The KiwiSaver Bill may have admirable aims – but will it work? Its stated aim is to “encourage long-term savings habit and asset accumulation by individuals who are not currently saving enough, with the aim of increasing individuals’ wellbeing and financial independence, particularly in retirement”.
The challenge is that the Government has only included $1000 carrot to encourage long-term employee participation which, on its own, offers very little incentive. For starters, if people have little surplus income, locking away four to eight percent of their gross salary (while being taxed on that gross salary) until they’re 65 is quite commitment.
Although employees are automatically enrolled in the scheme, sticking with it is not compulsory. Existing employees can choose whether to opt in and new recruits can opt out within given timeframe.
There is some flexibility. After 12 months, employees can elect to take “contribution holiday” for up to five years or, if they stay in for three years, they can choose to remove all contributions for first home purchase. Failing that, they can just wait until they’re 65 to collect their $1000 – plus interest.
So, even if the $1000 encourages initial participation, it won’t necessarily spur long-term savings and asset accumulation. What’s needed is longer term encouragement – such as tax incentives, tax relief (or deferment) for investment earnings, or ‘compulsory’ matching of employer contributions to encourage ongoing input.
Tax deferment provides long-term incentive because employees are only taxed on income that they are actually receiving or utilising. Income put aside is only taxed when it is received.
It could be argued that tax incentives are not incentives for the average employee but if they could function as deterrent to withdrawing the savings prior to retirement, the savings are effectively locked in without compulsion.
What about employers? The Kiwisaver scheme will inevitably involve some compliance costs though the Government should be given credit for structuring deductions along the lines of PAYE which has the benefit of familiarity.
In tight labour market, employers may feel the push to make contributions to KiwiSaver to ensure that they are competitive. But they’ll need to consider whether their own qualifying superannuation scheme would be preferable to KiwiSaver – as long as these meet certain criteria, they exempt employers from automatic enrolment in KiwiSaver. Most employer schemes currently allow withdrawal on change of employment.
Given the increasing trend toward letting employees decide what proportion of their gross salary goes to benefits such as vehicles or superannuation, it’s hard to see why they’d now opt to surrender part of their salary without matching employer contribution or tax incentive.
Neither does there seem to be benefit to employers in making these contributions – other than need to be seen as good employer. qualifying superannuation scheme, on the other hand, gives an employer the ability to set vesting period (not exceeding five years) which functions as an incentive to employer retention. It also means employers don’t end up investing in employees who don’t stay long. All of which rather defeats the long-term rationale for KiwiSaver, but may be what is preferred by employers and employees.
In conclusion, it is difficult to see KiwiSaver achieving its objective of long-term savings and asset accumulation. Long-term saving requires significant incentive and the $1000 carrot is not enough.
Terri Witters is solicitor with commercial law firm Simpson Grierson.
