KiwiSaver incentives and first home deposit subsidy face cuts in Budget 2011, industry group warns

KiwiSaver incentives and first home deposit subsidy face cuts in Budget 2011, industry group warns

The government is targeting cuts to KiwiSaver incentives and the KiwiSaver first home deposit subsidy from Housing NZ in the May 19 budget, Workplace Savings NZ has warned.

Chairman David Ireland said the industry considered it highly likely that the incentives were at the top of the government's hit list for Budget 2011.

The government should resist any temptation to cut KiwiSaver benefits, said Ireland, who heads up the industry body representing employer-run pension schemes.

"Both savers and the industry need to have confidence in the sustainability of current and future savings initiatives if that savings success story is to continue," Ireland said.

He noted the government had not consulted with the industry in the wake of the release of the Savings Working Group recommendations. See Alex Tarrant's article on the recommendations.

"We hope the lack of consultation is an indicator the government will stick with its existing policy, and not make a short term decision, in light of current economic pressures, that will have negative long term concequences on workplace savings," he said.

"All the talk about the need to increase the level of New Zealand's savings to address the pressures caused by an ageing population would count for nothing if the lifeblood of KiwiSaver is cut off."

See Amanda Morrall's April 19 article that enrolments to KiwiSaver spiked in March as savers scrambled to get in to KiwiSaver in case the subsidies were cut in the budget.

See details here about the KiwiSaver first home deposit subsidy.

'Planning for what might happen'

Ireland, who is a partner at Kensington Swann, said the group’s worries were based on what had appeared in the media

“It’s more planning for what might happen, so that strategies are worked through by the providers, so come May 20 [the day after the Budget] there’s a flurry of concerns from the public that actually we have thought about and identified,” Ireland said.

“But there’s no specific inkling or specific inside knowledge from the Beehive other than feeding off what the Minister has said re: ‘all options [for Kiwisaver changes are] on the table, and they’re looking at things very hard’, “he said.

Home subsidy?

There were a couple of industry participants who felt that the Housing New Zealand first home deposit subsidy was more likely than other incentives to be cut.

“From the structure or the objective [of the subsidy] we certainly hope not [that it would be cut]. Whilst the first home withdrawal is a bit of a challenge with Kiwisaver as it is, we’ve only just got to the point where people are starting to be able to withdraw funds for that,” Ireland said.

“You have a lot of children, in particular, being put into Kiwisaver with this objective in mind, who will suddenly have the reasons for them joining suddenly taken away from them, if that were to occur,” he said.

“Once you’ve been a Kiwisaver member for three years you are able to apply for that subsidy if you meet the criteria, and you are looking to buy your first home. What happens is you can withdraw your Kiwisaver savings and you can also get, on top of that, a subsidy from Housing New Zealand, so that when you come to settle your home [purchase], you can add both those two [for the deposit].”

The possible subsidy went up to NZ$5,000 – NZ$1,000 per year a person had been in the scheme.

“It’s a reasonable sum, and it’s something you’d bend over to pick up in the street,” Ireland said.

“But it’s just that token, that extra bit. In particular they are focussing on people looking to buy cheaper houses – there’s a cap on the value of the house that you might be buying in order to get the subsidy,” he said.

“They’re targeting people where it might make a difference to the amount of their own contribution to the home, compared the their mortgage funding, it’s to supplement that.”

Reasonable carrot

There were people in Kiwisaver who had joined for the first home buying help the scheme gave them, including the Housing New Zealand subsidy. It did not cost government anything by allowing people to use their own funds to put toward a deposit for their first home, so the group did not see that particular incentive being affected.

“Yes, they would still be able to withdraw their funds to buy, but it’s going to be a longer term plan, possibly, for them to get to their first home, especially now given the timing,” Ireland said.

The subsidy was a “reasonable carrot, in particular for the younger KiwiSavers, to get people into it early. This is a good way to save for your first home,” he said.

Meanwhile, the bigger issue for New Zealand’s overall savings perspective was if incentives to join Kiwisaver were significantly eaten in to, then people may stop saving through Kiwisaver.

“Because why would you lock your money away until age 65-plus, if you’re not given some sort of incentive to do so, other than ‘it’s a good thing to do’?”

“If you remove too much of the goodies that support Kiwisaver, then [people will think] ‘we may as well invest somewhere where we can get easy access to the money, where we don’t have to go through this process, say, of significant financial hardship withdrawal – we can get the money when we need it’,” Ireland said.

“The only ones left in Kiwisaver would be the ones who want to save themself from themselves, removing the temptation,” he said.

“We do recognise the government does have to save money somewhere, and so maybe some of the incentives could be tinkered with at the margins.”

The member tax credit was a big incentive.

“That’s the one that is probably the biggest on-going cost. It’s also the one that probably is also one of the big sellers for KiwiSaver, and the key thing that keeps people locked into the savings habit,” Ireland said.

“For people who aren’t salary earners, aren’t in PAYE – self employed etc – you don’t get the other tax relief that applies on employer contributions, so it’s now the only on-going subsidy incentive that you get for your contributions,” he said.

“We think getting people locked into that habit of regularly saving is a really good thing, and the member tax credit is a real push/inducement for people to do that.”

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31 Comments

"Workplace Savings NZ has warned."

Slow day huh?

Who cares what these non events think.

Worth previewing what might be in the budget.

Government deciding right now what to do with KiwiSaver. Yet little public debate.

These guys hear what's wafting around the Beehive, even if the government won't say with 15 days go to the budget.

We're trying to keep any eye on these things.

cheers

Bernard

BH says - "Government deciding right now what to do with KiwiSaver. Yet little public debate."

I don't remember any public date before Kiwisaver was introduced, it was just foisted on the NZ public.  

Still Bernard, look at the roaring debate on the Barfoots thread, yet Kiwisaver which over a third of NZders are signed up to doesn't even rate a stir?

 

I'm a fan of Kiwisaver. I think its the best thing Clarke's Government did.

Me too. Look at how many people are enrolled. For those of us not blessed with an education in finance it's an easy in to a savings plan. Sure you can say get educated and do it yourself but I've been reading about it for a year and it still seems way too complicated to me to try myself. Other than maybe picking a managed fund.

I still can't even figure out if I should switch kiwisaver providers and to which one! And if anyone has some advice on that I'm all ears.

Well some suggestions....

generally its always pay off debt as that is the highest interest....but Kiwisaver gives you 100% from the Govn in the first year assuming you put $1000 you see it doubled. So if I had spare $ I'd do kiwisaver for a year to get that 100% and then put it on holiday while I paid off the mortgage.....Im hoping to do that this year if I get a small pay increase.

In terms of kiwisaver fund types I intended to do some  sort of passive tracker (which is what I looked at) , but then I read that the likes of GS etc are fiddling the trades with micro/nano second trades before you and the nzx is goign to do that here... so not only can they beat you to the buy so you buy off them they can dump all their stock in a fraction of a second if it all goes wrong, its just a big risk you are left holding nothing....

So personally I'd look at  someone with a well known public image like say Gareth Morgan...and pick a low risk as possible fund for now because I see huge risk of a depression/deflation....so something with a lot of content of cash like things that can be sold fast....maybe a % of gold or silver if there is a such a fund...for me I want to protect my money right now and not take risk...but your appitite might vary.

regards

GS could only dump their stock if someone else is buying, so I wouldnt worry so much about being left holding the bag. The high speed traders are trying to take some cream off the top, they probably arent taking all the milk (or killing the cow!). Indexing has always had the problem of people taking advantage of their buy-and-hold strategy, but it still survives.

A well-known public image might give you some comfort, which is fair and understandable. Someone who has their reputation on the line is a bit less likely to be really dodgy. But it isnt fool-proof (Whimp!), and it could be counter-productive, as you might simply end up giving your money to the person who is the best at self promotion, or someone whose glossy outer image hides a lack of any real investing experience.

The first thing to do is decide whether you want to invest conservatively or aggressively. Do you want to protect your savings, or maximise your return. You will need to think about your time frame, your future income, your final investment total goals, and your own attitude to (severe) loss.

Its really hard to see which funds are going to perform the best, or which managers are the most skillful, before the fact, but there is one thing you know for certain: which ones will cost the most. Every quarter of a percent discount in the fees will mean a quarter of a percent the manager doesnt have to make back.

Those are all good comments, thanks guys. I'll keep thinking about it for now.

 "confidence in the sustainability".......Ireland has to be kidding....any idiot can see this vote buying piece of pork is not sustainable...should never have been allowed to start..and needs to be cut off at the head like now.

People will save if they know their savings are not being debased by a govt and RBNZ deliberately setting out to engineer a 30% drop in the value of the paper every decade.

They will save if they have surplus income...which is difficult when most incomes are either a benefit or a low wage or a bit of both. Salary bloats in the state sector....many are being given over $400ooo every year....what the feck would they know!

Now we have a madness with taxes stealing from those who are not in the Kiwisaver pork for votes scheme, to feed those who are....what a fecken joke.

Kiwisaver as it stands is a classic example of poor govt and one of the reasons why this country is utterly stuffed...trapped in a 'going nowhere' maze of govt bullshit and stupidity.

Oh and I forgot to mention....Kiwisaver is a cashcow for funds bosses....look at them get rich...stuffed with fees...that's why so many loved Cullen and right now are desperate for the idiots in the Beehive not to turn off the tap...."confidence in the sustainability"......sick joke more like!

I work for an Australian company that offers 10% super. However, in reality it is a savings scheme and if I leave the company I will get the money paid out, it is worth $50K after 9 years, but being with AMP it has performed poorly. But it has the 'paperbag' effect to me psycologically.

Because of this situation I am paying off my mortgage as quick as possible so I can start saving for retirement and kids further education. This will be paid off within the next 6 months. I would like to join KS but I cannot be bothered to wait until I am 65, I am 45 curently. If I get new employment I will join KS as the savings scheme will pay off the mortgage.

KS may be made compulsory which is the possible catch 22 for me.

So this is in black and white.  without the government handout, kiwisaver is not 'unquestionably' sustainable.  

'both savers and the industry need to have  confidence in the sustainability of current and future savings initiative if the savings success is to continue'

If the actual returns were calculated on both private and government contributions was calculated - it wouldn't match other investment options.  If it was the best performing investment - then there would be no loss of enthusiasm.

maybe the private/government partnership should be split up and each determine their best form of investment to improve the lot of nzers.

 

Chrissy, KiwiSaver doesn't pretend or aspire to be the best investment option for people who are actively interested in managing their money optimally and getting a good return on it.  It's supposed to be an easy and hassle-free option for people who aren't so engaged and financially literate, finding it difficult to look into the long term and to discipline their current spending. As such the automatic enrolment and automatic deductions from your wages are probably far more important features than the taxpayer-funded handouts.

FYI Vernon Small reports more detail via the DomPost on what could be cut.

http://www.stuff.co.nz/business/4963041/Government-may-cut-its-KiwiSaver-contribution

The Government is eyeing cuts to the KiwiSaver $20-a-week tax credit.

It is also looking to change the way public servants' contributions are paid as it seeks ways to bring the Budget back into surplus by 2014.

The change would mean that the contributions were paid directly from already-stretched departmental budgets, amounting in effect to a further cut in those budgets.

The $1000 kick-start for new KiwiSaver accounts is likely to stay, because it is valued by savers and is a key reason for the scheme's success.

There could be some savings for the Government if the payment were drip-fed at $200 a year for five years, as has been suggested by the Savings Working Group.

However, the Government is believed to be reviewing the members' tax credit it pays to savers, which is worth up to $20 a week.

That would mesh with the Government's wider view that it makes no sense to borrow for savings.

It is understood National's own research suggests that many savers do not understand or necessarily value the tax credit.

The tax credit is the only reason I contribute to Kiwisaver.  Without that, you may as well pack up the whole scheme.  More short term thinking from National.

What would you be doing with the money if you weren't contributing it to KiwiSaver?

If you would otherwise be saving it somewhere else, or using it to pay off your mortgage faster, then the Government is simply transferring public money to your private (eventual) benefit with no actual increase in total saving.  That's great for you, but how is it a good use of taxpayer/borrowed money?

If you would otherwise be spending it on short term consumption, then KiwiSaver has arguably done some good, by getting you to save more than you would have otherwise and hence increasing total private saving.   But is it really necessary for the Government to increase public debt by quite so much in order to achieve that?

The Government is contemplating changes to the structure that 'got us in' in the first place. Aren't there reasonable grounds, then, for us to ask for our money back, as we aren't getting what we  'paid' for? GIve us the option. Opt out now, before 65, and take all but the Governments contributiuons, or let us stay in, perhaps dormant, if we choose? Maybe it's a way of stimulating the retailers! ( although in a Muldoonesque way ~ haven't we been here, before?)

You have got what you have paid for - whatever you have already put into your KS account remains there, as does the Government contribution which has already been made, and any contribution your employer has made, and any returns your fund managers have made - and that money will be available to you at 65 plus whatever returns it makes in the meantime.  That wouldn't  change under these proposals.  So there's no justification for asking for the return of the money you have already contributed.

As for the future, you can stop contributing if you like, if you don't think that what you will get in future is worth what you will pay for it in future - look up "contributions holiday".   

 

You did get what you paid for. You got the subsidy for as long as it was around. There was no guarantee the subsidy would be there forever, so you cant argue that you only started with KiwiSaver reasonabley expecting a perpetual cashflow stream from the government.

So people only saw sense in contributing to Kiwisaver because it came with a govt. handout.  Why didn't you see the sense in saving without the handout?

Also need to remember if you can safe a wee bit, then empolyer will match up to 2%, I presume this will still stay, and only the government contributions that will go.

This debate has to be seen in the wider context of retirement income in general.  The greenstone suit has refused to countenance any debate over Govt Super, which in its current format is unsustainable.  The previous government was well on the way to constructing a viable alternative that in time would largely negate the need for Govt Super and make people more self-reliant. The current attempt to pull apart Kiwisaver will put us back to square one, or even worse.  For self-employed people like me there is no employer's contribution and there will be no incentive to continue contributing to Kiwisaver  if the tax credit is withdrawn.  That will make me less likely to vote for a party that is willing to consider cutting back on Govt Super.   National is arguing on the one hand that we should continue paying out non-means tested Govt Super to about 20% of the population, yet on the other hand is saying we should not use borrowed money to provide a partial subsidy to responsible savers for their retirement.      

Another way of looking at the retirement proposition as a whole is to ask why the Government should give you money now to support you in your retirement, when it is also going to give you money later to support you in your retirement?

I had to laugh, that was funny.

But to respond, maybe because we don't trust them to pay for our retirement later? A bird in the hand...

That's a reason (and a very good one) why you should save.  It is not a reason why the Government should pay people to save.

It seems that this government is keen on making it more difficult for first home buyers to get into the market and removing incentives for people to save for their retirement.  Just raise the retirement age already.  Excuse me if my dates/data are a little out (don't have the time for in depth research) but:

Super eligiibity age in 1991 - 60 (average life expectancy for females 79, males 73)

2001 - 65 (females 81, males 76)

2011 - approx life expectancy females 83, males 79-80

The simple answer to reduce superannuation costs is to raise the age to 67, then progressively to 69-70 over the next ten years, as people live longer and work longer, rather than messing about around the fringes of the whole affordability problem.  Make retirement saving compulsory as a percentage of income to reduce the debt burden for workers in the future.

The government is slowly ripping the heart out of kiwisaver.  A slight change in law now allows employers to include their contribution as part of the employees total salary.  So in effect if you contribute 2%, you actually are contributing 4% being the 'employer's' contribution.  Kiwisaver used to be basically a '3 for 1' deal, being made up of the employer's contribution, government tax credit and employee contribution.  With the government now considering removing the tax credit, and employers now not needing to contribute, you could possibly only get out what you put in plus interest.  And you have to wait until you turn 65!  Makes more sense to do your own investment, which people won't do as its not as straightforward as contributing to kiwisaver.

I wonder if removing the home deposit subsidy will be the start of bad things for people who have set aside three years of contributions for house deposit.  The next step will be to remove the right of people to make the first home deposit withdrawl.  Thats probably $10 000 at least for a lot of people that they won't be able to access.

 

The problem with kiwisaver is that it was done arse about face and never addressed the issue as to why we weren't saving in the first place.

My parents saw sense and set my brothers and I up with individual retirement fund accounts (through a managed fund) when we were teens and we took over our payments when we reached 21.  I have never adjusted the monthly payments (even though I should have/would like to) but have always put other savings aside on a regular basis into a seperate bank account.  So for 20 years prior to kiwisaver I made monthly contributions and received nothing in return from the govt.  Not 2% of my income but better than nothing.

I agreed with the reasons behind kiwisaver but I disagree with it being forced on us by the govt. telling me what I can and can't do with my money and telling me how much I should be saving.  I disagree with the extra cost forced onto employers and taxpayers/consumers.  There shouldn't be any need to offer extra housing subsidies either - that's not addressing the issue of why housing is unaffordable. 

Now everybody's bitching about losing their govt handout.  I don't get a govt handout yet I'm still saving.  Why do you deserve my tax money because you aren't responsible enough to save your own money?  Why weren't people saving in the firstplace?

Just scrap superannuation ending the expectation that their going to get something for nothing and it'll force people to save for themselves.  Give some sort of tax rebate (similar to donations etc) if an incentive is needed but only if it is reinvested into savings, but this should've been done 20 years ago.

"Why do you deserve my tax money because you aren't responsible enough to save your own money? "

The same could be said for needing superannuation in the first place.  I'm happy enough with people getting superannuation but it should be more relevant to today's life expectancy, not that of 20 years ago.

The fact is that the accessibility of kiwisaver is such that if the incentives are removed, then people won't join, and hence the cost of superannuation will be higher with our ageing population.  So either leave the incentives or make it compulsory, otherwise we really won't be solving the problem of borrowing/increasing taxes to fund the increasing elderly population.

"With the government now considering removing the tax credit, and employers now not needing to contribute, you could possibly only get out what you put in plus interest. And you have to wait until you turn 65! Makes more sense to do your own investment, which people won't do as its not as straightforward as contributing to kiwisaver."

You put the case precisely for the Government retaining KiwiSaver, but with lower subsidy levels. If you're a motivated, disciplined saver and a confident, savvy investor then by all means do your own investment. If you're not, you're probably better off in KiwiSaver, which is easy to join, easy to contribute to and does not require any investment expertise.

Either way, you personally will get the benefit of the accumulated savings so it's not clear why it's so unreasonable to expect you personally to contribute the bulk of the cost.

Meh - I can understand your sentiments about people saving for themselves, but harsh experience has taught us that people won't save adequately for retirement unless they're given a combination of carrots and sticks.  Labout pussyfooted around by not making Kiwisaver compulsory and announcing at the same time that Govt Super would be phased out over time.  That's what National should now be doing - it beggars belief that we are borrowing to fund Govt Super, 100% of which is ultimately taxpayer funded, yet we're going to pull the rug out from Kiwisaver members who are funding their own retirement.  Maybe Don Brash is our only hope after all.

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