KiwiSaver and PIE tax changes are having massive influences on the shape of the industry.
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Comments from our readers

On 9 May 2008 at 11:56 am chc said:
A scheme where my employer contributes, the govt contributes and I'm allowed to redirect half my contribution back to my mortgage? I'd be a kiwisucker NOT to sign up!!

My only bugbear with Kiwisaver is that the maturity date is "At NZ Superannuation qualifying age, currently 65". I would have preferred it to be flexible.

For the record, I signed my daughter up with Fisherfunds and taken a gamble with the Govt $1,000 kick-start contribution. My own fund, i've selected ABN Amro and selected investments from their investment list.

Happy Investing!
On 10 May 2008 at 8:57 am Murray Weatherston said:
Idle musings on a Saturday morning.

I can give a hypothetical instance where borrowing from your credit card to make a Kiwisaver contribution would make sense. Imagine you were self employed or not working and had joined Kiwisaver before 30 June 2008 with a minimum deposit. During year ended June 30 2009 you had not been in a position to make any regular contributions but you expected to have a better following year. So on 15 June 2009 you make a cash withdrawal from your credit card of $1042.86 and deposit it in your Kiwisaver - and qualify for the member tax credit (Government contribution) of $1042.86. Over the next year you pay $22per week off your card (to repay the balance over the year) instead of $20 per week into Kiwisaver. So I reckon its cost you $100 in year one to get $1042.86 from the Government (repayable with earnings when you turn 65).

Now before you say no-one would do that, how many people have signed their kids up for Kiwisaver on a similar basis?

Note I have based this on next fiscal year as the Government up to $20 per week matching contribution has fine print that says its $20 per week that you are a member of Kiwisaver - people who think they can join in June this year and slap $1042.86 before 30 June will get a surprise.

Re numbers signing up for Kiwisaver, I would love to see a breakdown of the joiners split into 3 broad categories - under 18, 18 to 60 and 60 to 65.

And a wild thought - what are the odds on Minister of Finance's Budget trick this year being making Kiwisaver compulsory on the basis that "600,000 Kiwis can't be wrong - so it has to be good for all the rest of you"?

No I haven't joined Kiwisaver (yet) - I am waiting to find out as a shareholder employee if I can start paying myself a minimal salary (say $30,000 p.a) through PAYE and pay Kiwisaver on that, but not have to contribute minimum 5% ( employee 4% + company 1% which also comes out of my pocket!) on the rest of my remuneration from the company. Any views anyone?
On 11 May 2008 at 4:59 pm Sharon T said:
But under 18's don't get the $1040.
On 12 May 2008 at 5:21 am Michael Littlewood said:

You need to do better than accuse Phil Rennie’s analysis as “poor and subjective”. Phil Rennie’s criticisms are all conventional economic analysis. You seemingly haven’t been following the arguments from those who suggest that KiwiSaver may not raise national saving by more than it costs.

Most money going into KiwiSaver is recycled from taxpayers and/or from KiwiSavers’ other savings. On a very preliminary analysis, less than 20% is “new” money. While that may surprise you, it is a similar finding to studies overseas that have looked at whether tax breaks for retirement saving actually increase national saving. The answer is only "possibly" but there is a respectable economic case to suggest that tax breaks actually lower national saving. If you are unfamiliar with those studies, you could save yourself some time by going to, choosing the “Search & options” tab on the front page and then choosing “Taxation” as your sort topic. There are ten research papers reviewed there that look at some evidence on this topic.

Even the Treasury agrees that KiwiSaver will cost more than households will save. Its analysis at the time of the 2007 Budget acknowledged that.

I am actually disappointed that more New Zealanders haven’t joined – this is a clear no-brainer – if you don’t join, your taxes will be higher but you won’t get your share.

On the credit card issue, let’s extend Murray Weatherston’s example. Let’s say I am an employee aged 60 on, say, $26,000 (just to keep the numbers simple and to illustrate the ‘maximum value’ point). Each year for five years until I am 65, I borrow the 4% (OK, let’s say I have the ‘headroom’ on my card to do that). The interest rate is 20% p.a. but each year, my KiwiSaver account has added to it the money I’ve borrowed ($1,040), the initial $1,000 kickstart, the annual “member tax credit” of $1,040 and the employer’s contribution that, over five years, will total an accumulated 14% of my pay.

By the end of five years, my credit card will stand at about $9,300. Meanwhile, a total of $15,000 odd will have gone into my KiwiSaver account (ignoring investment income). How good a deal is that?

An even better argument applies to borrowing on your mortgage (lower cost interest) while doing it on your student loan is a complete no-brainer.

And all this is in the face of respectable evidence that most New Zealanders were, before KiwiSaver, making quite rational decisions about their retirement saving needs. That’s the main point of Phil’s paper and is the main issue that you should deal with, whether or not he comes from a “right wing think tank”.
On 19 May 2008 at 3:22 pm Russell Hutchinson said:
Murray, the numbers you want for KiwiSaver adoption by age are here:

On 20 May 2008 at 12:05 pm Murray Weatherston said:
Thanks Russell
On 21 May 2008 at 10:16 am Edward Abel said:
The comments on GST as benefitting the rich were extraordinary. First it sounds like the 'rich' must be pariahs. Second, those 'rich' do pay tax on that income at up to 40% instead of 19.5%. Third, GST also 'taps' those in the black or cash economy who do not otherwise contribute. I could go on.........
On 21 June 2008 at 9:09 pm Jens Meder said:

Phil Rennie's "KiwiSaver or KiwiSucker" is just a piece of propaganda in my books, because he has evaded answering some critical questions submitted by me, so far.

Propaganda avoids debate.

And what credibility is there in Michael Littlewood's opinion backed by a certain Treasury study, that the relationship between saving, economic growth, and wealth creation is "dubious" ("not enough is known about it"), and "savings appear to be more a result, than a cause of economic growth", when they repeatedly have failed to provide a single theoretical or practical example of wealth creation and economic growth physically possible without the input of someone's savings, i.e.sacrificed hand-to-mouth consumption?

What value is there in the statement "KiwiSaver will cost more than households will save", when the incentive "costs" are nothing but wealth creation?

How can wealthy KiwiSaver retirees become a "potentially unsustainable burden", when being prosperous consumers not at their contemporary taxpayers' expense?

The same applies to the NZ Super Fund, which is pure wealth creation, at a higher rate than if the same money was returned to taxpayers as freely consumable tax rebates. (True or false, Mr Littlewood?)

Furthermore, if the NZSF was allocated to Personal Accounts, what argument could there ever be raised to making NZ Super means tested or surtaxed? Because the bigger your NZSF Personal account, the smaller the taxpayer's cost to finance your NZ Super.

Not like at present, where lower income workers have to contribute to many a prosperous retiree's NZ Super.

However - let us say this is all debatable.

Could Phil Rennie, Michael Littlewood, the Retirement Commissioner and perhaps the Business Round Table, or anyone else, please comment on the pros and cons of allocating the NZ Super Fund to Personal Accounts, which would finance their owners NZ Super from their 65th birthday until consumed, at which point our PAYGO would take over automatically, without any means testing or other complications?

On 3 August 2008 at 4:03 pm David W said:
I note that Jens Meder's request for response has not been posted as yet. The politics/economics of the Foundation are a relevant factor in assessing credibility and Philip Mac is right to point out that, in his view, the Foundation is a 'right wing think tank'. Whether he is accurate in this opinion should be for readers to judge. As an indication of where the Foundation might sit in the political/economic spectrum, see advert in Sunday Star Times 3rd August, Focus section C5. In the advert, various politicians are accused of adopting socialist policies, thus "leading us down the road to poverty". This would appear to support Phililp's summation of right-wing thinking. The website will provide further data to assist readers in evaluating the relevance of the Foundation's views. Assessing the validity of a stated point of view as contained in the research in question is assisted by providing a clear identity of the issuer of that point of view. As a journalist, Philip was doing no more than stating what he believed to be relevant to his readers.
Now what about the response to Jens Meder?
Commenting is closed



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