For most of us, saving for retirement is one of those “yes-I-must-look-into-it-sometime” kind of topics. And so, till the budget at least, the government’s KiwiSaver scheme has failed to excite anyone but the fund managers of large financial institutions.
Last week’s announcements of additional encouragement and incentives to save with KiwiSaver will change this and create a lot of discussion in smoko rooms up and down the country.
Previously the government established the Government Superannuation Fund to provide some long term underpinning to national superannuation but even when it reaches its full potential the fund will only contribute some 14% of the income needed to fund the retirement of the baby boomer generation.
Alongside this we are constantly told we are poor savers and this is one reason why inflationary pressure is high. And so on the face of it a scheme such as KiwiSaver which encourages New Zealanders to save for their retirement seems a good proposition. It kills two birds with one stone – helps ensure a decent income in retirement and dampens inflation.
But there are two substantial interlinked problems with the scheme – both of which herald a bleak future for many of us in retirement.
The longer term problem is that KiwiSaver is paving the way for wholly privatised national superannuation. It’s Roger Douglas all over again. How well off you are in retirement will depend on what you personally are able to save for yourself. To some extent this has always been the case but once KiwiSaver is established the writing is on the wall that over time the safety net of national superannuation will be hacked away and large numbers of retired New Zealanders will fall rapidly into poverty.
This was retirement as it used to be whereby those unable to save during their working lives, predominantly women and the low paid, lived in rat infested hovels or boarding houses, dependent on charity from church or community groups funded by philanthropists.
Is this a far fetched scenario? Not any more than the 175,000 New Zealand children who now grow up in families living below the poverty line. Whoever thought this would be tolerated in New Zealand?
We have already seen agonised efforts from both National and Labour to reduce the long-term expense of national superannuation. The age of eligibility has risen from 60 to 65 and attempts have been made to claw back payments through a superannuation surcharge.
To their credit older New Zealanders fought and won against attempts to undermine their retirement income. One of their successes is that only a tiny percentage of the elderly are living in poverty while the opposite applies for the nation’s children who have much less lobbying power. We need baby power as strong as grey power.
The other more immediate problem is that low-paid workers will struggle to get started. For those joining the scheme payments must be made at either 4% or 8% of gross pay. Even at 4% this will mean a drop in take-home pay of more than 5% for families. This is simply unsustainable when we already have one in seven families borrowing money for daily living expenses such as buying the groceries or paying the electricity bill. These families, the working poor, will not only miss out on the $1000 government start-up but more importantly will fail to get any of the on-going benefits of government and employer contributions.
Finance Minister Michael Cullen himself estimates that only perhaps 50% of workers will take up the scheme in the first few years. This means the $3.2 billion going into the scheme in the first four years will be taken up by high and middle income earners with low-income workers effectively locked out.
And it gets worse. There are scenarios now being considered which could see collective agreement negotiations based, for example, on a 3% pay increase alongside a 2% additional employer contribution to KiwiSaver. This will be attractive to businesses because with tax benefits they will pay less than the 5% received by the employee but workers unable to afford KiwiSaver will be left with just a grindingly low pay increase.
In the developmental stages of KiwiSaver the government was lobbied to lower the 4% threshold but refused.
There are now other schemes being proposed which would have just a 2% or perhaps a $5 per week minimum saving but while these would be more easily affordable for low income families they will not attract the benefits of the government scheme.
Most of these benefits will accrue to those on higher incomes with huge numbers of low-income families missing out altogether.
Many of these people when they retire will find themselves relying on another of the budget’s announcements – a projected increase in charitable donations due to the scrapping of the rebate threshold.