Kiwisaver or KiwiSucker?

You’d have to be an idiot not to join KiwiSaver, according to most financial advisors. In effect the government is paying you thousands of dollars to join, and soon employers will have to contribute as well.

But is it too good to be true? Everything in life has a cost, even if it’s not immediately obvious. KiwiSaver may be lucrative for many people but that doesn’t mean it’s good for New Zealand as a whole.

The total cost of KiwiSaver’s subsidies will soon reach $2 billion a year, and that is probably a conservative figure given the scheme’s popularity. This is a huge bill for the taxpayer to carry, more than the government spends on the entire defence force.

So why do we need it? According to the government, New Zealanders are such poor savers that we can no longer be trusted to make our own financial decisions. This reflects a fashionable view that we are a nation of irresponsible spendthrifts heading for poverty in old-age unless we change our ways.

Perhaps surprisingly though, the facts tell a different story.

Most retired people seem to have managed their finances reasonably well. Older New Zealanders have a higher average standard of living than any other group in society, so we can hardly say the system has failed them.

For baby-boomers approaching retirement the picture is also reasonably positive. According to research from the Retirement Commission, around 80% of couples aged 45 to 65 are saving enough to at least maintain their current lifestyle. This is good news, given that most people need less money in retirement because they usually own their house, have paid off debt, and no longer have dependent children.

Overall, New Zealand’s national rate of savings is positive and has been for the last 15 years. Measured household saving may have been in decline, but this is only a very narrow measure. The overall wealth of New Zealanders (including wealth held in trusts, farms and businesses) has greatly increased.

For young people it is hard to predict too far into the future, but KiwiSaver may represent a massive overload. With KiwiSaver and New Zealand Super combined, it is now possible for a young person on the average wage to retire on a higher income than they enjoy during their working life.

This is a crazy distortion, given that most people need money more when they are younger to raise a family and pay off a mortgage. It’s just one example of the unexpected side-effects that occur when governments try and influence behaviour.

Of course, none of this is an excuse for complacency when it comes to saving. Undoubtedly there is a small number of people who aren’t managing their money well, and are in for a rude shock when they retire. But we need to recognise that the broad majority of people aren’t stupid, and are quite capable of looking after themselves.

All of this makes KiwiSaver a solution in search of a problem; the proverbial sledgehammer to crack a nut.

None of this would matter if KiwiSaver was a harmless policy, but unfortunately it’s not.

For many New Zealanders, it is now more rewarding to invest in KiwiSaver than it is to save in other ways, like paying off debt or a mortgage, buying shares, or investing in a business. In fact, some financial advisors say it is now logical for people to borrow money on a credit card if necessary to take part in KiwiSaver.

This kind of distortion is not good for New Zealand’s economy, because rational decisions are being warped and money is pushed into less productive investments.

And, of course, the huge cost of KiwiSaver is significant. Most of the benefits will flow to the wealthy, who can afford to save and already were. It means the government will have billions of dollars less to spend on more pressing problems, which is why lobby groups as disparate as the Child Poverty Action Group and the Business Roundtable are strong critics of KiwiSaver.

It’s worth noting that the original version of KiwiSaver was a clever and popular policy. There is nothing wrong with helping people to save, as long as they have flexibility to decide what is best for themselves. The problems have come with the expensive ‘turbo-charged’ subsidies introduced under secrecy last year.

Despite all this, it remains to be seen whether any politicians are brave enough to challenge the sacred cow that KiwiSaver has become. More importantly, would voters be willing to look beyond self-interest to do what is best for New Zealand as a whole?

Phil Rennie is a policy analyst with the Centre for Independent Studies. The full report on KiwiSaver is available online at www.cis.org.nz