Dr Susan St John and Claire Dale
The NZ Institute have recently come out swinging the axe for KiwiSaver in a new report that suggests NZ’s rainy day fund could help solve economic pain of Covid-19. The language is somewhat sensationalized, for example, the author of the report is quoted saying:
“How many folk know that the Government still spends about $1 billion a year on KiwiSaver subsidies even though rigorous evaluations of the scheme’s performance found it to be a complete flop?“
Without providing any reference for those “rigorous evaluations of the scheme’s performance”, he then goes on to say:
“At the very least, KiwiSaver subsidies are a luxury we can’t afford right now and they should cease.”
The report’s author is an ex-Treasury econometrician who has been of part of a group of like-minded economists whose analysis of the available data between 2006-2010 form the basis of at least 6 Treasury papers and articles. The latest, published in the New Zealand Economic Papers in 2017, and also based on data pre 2010 is named “KiwiSaver and the accumulation of net wealth”,
Using the same limited and out-of-date data sources, two other commentators have also weighed in. In Rob Stock’s March article, Call to suspend 800 million KiwiSaver subsidies during COVID crisis, they claim:
“KiwiSaver was always “a solution for a problem which did not exist… Subsidising KiwiSaver was a silly idea at the best of times. It becomes even sillier at the worst of times….What we should be doing is allowing people with KiwiSaver to take out $2000 a month providing they give us a certificate that they have reduced income, or have been laid off because of coronavirus.”
This urge to ensure that the small retirement savings that low income people have accumulated in KiwiSaver are eroded pre-retirement is very strange considering the timing – in early 2020, just as sharemarkets were tanking. The long-term consequence on the distribution of income for future retirees is ignored. Particularly worrying is the situation of those in their late 50s and early 60s who have lost jobs and are the least likely to be re-employed or to be able to repair their balance sheets.
Of course, there will be cases where early access to KiwiSaver is justified and sensible, but in a well-functioning society such cases should be rare, even in a crisis. There are other options to drawing on KiwiSaver balances – including better income support in the welfare system, and increasing availability of low- and no-interest loans from not-for-profit microfinance providers. The Commission for Financial Capability’s sorted.org.nz provides online advice, and Financial Mentors offer free services throughout New Zealand.
The more substantive issue is the animosity to the use of ‘taxpayer’ money to subsidise saving and the implicit idea that KiwiSaver was a mistaken policy that has been proven ‘not to work’. The Treasury-based body of work is entirely founded on the idea that KiwiSaver should be judged on whether it has increased saving. This is too big an issue to cover here but suffice to say it overlooks for example that the form of saving is important too.
In terms of their own criterion for success, the Treasury-based studies show that about one third of KiwiSaver funds can be attributed to new saving. Disparagingly however, they frame it “that only about one third of KiwiSaver funds can be attributed to new saving.” Leaving aside criticisms of the methodology, this finding scarcely supports the conclusion that KiwiSaver has been “a complete flop”. Today, one third of the over $57 billion that has been accumulated in KiwiSaver accounts represents a significant gain in individuals’ retirement savings.
The authors could have more usefully said:
“It is amazing that as much as one third of KiwiSaver funds appears to be new saving. There were always going to be offsets especially as many old-fashioned employer-based schemes were either closed, redesigned or switched into KiwiSaver. KiwiSaver means that we have a much more inclusive policy that utilises the advantages of work-based saving while not excluding those not in paid work. Of course, in the early years of KiwiSaver, many people not in paid work joined with the kickstart and may not have made many personal contributions yet. That doesn’t mean in the next 40 years it ‘hasn’t worked’. We must be very modest about these studies: KiwiSaver only started mid-way through 2007, and any data based on only the very early years can’t realistically be used to judge a long-term savings scheme with a 40-year horizon.”