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National just doesn't get saving

Friday, May 13th 2011, 9:42AM 6 Comments

by Philip Macalister

National governments seem to have a genetic disorder when it comes to savings schemes. They just don’t seem to get them and always make changes – often to the public’s detriment. Schemes like KiwiSaver need certainty to continue to have investor confidence. KiwiSaver has been one of the most successful products ever launched in New Zealand. It has 1.7 million customers already and has been embraced by citizens. It’s been embraced because of its simplicity, as well as for the $1,000 kick start. To a lesser degree the $20 a week “tax credit” has also been a selling point. People will lose confidence in the scheme if this, or any other government, continues to meddle with it. As member balances grow the reaction to meddling will become stronger. I take a view the government has to think about investing and retirement savings over the long term and has to take account of the economic cycles. We know cycles happen and this should have been thought about at the design stages. What happens when the economy is bottoming out? With the NZ Superannuation Fund National has acted a little like a typical mum and dad investor and done all the wrong things. The best time to be investing in the markets is when they are at the bottom yet they stopped contributing the NZ Super Fund. In the past year it made returns of more than 20%. Now we are told that KiwiSaver in its current format is unaffordable. That isn’t something which has been agreed on. Again the government needs to think long term. KiwiSaver is about building up a pool of capital for the economy. Key’s arguments about the member tax credit not being real savings is incorrect. All this talk of cutting the member tax credit isn’t going to make a huge different to the government’s finances. Currently it costs around $800 million a year. If the MTC is cut by half that only equals about one week of what the government says it has to borrow. The stark reality is that there are far less productive things the government funds which should be cut ahead of KiwiSaver. Overall it’s a ballsy move from the government. In an election year it is taking away money from 1.7 million people and putting more costs onto businesses. Whether it is right or not; it quite possibly will become a circuit breaker for the election.
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Comments from our readers

On 13 May 2011 at 11:05 am Willy said:
I couldn't agree more. We are always considered the poorer cousins to Australia. This incredibly successful savings scheme is designed to put money in our pockets at retirement when we need it and now the government want to cut it back. Having worked in Australia with their Superannuation Scheme, it takes a while to really see the benefits, but Aussies are now retiring with substancial savings and it is allowing the government to payout less on Pension payments as a result. Talk about short sighted, I actually thought John Key was innovative now I have my doubts.
On 13 May 2011 at 11:07 am Nick said:
You are right that the public lose confidence when their savings schemes are tinkered with every 3 years, and you are right that governments need to take a long term view. But can you blame them? That is the nature of the beast with a 3 year electoral cycle.

Perhaps the solution is to depoliticise savings so that rather than needing a simple majority to make changes, the government of the day needs a 75% majority.
On 13 May 2011 at 11:45 am Andy said:
I may be wrong, but I was led to believe that it was only the $20 per week "tax credit" that was to be reduced (not removed). If it wasn't for someone physically setting up a savings account and putting money in it for them, I suspect a large portion of New Zealanders would not have a savings account right now. 1.7 million customers is a lot, and a big statistic. A more relevant statistic would be the number of people actually contributing to the scheme actively. Of that 1.7m, many may be self employed without the tax breaks and unemployed minors who are only taking advantage of the $1000 kick start. We need to create a sustainable savings environment rather than doing doing the savings for people who can't be bothered or can't afford. Let's be real - 4% is not a lot...
On 13 May 2011 at 5:55 pm traveller said:
Kiwisaver was set up at a time when it could supported by a big and unrealistic tax incentive from the Labour-led government in the hope it would get them reelected. Long term that was likely to be unsustainable and has since proved unrealistic as we have experienced a major change in the investment scene over the last three years. As well, the government has had to bail out poorly informed investors who put money into badly run finance companies, property syndicates and now an insurance company.Not surpising the government is strapped for cash.
Would Kiwisaver have been just as popular if the initial incentives had been half? Probably yes, after all it was something for nothing and we all like that don't we?
On 16 May 2011 at 11:34 am Independent Observer said:
History has demonstrated repeatedly that jurisdictions who have introduced incentivized superannuation schemes tend to enjoy robust capital markets and financially healthier citizens as a result.

Today’s costs of motivating constituents to provide for their own retirement are vastly less than the longer term costs of doing nothing.

The unfortunate consequence of today’s politics is that 3 years is considered a long time – with little foresight beyond this.
On 19 May 2011 at 11:03 pm John said:
Anyone on an income over about $60,000 has effectively lost any Kiwisaver incentive. The $512 tax credit is offset by the new tax on the employers contribution.

For example if your income is $71,000 - the employers contribution
of $2130 is taxed at 33% i.e. $702 dollars taken. The tax credit is only $512 so the net position is a tax increase of $190 on top of a reduction of the member tax credit by another $512. Its "hidden" because it is paid by the employer - but that is just a slate of hand.
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