Editorial: KiwiSaver a lot more attractive

Opinion

Workplace savings schemes face stiff competition from other spending priorities. For some people it might be their children's education, for others healthcare or paying off a mortgage. Also, they must be more attractive than other savings options, be they the housing market, shares or a personal superannuation scheme. To be successful, a workplace plan must, therefore, contain considerable incentives. Employees must have a reason to become involved and to stay locked in, and employers must be encouraged to make a meaningful contribution.

The lack of sweeteners was the main drawback of the Government's KiwiSaver scheme when it was introduced in last year's Budget. So faint-hearted was it that the Finance Minister's modest expectation - 265,000 account-holders by 2008 - seemed a realistic assessment of its potential. Now, however, Michael Cullen has had a rethink and the chances of the scheme implanting a much-needed savings culture have improved substantially.

Most significantly, Dr Cullen has decided that voluntary employer contributions to a worker's account will be exempt from the superannuation withholding tax they at present attract. The exempted sum is capped at 4 per cent of an employee's salary to reduce the chance of people taking excessive advantage of the arrangement.

In one swoop, Dr Cullen, a long-time sceptic of tax breaks for savings, has given employers a reason to become involved. That involvement will, in turn, encourage employee participation.

Workers will be far more inclined to join, and stay in, the scheme if they see their savings getting an added boost. The incentives for employees do not end there. Dr Cullen has also decided they will be able to divert half their personal contribution to pay their mortgage. National's finance spokesman, John Key, has criticised this, saying it alters KiwiSaver from a savings account to a cheque account. That is a glass half-empty perspective. On the positive side of the equation, the mortgage diversion option is likely to encourage under-pressure savers to stay with the scheme rather than desert it.

The Finance Minister will have been loath to introduce the tax break. Aside from his doubts about its impact, there is the small matter of an estimated $35 million in foregone revenue in 2007-08, rising to $162 million in 2011-12. The more people who are attracted to the scheme, of course, the more money disappears from the Government's coffers.

But, even if only after prodding, Dr Cullen has been realistic in accepting that such incentives are needed. He should probably have recognised as much far earlier when he saw, quite correctly, that any scheme with a high degree of compulsion would be greeted with distaste and that KiwiSaver must have a voluntary approach. Also, he was armed with advice from Treasury officials, who had concluded that tax breaks would be the most effective form of incentive.

But better late than never. The scheme, now due to start next July, has a far better chance of improving New Zealanders' dismal rate of saving, a situation explained, in part, by their lamentably low participation in workplace superannuation plans. There is even the possibility of the bonus of inflation pressures being dampened if workers modify wage demands and, instead, accept an increased employer contribution to their KiwiSaver accounts.

Indeed, Dr Cullen's foregone revenue could be money extremely well spent if the scheme helps correct the present mismatch between savings practices and demography. Only a high participation rate will achieve that. Happily, that is now far more of a possibility.