KiwiSaver

Budget 2011 includes changes that will see KiwiSaver funds continue to grow rapidly, but with a larger share of contributions coming from members and employers, and a lower share from the Government. This is expected to raise national savings, as government borrowing to fund private savings will be reduced.

KiwiSaver's contribution to national savings

The main purpose of KiwiSaver is to help people save for their retirement. As at December 2010 KiwiSaver balances totalled $7.9 billion. There are close to 1.7 million members, with around another 20,000 joining each month.

Just over 43% of all contributions to date have been funded by the Government, primarily through Member Tax Credit (MTC) and Kick-Start payments.  This figure does not include the Employer Superannuation Contribution Tax (ESCT) exemption which, if counted, would bring the Government's share closer to 50%. In 2010/11 alone the Government will contribute around $1.2 billion.

National savings is simply the sum of public and private savings. At present, KiwiSaver's contribution to national savings is mixed. It helps individuals to save for their retirement, and thus lifts private savings. But it lowers public savings. It means the Government is borrowing, mostly from foreigners, to contribute to private savings.

The total impact on national savings depends upon what portion of the private contributions is additional saving, versus redirected saving that would have occurred anyway. Given the high public contribution, it is not clear that national savings have benefited greatly.

Budget 2011 includes changes to KiwiSaver to improve national savings

The Government believes that a better approach is to have New Zealanders actually saving for their future. This approach entails retaining KiwiSaver, with voluntary participation, but shifting the balance more towards private contributions.

The initial Kick-Start payment of $1,000, which is a factor in many members joining the scheme, will remain unchanged.

Figure 1 - Projected contributions to KiwiSaver funds

Source:  The Treasury

The Budget includes the following measures:

• From the year ending 30 June 2012, the MTC is to be halved. The Government will now contribute 50 cents for each dollar contributed by individual KiwiSaver members, up to a maximum of $521.43 per year, equivalent to $10 per week.
• From 1 April 2012, all employer contributions to employees' KiwiSaver accounts will be subject to ESCT. ESCT will be applied at a rate equivalent to an employee's marginal tax rate. This change will therefore have more impact on higher income earners who pay higher tax rates.
• From 1 April 2013, the minimum employee contribution rate will rise from 2% to 3% for all members. The default contribution rate for new employees will also be 3% beginning at the same date.
• From 1 April 2013, compulsory employer contributions will rise from 2% to 3%.

The combined impact of these changes is fiscal savings to the Government of $2.6 billion over four years.

Changes made in Budget 2011 put the scheme on a sustainable footing. KiwiSaver remains an attractive savings option for New Zealanders. The Government will contribute close to $650 million to KiwiSaver accounts next year and $2.5 billion over the next four years.

KiwiSaver is building a large pool of local capital

KiwiSaver funds will continue to accumulate rapidly. Current projections are for total funds to rise from $7.9 billion currently, to around $25 billion by 2015, and almost $60 billion in 10 years' time.

Figure 2 - Projected cumulative KiwiSaver contributions

Source:  The Treasury

KiwiSaver funds are well placed to participate in the Mixed Ownership Model which the Government will look to introduce from next year. Where SOEs raise outside equity, New Zealand investors will be at the front of the queue to invest. KiwiSaver funds are likely to become substantial long-term holders of these investments.

The decisions to lift default contribution rates, to keep KiwiSaver membership voluntary and to remove the ESCT exemption, were all recommendations of the Savings Working Group.