Rozanna Wozniak: Stronger incentive needed for retirement savings

Rozanna Wozniak

There will be a test of willpower for some New Zealanders in 2007. Will it be a new car, another holiday, or a voluntary contribution to the KiwiSaver scheme?

KiwiSaver is based on the raw proposals for workplace savings put forward by the Harris working group last year. The main addition to those proposals is an initial sign-up bonus of $1000, provided by the Government, which cannot be withdrawn until retirement at 65.

The Government added this extra bonus because of criticism that the original scheme lacked any real incentive, and that the withdrawal criteria were too loose.

The moral argument for denying workers access to money that is 100 per cent their own savings was difficult to justify. Savers should also get enhanced returns from the Government's plan to subsidise fees.

The other important change to the original proposal is the addition of an incentive for prospective first-home buyers. The Government will allow KiwiSavers who have been contributing for at least three years to put their accumulated savings towards the deposit on their first home.

The Government will contribute $1000 per year of membership (in the form of a suspensory loan) up to a maximum of $5000 after five years. Couples will, therefore, be entitled to as much as $10,000 if they both contribute. Subsequent contributions can also be diverted on an ongoing basis towards mortgage repayments.

There is little doubt that the scheme will encourage young people into their first home. It may even help lift home ownership rates slightly. But will it result in a measurable lift in private retirement savings?

The Government is hoping that employers, many of whom are currently faced with employment and retention issues (although this may change before 2007), will come to the party. Without this added incentive, the motivation to join for the vast majority of New Zealanders is not particularly compelling.

Nearly half of those eligible to join the state sector superannuation scheme have signed on in the first year, attracted by a matching employer contribution of up to 1.5 per cent of gross salary, rising to 3 per cent this year.

Treasury had anticipated that less than a third would join. In fact, shouldn't membership rates be significantly higher given the rewards on offer?

If state sector workers have not been tempted by a dollar-for-dollar subsidy, it is difficult to see why private sector workers would join KiwiSaver with no employer subsidy.

The Government's $1000 contribution, plus interest, which they may not receive for another 20 or 30 years, simply does not sound enough.

Given the likelihood that all members will be able to divert contributions towards mortgage repayments rather than just first-home owners, and the added option of taking five-year contribution holidays, there is clearly a risk that the scheme will be nothing more than a plethora of accounts with little savings in them.

Realistically, the success of KiwiSaver probably relies, first, on employers, and second, on a change in the behaviour in middle-income New Zealand. In fact, it could be argued that to the extent that New Zealand has a savings problem, it is middle-income earners whom the Government should have been targeting with a savings scheme in the first place.

At one end of the income spectrum, most high-income earners are probably saving enough for their retirement, and $1000 will appear inconsequential. Even if employers start to offer an added incentive, it is more likely to redistribute saving from other sources rather than result in new saving.

At the other extreme, the Government recognises that many low-income earners cannot afford to save unless incomes rise significantly and New Zealand Superannuation will always be their main means of support.

Putting aside 4 per cent of their income will probably be beyond the scope of many in this group, and the extra $1000 subsidy is unlikely to sway their decision. An employer subsidy would undoubtedly help, however, particularly if it can be packaged with an annual wage review to ease the burden.

If the Government is serious about retirement savings, it needs to focus on sending the right message to middle-income earners. Many people in this category probably could save more, but when faced with the choice, the new car, holiday or flash house always sound more attractive.

* Rozanna Wozniak is the chief investment adviser to Spicers Wealth Management.