KiwiSaver is a voluntary savings scheme aimed at increasing the retirement wealth of a target population. 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 first tier, 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.
People under the age of 65 may join KiwiSaver. A main innovation of KiwiSaver is the automatic enrolment feature, which works on the behavioural economics notion that people suffer from inertia. All new employees are automatically enrolled, but they have the ability to opt-out within two to eight weeks of starting a new job. KiwiSaver members are required to make a minimum contribution of 2% of their gross salary/wages, and have the option of taking a contributions holiday after a year's membership. Employers must also make a matching contribution of at least 2%. In addition to salary/wage deductions, all KiwiSaver members can make voluntary contributions of any amount. There are also government incentives for joining and contributing. When the survey was conducted, the main incentives were a $1,000 kick-start contribution, a matching government contribution that was capped at $1,042.86 a year, and exemption from employer superannuation contributions tax (ESCT). Savings are generally locked-in until a member turns 65.
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 work is part of a wider, on-going programme of evaluation under the leadership of IRD. This is a broad programme covering the administration of the scheme, the scale and pattern of uptake, the contribution of different features of the scheme, communications, its impact on financial markets, and critically, the savings habits and asset accumulation of both members and non-members.
The currentanalysis focuses solely on the last of these elements and relates specifically to Objective D of the Joint Evaluation Strategy (Inland Revenue, Ministry of Economic Development et al 2006, Appendix D, p.ii ):
The impact KiwiSaver is having on the saving habits and asset accumulation of individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement.
The following are the specific short-term objectives stated in the Strategy:
- What is the scale and nature of participation and non-participation over time?
- Why have individuals opted-in/-out?
- Do the asset accumulation activities of KiwiSaver participants differ from those of non-participants?
- What would savers have done if KiwiSaver didn't exist?
The results of the analyses in this paper address these questions. In addition, the paper examines the effectiveness of the scheme. This aspect relates to scheme's ability to reach its target group, and having enrolled those in the target group, the extent to which the scheme has achieved the stated objective for that group.
The analysis undertaken here is based on the key statement of the high level intent of KiwiSaver in the KiwiSaver Act 2006:
The purpose of this Act is to encourage a long-term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement. The Act aims to increase individuals' well-being and financial independence, particularly in retirement, and to provide retirement benefits.
To that end, this Act enables the establishment of schemes (KiwiSaver schemes) to facilitate individuals' savings, principally through the workplace.
While the specific purpose is stated in the Act, it is possible that those framing the programme had other implicit objectives. These could include for example: increasing national saving rates through greater household saving, and thereby reducing New Zealand's external vulnerability; or enhancing economic growth by facilitating investment through the deepening of domestic capital markets. While recognising that there may well have been wider objectives, this paper focuses principally on the effectiveness of the scheme to deliver to the target population. We do however present an initial evaluation of the possible contribution to national saving.
It is appropriate to underscore both the strengths and limitations of the survey on which much of the analysis is based. A positive feature is that the data come from a statistically valid national sample from which population estimates can be derived. It represents the most comprehensive source of household data collected since the scheme began; furthermore the results apply to 2010, so are relatively recent. However, it is recognised that as the scheme was introduced only in July 2007 and the survey conducted in the first quarter of 2010, the data reflect a very early stage of the scheme. In other words, while these results provide a useful preliminary assessment, they do not necessarily reflect the outcomes that will prevail once the scheme is fully matured. In addition, the survey provides a “snap shot” at one point in time; as a consequence it is limited in the extent to which it can identify how the savings behaviour of particular individuals has evolved over time. The survey relies on respondents' estimates of their expected income in retirement and the amount of income they would need to cover their basic needs or be comfortable.
It should be noted that the analysis in this paper relates to the KiwiSaver policy settings that were in place when the survey was conducted (January-March 2010). The analysis was undertaken as part of the ongoing KiwiSaver evaluation programme and does not address the specific changes that were announced in the 2011 Budget. Further analysis may examine the impact of these changes. These include an increase in the minimum employee contribution from 2% to 3%, an increase in the compulsory contribution from 2% to 3%, a reduction in the member tax credit to a maximum of $521 and requiring $2 contribution from the member for each $1 of tax credit, and finally the removal of the exemption for the Employer Superannuation Contribution Tax (ESCT).
The paper proceeds as follows. The next section outlines the survey from which the data for this analysis has been drawn. It is followed by a brief discussion of the methodology. The main body of the results are in Section 4. The analyses examine factors associated with the likelihood of being a member, of undertaking financial planning, of having sufficient income in retirement, and importantly the extent that contributions made to KiwiSaver were “new” savings rather than funds diverted from other savings vehicles. In addition, we examine the effectiveness of the scheme in reaching the target group as specified in the Act. Finally we present some initial estimates of the possible impact of the KiwiSaver scheme on the overall level of national savings, reflecting both changes at the household level as well as the fiscal costs of the scheme. Conclusions are drawn together in Section 5.
- The KiwiSaver Act 2006 explains the purpose of KiwiSaver is to “encourage a long-term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement.” This suggests there may be a “target population” for which KiwiSaver is intended to help. This is further addressed in Section 4.8.
- See Inland Revenue et al (2006).
- See Capital Market Development Taskforce (2009) and Savings Working Group (2011).
- This survey was undertaken by Colmar Brunton on behalf of IRD, as part of the KiwiSaver Evaluation Programme.
- For more details, see Colmar Brunton (2010) and Inland Revenue (2010b).