Cover Story
Saving Ourselves
by Joanne Black
The KiwiSaver scheme means that tens of thousands more New Zealanders will begin saving for retirement. But is it smart to join? And do we really have a savings crisis?
Retirement Commissioner Diana Crossan turns the tables when anyone asks her whether New Zealanders are saving enough for their retirement. “I tend to say, ‘Are you?’ and then they go, ‘gulp’, and if they can’t answer that then, yes, we’ve got a problem.”
Given that almost half of all New Zealanders retire with no income other than NZ Superannuation, it seems that gulping is an all-too-common response when individuals consider retirement savings.
However, there is evidence that people may be more astute about retirement provision than is commonly supposed.
University of Waikato economics professor John Gibson has co-authored reports with Treasury economist Grant Scobie which suggest that, contrary to popular opinion, there may not be widespread under-saving for retirement in New Zealand. Statistics show only 1% of New Zealanders aged over 65 are in severe hardship, with a further 3% in significant hardship.
Gibson says that although some people are making insufficient provision for retirement, he believes we do not have a retirement savings crisis and that most people do not need to make additional savings.
Part of the reason for this theory is that many people are on low incomes during their working lives so the transition to NZ Superannuation, to which there is universal entitlement, is not likely to be too difficult. Importantly, 85% of New Zealanders reach retirement owning their own home.
“If these people are struggling to make ends meet now, and are going to receive a fairly adequate transition, is it sensible for us to be badgering them about trying to put away savings, when, assuming the rules of the game stay the same, we would predict they are going to be as well off, or possibly better off, in retirement than they are now?” asks Gibson.
He says it is a similar situation for people who have wealth but are on low incomes, like some farmers, who will have no problem replacing their accustomed income once they retire.
“Those in the worst position are those with relatively high incomes and relatively low wealth because they are going to be trying to replace a lot in retirement and are less well prepared for it than people with higher wealth but lower incomes.”
It is precisely the desire to get more people on middle and higher incomes to start or increase their saving for retirement that has prompted the government to introduce the KiwiSaver scheme. From July 1, every person aged 18-65 who starts a job will be automatically enrolled in KiwiSaver, committing either 4% or 8% of their gross income to the scheme. An employee’s contributions attract no tax advantages and employers are not obliged to contribute. Anyone who does not want to join KiwiSaver has eight weeks to opt out. Other than in exceptional circumstances like serious illness, or when buying a first home, the money will not be paid out until the worker is 65.
Although economists and other commentators agree that the scheme may help some people and will be a useful discussion topic around the water cooler, some are far from convinced of its usefulness.
“The thing about KiwiSaver is that it sounds like a good idea if you say it quickly, and that is where most politicians would leave it,” says Michael Littlewood, who is co-director of the Retirement Policy and Research Centre at the University of Auckland’s Business School.
Littlewood is critical of the scheme being set up to solve a problem that has not been proven to exist. He is also critical of KiwiSaver’s provisions, including the vesting age that lasts till 65 and the restriction on payouts except in the case of serious illness.
“Given that it is the individual’s own money, why is there that restriction on taking the money out? Because people might spend it? I beg your pardon? This is the worker’s own money. What right does the government have to say to an individual, ‘No, you are not entitled, you just suffer the pain for the moment because you don’t have something serious enough to qualify for the early withdrawal’? This is really silly stuff, it’s making judgments as to what people should do with their own money.”
Nevertheless, because the government contributes $1000 to kickstart every KiwiSaver account, Little-wood says that every-one should join, contribute their 4% for the required 12 months to qualify for the $1000, and then take a payments holiday – possibly in perpetuity. He believes the government will have underestimated the number of people who will calculate that they are better off putting the extra money onto their mortgages, rather than being in KiwiSaver, and will stop making KiwiSaver contributions.
He suggests people should aim to get a part-time job on a low income after July 1 “so that 4% of that is not very much: in order to get the $1000, then you’re not forced to join with your other income”. He admits behaviour like that will probably force a change in the scheme’s rules, “because people in Wellington will be saying, ‘No, we didn’t intend that to happen.’ But who made the laws? …
“It is almost impossible to control human behaviour, so what you end up with is something that will generally work, and recognise that there are people who are going to take advantage of it.”
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