Govt told to keep quiet on KiwiSaver kickstarter axing to avoid sign-up spike

Thursday 9th July 2015

The Treasury warned the New Zealand government not to announce the axing of the $1,000 kick-start KiwiSaver payment prior to Budget 2015 to avoid a spike of enrolments to the self-funding retirement and savings scheme.

The National led government scrapped the $1,000 incentive it paid to those who joined KiwiSaver in the May 21 Budget in a bid to boost value for money in the scheme. A report for Finance Minister Bill English in March advised the cancellation could be implemented by Inland Revenue Department on Budget day and warned against advance public warning of the plan.

"If the policy change were to be announced in advance of the effective date (say on 1 July 2015) we would expect large numbers of enrolments in that intervening period," the report said. "This would reduce the fiscal savings."

"Provided that the kick-start can be removed with immediate effect from the passing of legislation on Budget night, there would be no spike in enrolments to KiwiSaver," the report said.

When introducing the opt-out superannuation savings scheme's legislation in 2006, then Finance Minister Michael Cullen said the scheme was an important factor in providing a vehicle to top up the nation's universal pension to avoid a significant drop in income at retirement.

The affordability of New Zealand's superannuation has been a contentious issue, with Prime Minister John Key pledging to resign rather than raise the pension entitlement age.

The March Treasury report forecasts the government would save $17 million for the remainder of the 2014/15 fiscal year by axing the incentive. The year savings would be $175 million, before declining to a forecast $110 million in the 2021/22 fiscal year.

The Treasury also advised against keeping the incentive for under 18 year-olds, as it would create "a strong incentive for the non-target group (children) to join KiwiSaver" who have different saving priorities.

"While there is no absolute rule about when to start saving for retirement, it is recognised that for many people, developing an early retirement savings habit and making regular contributions is important for ensuring a pot of funds is built up for retirement," the Treasury report said. "For young people their focus should be on the development of human capital, and saving towards their education and skills development for the labour market."

The axing of the kickstarter incentive came after Treasury recommended a wider review of the KiwiSaver scheme, arguing it represents poor value for money for the government and has vague aims, according to its May regulatory impact statement on the post budget law change needed to drop the incentive. Reducing incentives would improve the scheme's value for money as wage and salary earners were likely to join anyway because of employer subsidised schemes and didn't need the kick-start to join, said the Treasury's financial markets manager, James Beard, at the time.

The Treasury's preferred option would have been a fundamental review of the KiwiSaver legislation's purpose to deal with the "imprecise definition of a target population" for the scheme, which is meant to be help Kiwis prepare for retirement. That option was out of scope for the advice the government sought from the Treasury on identifying measures to "improve KiwiSaver effectiveness ... and reduce the fiscal cost."

BusinessDesk.co.nz

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