KiwiSaver providing poor value for money, needs rewrite - Treasury

The RIS shows the $1000 kick-start payment is by far the less costly part of the two incentives that operate to encourage KiwiSaver membership.

The Treasury recommended a wider review of the KiwiSaver scheme than just axing the $1000 kick-start payment, arguing it represents poor value for money for the government and has vague aims, according to its regulatory impact statement on the post-budget law change needed to drop the incentive.

The change was passed into law during an extended parliamentary sitting late Saturday evening, following Thursday's budget announcement, amid opposition party claims the government was robbing future generations to pay for increased income support for families on benefits and low incomes. But the Treasury says dropping the kick-start will improve value for money from the scheme.

Reducing incentives would improve the scheme's value for money as wage and salary earners were likely to join anyway because of employer-subsidised schemes and didn't need the kick-start to join, said the Treasury's financial markets manager, James Beard.

The RIS shows the $1000 kick-start payment is by far the less costly part of the two incentives that operate to encourage KiwiSaver membership.

Removing it will cut the scheme's cost by $175 million in the 2015/16 fiscal year, falling to $107 million by 2018/19, whereas removing the member tax credit contribution, worth $521 a year a KiwiSaver member, would save the Crown $709 million in the first year, rising to $832 million four years later.

The Treasury's preferred option would have been a fundamental review of the KiwiSaver legislation's purpose to deal with the "imprecise definition of a target population" for the scheme, which is meant to be help Kiwis prepare for retirement. That option was out of scope for the advice the government sought from the Treasury on identifying measures to "improve KiwiSaver effectiveness ... and reduce the fiscal cost."

Axing the kick-start incentive effectively pays for the budget's $240 million-per-year initiatives to raise benefits for people with children and Working for Families tax credits for low and middle income working families. The government had pruned KiwiSaver subsidies already, delaying plans for automatic enrolment and halving the Crown's contributions to member accounts.

"The removal of the kick-start would reduce the attractiveness and enrolment rate into KiwiSaver by the self-employed," who didn't really fall into the target market, and "may marginally improve the target effectiveness," the Treasury report said. Wage earners were less attracted by the kick-start because of the employer contribution, "therefore removal or reduction of the kick-start would reduce fiscal costs without reducing savings rates, thus increasing value for money."

The latest changes to the savings scheme come after a seven-year, joint agency evaluation study into KiwiSaver, completed in February and published on Inland Revenue’s website the day before the budget.

The evaluation said there were concerns about the amount individuals are saving, with only one-third of KiwiSaver contributions representing new savings and the rest substituting other forms of savings and debt reduction.

"While the KiwiSaver scheme has promoted KiwiSaver membership, evidence reported subsequently suggests it has been less effective in promoting additional savings," the evaluation report said.

A Treasury working paper in 2011 found that just 7% of members fell into the target if it was defined as those who didn't expect to be able to meet their basic needs in retirement, or 22% if that definition was loosened to include those expecting insufficient income to live comfortably in retirement. Identifying the target "has always been problematic" as no explicit demographic was provided at the beginning of the evaluation, it said.

Introducing the KiwiSaver enabling legislation in 2006, then-finance minister Michael Cullen said the scheme was an important factor in providing a vehicle to top up the nation's universal pension to avoid a significant drop in income at retirement.

The affordability of New Zealand's superannuation has been a contentious issue, with Prime Minister John Key pledging to resign rather than raise the pension entitlement age.

The KiwiSaver evaluation report found for every $1 the government spent on administering the scheme and topping up members' accounts, it only got an extra 20c of additional savings by its target group in 2008/09, rising to 38c in 2012/13, as the level of incentives dropped.

"It is too soon to tell whether this slight improvement in value for money will be sustained over time," the evaluation report said. Things that would weigh on the cost-benefit analysis were whether membership growth would slow and, if the first-home deposit subsidy becomes a significant cost in the future.

The evaluation also found KiwiSaver hadn't been successful in improving the accumulation of net wealth, although that judgment had been made over a short timeframe.

"Based on the evidence collected across the first seven years of KiwiSaver, and in particular the first 3.5 years, the success of KiwiSaver in achieving these (goals) is marginal at best," the evaluation report said.

Other limitations of the evaluation were some data coincided with the global financial crisis, the first retirees drawing on the funds weren't representative of the target, and there was a reliance on self-reported data.

(BusinessDesk)

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