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Peter Dunne says what Judith Collins describes as money 'put aside for a rainy day' is far more than that

Peter Dunne says what Judith Collins describes as money 'put aside for a rainy day' is far more than that

By Peter Dunne*

On the face of it, National’s new policy of allowing people to withdraw up to $20,000 from their Kiwisaver accounts to put towards a new business venture looks attractive, especially as the daunting task of recovery from the economic ravages caused by Covid-19 gets underway. If it works, it could certainly encourage more business investment, increase activity and jobs, and aid the process of recovery.

But as many analysts have pointed out it is also extremely risky, given the high rate of new business start-ups that fail, even at the best of times, and could see people losing substantial amounts of their Kiwisaver investments, to their personal longer-term detriment. Judith Collins’ counter that people should have a choice whether to invest their Kiwisaver funds with a funds manager, or in a new business venture has some merit, but misses the fundamental point of Kiwisaver.

What she describes as money “put aside for a rainy day” is far more than that.

Kiwisaver is a savings scheme for a person’s retirement, both to reduce their long-term reliance on New Zealand Superannuation and to enable them to enjoy a decent standard of living as they grow older. The idea was that everyone joining Kiwisaver had the equivalent of a dedicated fund where their investments were locked away until they reached 65.

An early concession was made to allow first home buyers to withdraw a small proportion of their Kiwisaver investment to go towards the cost of a deposit on a house. However, successive Labour- and National-led governments have properly resisted many other calls for people to be able to access their Kiwisaver funds early, for matters such as student loans repayments or unexpected health costs. In so doing, they have recognised the long-term nature of Kiwisaver investments, so that individuals get to enjoy the benefit of a substantial retirement lump-sum pay-out at the age of 65.

Retirement income policy has been a vexed issue since the fourth Labour Government introduced a 25% tax surcharge on superannuitants’ additional income above $5,200 a year in 1984. From that time, and through most of the 1990s, superannuation policy was a political football kicked back and forward between the Labour and National parties. Both wanted a viable long-term solution to the rising costs of New Zealand Superannuation as the population lived longer, while, at the same time, not incurring the wrath of older voters in the process.

Eventually, in 2000 Sir Michael Cullen established the Superannuation Fund (popularly known as the Cullen Fund) to pre-fund a portion of likely future superannuation costs by setting aside a fixed sum each year for the Fund to invest and build up. That established a measure of stability in superannuation policy and brought the government time in terms of rising future costs of New Zealand Superannuation due to an ageing population.

The establishment of Kiwisaver by Sir Michael in 2007 as a voluntary retirement savings scheme was the next step in making the long-term costs of looking after older New Zealanders more sustainable.

However, the new equilibrium was short-lived.

In response to the Global Financial Crisis in 2009 Sir John Key’s National-led government suspended the annual contributions to the Superannuation Fund and did not resume them during its entire term of office.

Meanwhile, projected long-term superannuation costs were continuing to rise, leading Labour in Opposition in 2014 to propose gradually lifting the New Zealand Superannuation entitlement age from 65 to 67.

Yet when the National-led government introduced legislation in 2017 to increase the age to 67 over a 20- year period, the Labour Party opposed it. It was reminiscent of the superannuation game-playing of the 1980s and 1990s all over again.

Today, the current Labour-led government’s position is that the age of entitlement will not be shifted above 65 years, and that the issue is only being discussed because National cut contributions to the Superannuation Fund back in 2009.

National, on the other hand, remains committed to its 2017 position of raising the age to 67 over 20 years. The upshot is that no-one under about 45 years of age can plan their futures with certainty.

It is generally accepted that the advent of Covid-19 has led to dramatic changes in the way governments the world over will need to respond to the new economic and social challenges now facing their countries. A new sense of innovation and flexibility will be required. Doing things the way they always have been done is not likely to work anymore.

However, no matter what new dynamics Covid-19 imposes, some things will not change.

Meeting the rising costs of superannuation will be one of them because populations will continue to age.

This is hardly the time to be further weakening the mechanisms, like Kiwisaver, already in place to help people save for their retirement. If anything, the incentives need to be increased, and Kiwisaver made a compulsory savings scheme for everyone entering the workforce, so that they can plan their futures with certainty throughout their working careers, regardless of the external uncertainties.

Kiwisaver is a critical part of that process and is most certainly not just a piggy bank to be raided on “a rainy day” as National is now proposing.


*Peter Dunne is the former leader of UnitedFuture, an ex-Labour Party MP, and a former cabinet minister. This article first ran here and is used with permission.

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50 Comments

13
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Well said Peter. The existing exemptions to make withdrawls (house buying and financial hardship) should be removed in my opinion. In addition make contributions compulsory.

National are throwing people under the bus if they can willy nilly grab $20k to as crusher says, "go out and buy a ute". Sure spending increases but if we assume, at best, a similar business failure rate (50%?) to today that leaves half of all people in a worse off position.

That sounds like a terrible outcome and policy to me but hey I'm not an expert like Crusher.

""The existing exemptions to make withdrawls (house buying) should be removed in my opinion""

How else do you suggest young people get together a deposit for a home these days?

15
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Save for 10 years like everyone else. Depending on when you start working full time and time to promotions a lot of people should be able to afford a house by the time they are 50 or 60 and then pay a mortgage for 30 years.

In my region, house prices have jumped 24% yoy, the year before was 18%. How do you expect to save a deposit with price inflation like that?

If people can not save a deposit, they just can't afford it then. That means the housing price is too high and it needs to come down. Give them option to use kiwi saver and to borrow as much as they can to buy houses is to encourage them to bet their future on that house. You'd better hope housing price wont fall cause if it falls, your retirement is screwed. It will be hard for government to make healthy economy decision and policies as most people are tied into housing. That's why government now is throwing everything they can to save housing market. It will just get worse. It might not show any sign in two or three years. But 10 years? No one knows.

Retirement screwed vs being screwed at the present? Why worry about 30 years down the track when you're barely treading water now?

Simple, when you are young, you can fall but you just get up and try again. When you are getting retired, it's not that easy to do that. That's why it's better to set aside some savings for your future retirement and not to put all the eggs in one basket.

I'd rather not fall to start with

There's no coming back from bankruptcy over a house, when wages are poor, they've had to sacrifice so much that the privileged just don't even comprehend.

House prices are approaching 10 times the median income, if not more in Auckland, Tauranga and closer in the rest of New Zealand. This is unacceptable.

A saner approach would be targeted discouragement and taxation on gains for those being used for investment. Bring it down to less than 6 times median income then we will enjoy a fairer society rather than the unnatural class division happening now.

Because drowning is far worse .

'If people can not save a deposit, they just can't afford it then'

Is that true also when using equity in previous homes/rentals to purchase additional homes/rentals? They haven't saved anything yet the banks lend to them without a cash deposit for the additional home/rental they are buying. Would appear to be an unfair advantage and causes our housing market to have ponzi like characteristics.

That's the risk our financial system has. They lend based on the current home / rental value. The risk seems to be not high at the moment as the housing value is still going up and people are still earning well. But when people are not earning so well, housing value starts falling, banks will get negative equity, then this can cause butterfly effect to our banking system like banks go bankrupt, people lose their deposits, more people lose their jobs.

Well not with kiwi saver obviously.
Things like access to KS and home buying grants are part of the problem not the solution.

It's not a captive market. House prices will rise no matter what you do with Kiwisaver if you have open slather on immigration and no intention of reform. Tapping Kiwisaver is just letting the locals catch up on price pressure you've intentionally imported. Taking away Kiwisaver tapping won't make houses any cheaper if migration trends continued upwards - which they did for years.

This and central government/bank support for pushing up house prices will likely see the rise of populism, unless politicians begin to take seriously the need to represent the needs of their electorates at a broad rather than narrow level.

I think the dictator's eyebrows were raised.

Honestly, I don't know why I bother posting on this site. Half of the posters are oblivious boomers that are so far detracted from reality its comical... "Just save the deposit"

My 4 kids, all in their 30s, with no finances apart from their own, own 5 houses and 2 sections between them. All mortgaged, but they all live great lifestyles, under no financial stress.

*wooooosshhhhh!

My two kids bought their own places just a few years ago while in their mid-20's with their own savings as deposit. The bank wanted me as 'guarantor' but I said "no, if you can't do it on your own you should not be doing it". (However, I would have stepped in and helped out if they had got in the s..t, but I didn't tell them that). Now the younger one is shopping for a section to build a new home. Disclosure: neither of them are in Auckland.

LOL.
Like everyone else.

Sure, Boomers were all saving from the age of 12 when they bought their first houses in their early 20s with a single income.
Just the same.

But I do agree that FHBs should not be allowed to raid KS for a deposit.
KiwiSaver withdrawals don't help 'young people'.

They do the opposite, only driving prices up for vendors and ultimately benefit retirees.

House prices would be a lot lower without KS FHB withdrawals and the ability of investors to use unrealised capital gains to leverage into property after property.

11
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How did the ability to use KiwiSaver ever make housing more affordable?
It's effectively a subsidy in a market of inelastic supply.

11
up

Exactly, it just allows more money to pump up the price of the lower quartile housing stock. Get rid of the housing grants too.

@an_observation

How else do you suggest young people get together a deposit for a home these days?

They need to SAVE ! , just like we all had to do in the 1960's , 70's , 80's and 90's .

During WW2 even my Grandparents saved pennies and their meagre wages for their first home . They saved in those little savings books that were common in those days

And given that need to save, along with the current high house prices, those with land that has received much monetary betterment from central bank and government policy will need to be the ones to step up and spend in the economy instead.

And young people will need to vote for politicians who will tax their income less, and tax free money flowing to property a little as well.

Thus helping address the imbalance.

Oh yeah, Boatman. The good old days. Well, the reality is they don't exist anymore. There is a totally new landscape out their, initially with chineese housing investment in NZ which Wong Key gave the Green Light to which turned out to a huge disaster for kiwis trying to buy into the market. Then, China rubbed salt into the wound by giving the globe Covid19. Quite frankly, the majority of kiwis dont know the good old days. Its like an urban myth to them.

With property investors pushing up prices the game is rigged, as you well know Boatman. No matter how much you save. Gee - 80000 which takes over 10 years to save, then stuck with a 700000 mortgage on 80000 income, raising two kids.

Bit pious from the boomer generation as always.

KiwiSaver withdrawals don't help 'young people'.

They do the opposite, only driving prices up for vendors and ultimately benefit retirees.

House prices would be a lot lower without KS FHB withdrawals and the ability of investors to use unrealised capital gains to leverage into property after property.

The point of those provisions is that NZ superannuation is paid at a level that assumes you own your own home without a mortgage. So allowing people to set themselves up for retirement by owning their own home goes neatly into that setup.

Financial hardship is similar - the main financial hardship people are likely to be paid out for is when they're facing a mortgagee sale.

If I owned my current house freehold, with rates and maintenance it would cost $125 per week to run. Can't beat home ownership. Everyone should have a house. Singapore has an interesting system.

You cannot force people to send part of their salaries to a private pension provider. This must always be optional as long as there is not a public counterpart that can be chosen instead.

In all fairness house buying is part of most peoples pension plan , but i agree withdrawal for business start up is ludicrous and will leave many destitute.

By 'business' do they include rental properties?

Yes please! I can make my money from KiwiSaver work much better for me and my retirement than the Kiwisaver fund managers.

You best send Judith an email then and make sure that is part of the policy - but then its probably a waste of your time as National are polling at about 25% and highly unlikely to be elected.

My own, doubtless flawed, understanding of the Super issue:

  • There will be an increased number of superannuitants drawing tax from a decreased number of working-age citizens in years to come.
  • So pre-funding via NZSF, and hoping that investment returns exceed opportunity cost, is the first step to softening the fiscal punch that's coming.
  • KS is, like the US' IRA's, an Individual Retirement Account that originally had, as its sole purpose, the funding of all or of a substantial fraction, of one's retirement, thus lessening the call on a decreasing tax funding pool.
  • Apart from a welfare net under destitute pensioners, the aim was to reduce reliance on tax-funded super to zero at best, or to a small fraction at worst.

But as the exemptions, withdrawals and other nibbles at the KS cake increase, that just leaves the NZSF as the other leg of the prop. And as these NZSF investments are largely illiquid (farms etc....), as redemption needs (liquidating parts of the fund) roll around, it might just be harder than we all thought to actually get $$ out of the thing....

Kiwisaver has never been proposed as a replacement for NZS and there's never been any serious talk by current political parties to start means testing or taxing superannuation on a different basis from other personal incomes.

Edit: Replaced NZSF with NZS

Um, NZSF is the NZ Superannuation Fund, not the tax-funded ongoing NZ Super scheme. Abbreviation confusion....

Dunne is right about this !

Kiwisaver should be untouchable until 65

So long as money withdrawn is being invested in assets or things that will earn (and not just consumption) then should be freedom to do so. People withdrawing money for investment in business or houses will (on average) be seeing larger returns on capital than kiwisaver will. And the net benefit to society of more businesses being established has a lot of other positive effects - more employment, more export earnings, more self-sufficient entrepreneurial types in our society, bringing their energy and hardworking attitudes they add to mix which is incredibly valuable.

What a crock...the stock market has been the greatest wealth creator over the past 100 years than any other asset.

It is easier to lose your shirt in the stock market than it is in property.

Collins’ eyebrows were raised when she proposed this. So it’s a joke, right? She must be sooo conscious of her expression now when she says anything. Oh, what fun. Seriously, dipping into KiwiSaver to start a business is a stupid idea. Perhaps a long term loan paid for by a percentage of KiwiSaver gains might work, but hey, what 25-year-old wouldn’t want to buy a ‘company car’ with money his employer has put into the account? Big no, I think.

Spare us. What is it in New Zealand that when there is some capital we are so anxious to spend it.
Nats are near clueless as the Labs.

This is a tricky one. Only recently they amended for withdrawal in case of those diagnosed with serious illnesses, right ? Too many exemptions, like those for starting a business will erode the mission of the scheme. Playing politics with the retirement fund is a dangerous precedent and should not be encouraged.

If necessary, Collins may promise to get the Treasury to extend interest free loans for eligible business schemes, though even that may be a tricky precedent. But may be excused as one off due to the extraordinary Covid repurcussions.

And please don't subsidise the fees to Accountant, finacial consultant, etc. That is a scam trap.

Only recently they amended for withdrawal in case of those diagnosed with serious illnesses, right ?

No, that's been there since the beginning.

No new reasons to withdraw money have been added to kiwisaver. Some have been petitioning for various changes or to make it easier to withdraw money when in hardship, in particular with COVID and Australia changing their system to allow withdrawal of up to $20k.

How about that boy who is working for Countdown who wanted to go see his brother/cousin in UK ? Didn't his case initiate some change ?

That was a case of how the existing provisions were applied, not a new provision.

In his particular case, he was expected to never live to the age of 65.

From experiences learned from the old Government Superannuation Fund for public servants, to have the provision to withdraw funds for a first home as the single provision for withdrawing money from KiiwSaver until retirement is the correct one.
That GSF scheme was closed to new members in 1992, however it was the model - with improvements out of experience - as the forerunner for the wider available KiwiSaver Scheme. The old scheme had many of KiwiSaver's main features - especially the employer contribution (then 6%).
Many contributors withdrew from the fund when they were purchasing their first home and unfortunately did not take the option to rejoin at a later date. To allow contributors to withdraw some but not all of their KiwiSaver funds to buy a house, but require them to continue contributing or take a finite contribution holiday, is a tremendous improvement and hopefully negates the repeat of those letting their GSF die.
In the era of Rogernomics, many public servants faced hardship as a result of restructuring and again many, out of seeming then current necessity, pulled out. The current situation of economic hardship is much like the temporary situation for that public servants experienced during the period of Rogernomics. For those who pull out of the old scheme, they very sadly regret that.
Those who are now retired who accessed their contributions to buy a home, but maintained their contributions during temporary hardship, now have a long. very secure and very comfortable lifestyle. They have no regrets.
Please, do not tamper with the provisions of the existing KiwiSaver - these were based on with improvements from the experiences of the old Government Superannuation Fund. Do not now, at the first hint of problems, start tampering and dismantling or destroying it.

Nah. Let’s lump the retirement crisis on the next generation like we’re doing with all the other problems.

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See Party Policies here. Party Lists here.