Government cuts its Member Tax Credit KiwiSaver contributions in half, will raise min payments to 3%, look at soft compulsion

By Alex Tarrant

The government’s Member Tax Credit contributions to KiwiSaver accounts will be cut in half from July, while minimum employee and employer contributions to the scheme will rise from 2% to 3% from April 2013.

Meanwhile, the tax-free status of employer contributions will be removed from April 2012, but the NZ$1,000 Kickstart will remain.

Treasury is expecting wage growth of about 1.4 to 1.8 percentage points above inflation between 2013-15, saying that wage growth would mean people should be comfortable contributing more into their KiwiSaver accounts.

Finance Minister Bill English and Revenue Minister Peter Dunne announced the changes in Budget 2011, saying the cuts would help the government return its books to surplus by 2014/15 and keep net government debt peaking below 30% of GDP.

English said the changes would save NZ$2.6 billion in expected spending over four years.

Prime Minister John Key had earlier this month indicated changes, although the scope of cuts to government contributions to KiwiSaver were unknown until today.

The Labour Party attacked the government’s intentions, saying further changes to KiwiSaver would diminish the public’s confidence in the scheme and be detrimental to private saving rates.

From July 1 this year, the Member Tax Credit Rate will be cut in half to NZ$521 a year, English said. This means that in a financial year, for every NZ$1 a KiwiSaver puts into their account, government will contribute 50 cents until the KiwiSaver’s contributions hit NZ$1,042.

By that stage government would have contributed the maximum NZ$521 for the year. Any additional contributions by the KiwiSaver will not attract government contributions.

Meanwhile, from April 1, 2013, the minimum employee and employer KiwiSaver contributions will rise from 2% currently to 3%.

“While KiwiSaver has been very effective in attracting new members, it has done so at a high cost to taxpayers, with the scheme costing the government over NZ$1 billion a year in subsidies and tax breaks,” English said.

The changes were expected to lift the overall national savings rate as they would reduce government borrowing in order to fund private savings, English said.

“KiwiSaver funds will continue t oaccumulate rapidly. Total funds are projected to rise from NZ$7.9 billion currently, to about NZ$25 billion by 2015, and almost NZ$60 billion in 10 years. The Budget changes do not significantly change the expected inflows into the funds,” English said.

Just over 43% of all KiwiSaver contributions so far had come from the government.

Meanwhile, Revenue Minister Dunne said the government believed most people would find 3% minimum contributions affordable.

“We have given workers and employers two years to adjust and plan for the increased contribution rates, which will kick in at a time of strong forecast economic growth,” Dunne said.

Treasury is forecasting economic (GDP) growth of 4% in the year to March 2013 and 3% the next year.

Nominal average hourly wages are expected to rise 4% in the year to June 2013, 4.2% in the year to June 2014 and 4% in the year to June 2015. Inflation over those years is expected to be between 2.4% to 2.6%, giving real annual wage growth of 1.4% to 1.8% over that time.

To look at compulsion

Government would also look at a ‘soft compulsion’ option for KiwiSaver recommended earlier this year by the Savings Working Group making KiwiSaver enrolment, English said. The change would mean every person was automatically enrolled  in KiwiSaver when they either reached a certain age or began working.

However Budget 2011 would not see the idea implemented.

“We just couldn’t see a good enough reason to move to compulsion [in this Budget],” English said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

2 Comments

Does know one remember what the government contribution was when labour introduced it. It effectivly was a optional tax cut that we could not touch till retirement and not produce inflationary pressures a tax cut would cause. So in essence national have reversed the tax cut we got this year. I would rather have the tax credit than a tax cut.

I have not heard them mention this once and have not heard anyone else say it. Has everyone forgot

Hi Nightg

The Govt's regular incentive contribution has been the Member Tax Credits (MTCs) of $1042 a year that we have now , since KiwiSaver started in 2007.

What you might be thinking of is that the  *employer* used to get a tax credit was well - but it worked differently to MTCs.    They could reduce up to $20 a week off their PAYE bill to the IRD if they were paying into their employees' KiwiSaver accounts.   National got rid of that bit.