Inside Money: Govt blows $5b on KiwiSaver in five years

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The Inland Revenue Department's (IRD) sixth annual 'KiwiSaver evaluation' report puts the total cost of the savings scheme to the Crown since inception to June 2013 at $5.3 billion.

While the IRD wasn't filing a return for tax purposes, it has slightly over-stated the costs to the government of KiwiSaver, neglecting to account for the money it actually collects off schemes (on behalf of members) every year.

With the removal of the tax exemption in 2012 on the employer component of KiwiSaver contributions, the government sneakily increased its tax-take without many people noticing.

The IRD report makes clear, however, that tax tweak didn't fall evenly, with the 1 per cent increase in compulsory employer contributions introduced this April effectively wiped out for those earning over $57,600 annually.

"However, for those earning $57,600 or less there was a net 0.5% increase in the contribution from employers with the shift from 2% to 3% contribution," the IRD says.

According to the Financial Markets Authority (FMA) 2013 KiwiSaver report, schemes paid about $135 million in tax, probably the highest annual amount so far.

I haven't added up the KiwiSaver tax collected so far but $3-400 million sounds like a pretty good guess to me - maybe over the holidays I'll do the math.

But let's say, KiwiSaver has cost the taxpayers of New Zealand (in gifts to half of the population) about $5 billion.

The tax collected from KiwiSaver schemes should also go up over time as the overall funds under management increase and investment returns trend in a generally positive direction.

As the IRD report also notes: "As a proportion of the total value of funds passed to providers for investment in members accounts, the contribution from the Crown is declining over time."

Given the fixed value of the member tax credit, set at a maximum of about $521, the value of the government contribution will erode over time as well - worn down by inflation (due to increase next year, allegedly).

The government, then, has done a pretty good job of containing Crown costs without totally derailing public support for KiwiSaver - perhaps a more financially literate population would've protested these changes.

Intriguingly, the IRD report says the government is planning a KiwiSaver cost/benefit analysis next year - just because it's relatively cheap, doesn't mean it's worth it.

"The value for money study will be an assessment of a broad set of KiwiSaver costs and benefits," the IRD report says. "It is expected this will commence in early 2014. The assessment will be an important input for future policy debate and decision."