Executive Summary

KiwiSaver is a voluntary savings scheme aimed at increasing the retirement wealth of a target population.[1] Its introduction in 2007 was prompted by a view that household saving in general appeared to be low and declining, and that there may be some who would reach retirement with an accumulation insufficient to allow them to sustain their pre-retirement standard of living. As the population ages, a significantly greater number of people will become eligible for the universal state pension (New Zealand Superannuation, hereafter NZS), resulting in increased pressure on government finances. Given the costs to the Crown of the KiwiSaver scheme, it is appropriate at this time to assess the contribution it is making to future retirement incomes.

KiwiSaver has proved very attractive to savers, with membership still increasing at a rate of about 20,000 a month and total savings of nearly $8 billion now in individuals' accounts (Inland Revenue 2010a). Over time this should help to deliver significant levels of individual retirement savings and hence contribute towards the scheme's stated objective of enabling some private individuals to save more for their retirement than they might otherwise have done.

However, the strong growth in membership and the private benefit of growing accumulations of retirement savings have come at significant public cost. Through direct subsidies and forgone tax the Government now contributes over a billion dollars per year to individual KiwiSaver accounts, estimated at about 40% of total contributions in 2009/10 (Inland Revenue 2010a). Especially now that this contribution is being funded through increases in public debt, it is both prudent and opportune to examine the impact of the scheme.

A critical element shaping the success of KiwiSaver is the extent to which individuals participate in the scheme, given its voluntary nature; and, having chosen to participate, the extent to which their attitudes and practices toward savings have been modified by their participation, particularly whether they save more or whether they substitute saving through KiwiSaver for other forms of saving. This paper presents the results of an initial evaluation to assess individuals' saving behaviour following the introduction of the KiwiSaver scheme.

This analysis of the impact of the scheme is based on a national survey of 825 individuals conducted by personal interviews between January and March 2010.[2] Clearly there are limitations to the data on which this study is based. In the first instance the scheme had been in place for less than three years at the time of the survey. Changes in saving behaviour may occur over much longer periods and so we cannot be sure we have captured the full effect of the scheme at this early stage. Critical elements of the survey results on which we have drawn are based on asking for expected levels of income and expenditure in retirement. While the survey gives valid estimates for the population, there will be wide variation across individuals. As with any survey, there is a risk that some respondents may have answered questions about what they would have done in the absence of the scheme in a way they felt showed them in a “favourable” light with the interviewer. Finally, it should be noted that while the models used in this analysis can reveal significant associations, they do not unequivocally establish the direction of causation. For example, does membership lead to greater financial planning, or does having done financial planning lead to joining KiwiSaver?

The principal findings of the analysis can be summarised as follows.

KiwiSaver membership

• Older individuals and those who expect NZS to be their main source of retirement income are more likely to be KiwiSaver members.
• Being a KiwiSaver member is associated with an increased likelihood of having done some financial planning for retirement, while those in poorer health or expecting NZS to be their main income are less likely to have undertaken retirement planning.
• Those expecting NZS to be a major source of income were more likely to have opted in, while older individuals and those with higher incomes were less likely to have opted out.

Funding KiwiSaver contributions (additionality)

• KiwiSaver members report that on average they would have applied 64% of the money they are now contributing to KiwiSaver to other forms of saving and or debt reduction had they not joined KiwiSaver. In other words, about one third of their private contributions represents additional savings over and above those that would have been made anyway.
• Those owning their own home or having higher levels of education would have saved more of the contributions to KiwiSaver in the absence of the scheme. In contrast women or those in part time employment would have tended to spend more of their contributions to KiwiSaver in the absence of the scheme.
• Females, those with more children, those expecting NZS to be their main income in retirement and those in poor health were all less likely to have saved specifically for retirement had they not joined KiwiSaver.

Retirement income expectations

• Overall 78% of respondents expected their retirement incomes would be adequate to meet their basic needs. 50% of respondents expected their incomes would be adequate to live comfortably in retirement.
• Those reporting less than average health were likely to have a significantly larger shortfall in expected retirement income relative to that needed for living comfortably.
• About 80% of KiwiSaver members did not have an expected income shortfall in retirement (relative to meeting their basic needs).
• While this finding could be interpreted as a measure of success of the scheme, there is no evidence that membership influenced the size of the expected shortfall in retirement income. Indeed, among those not in the scheme, 76% also had no expected shortfall in retirement income. Critically, after controlling for other factors which may affect the size of the shortfall with regression analysis, no statistically significant difference was found between KiwiSaver members and non-members.

Reaching the target population

• The KiwiSaver scheme appears to reach about one third of the target population, defined in the Act as those who would not otherwise have saved enough to maintain their standard of living in retirement.
• Leakage, that is, the proportion of KiwiSaver members considered to fall outside the target population, however, is estimated to be as high as 93%.
• With ongoing costs of the scheme for salary and wage earners projected to total around $823 million for the 2011/12 year, the costs for each member of the target population may exceed $13,000 per year.

Impact on national savings

• While there may be some short-run increase in national saving, it appears that given the extent of public contributions through tax concessions and direct grants, the net contribution to overall saving would be marginal at best in the longer term, and may in fact reduce national saving.

The results in this study represent an initial assessment of some aspects of the KiwiSaver scheme. It is important to stress that this paper is based on data collected between January and March 2010, before the various changes to the scheme that were announced in Budget 2011 had taken effect.

Further evaluation must await additional data garnered when the scheme has greater maturity. Given the importance of KiwiSaver as an element of New Zealand’s retirement income saving policies, further evaluation will be highly desirable. In conjunction with IRD, the Treasury has developed a set of questions on KiwiSaver to be included in the last wave of a major longitudinal panel study conducted by Statistics New Zealand. It is expected the results of that survey will be available for analysis in the first half of 2012, and the findings should shed further light on the behavioural changes induced by KiwiSaver.