KEY POINTS:
Retirement income policy should not be made by vote-seeking politicians under pressure. Major changes to KiwiSaver by Labour in 2007 just five weeks before implementation were not scrutinised and justified by economic analysis.
Now that error is compounded by National, whose patch-up changes are not the fundamental review that was required.
Under Labour, the cost of the generous tax-funded subsidies to KiwiSaver will rise to more than $2 billion annually within 10 years, rivalling contributions to the New Zealand Super Fund.
While claims on the economy don't occur until KiwiSaver lump sums are paid out, starting from 2012, from that date they will rapidly increase demands on real economic output, just as the pressures from ageing intensify.
Moreover, the unfairness of KiwiSaver will be increasingly apparent as the better-off retire with large savings pots that have been heavily subsidised. Calculations by the Retirement Policy and Research Centre suggest a 40-year-old KiwiSaver on a high income may have around a third, or $100,000 to $150,000 of their final payout at 65 effectively funded by the taxpayer.
Many of the lower-paid will get very little or nothing, either because they cannot afford to be in the scheme at all or because they stop contributions after one year.
In the meantime, the taxes of this group will need to be higher and their pay rises lower than they otherwise would have been in order to pay for the subsidies of those who can afford to join.
Even if membership of KiwiSaver eventually reaches 50 per cent, there will be a clear two-class division on retirement with those without KiwiSaver falling further behind.
The cost and inequity of the uneven benefits from KiwiSaver must have implications for the sustainability of New Zealand Superannuation in its present form. The Treasury said in 2007 "fiscal strains ... are likely to appear in the long term as the New Zealand population ages. If trends do not change, these strains could mean that programmes like the Super Fund may have to become less generous in the future."
In the 2007 Review of Retirement Income Policy, the Retirement Commissioner warned: "KiwiSaver's generous incentives will compound the gap in retirement income between those who have saved and those who have not, threatening the equity and fairness of current retirement income policy."
The major unjustifiable tax-funded costs of KiwiSaver stem from subsidies that are tied to employment. The effect is to advantage employees, especially when highly paid, much more than the low-paid, or those not in the workforce.
National is right to question these subsidies, but making piecemeal policy, without wide consultation, under election pressure is no way to achieve the stability in policy that is needed.
New Zealand has had a proud tradition of not linking social provision to paid work contributions. This is an important issue for women whose workforce participation rates are lower than men's. There are no clear advantages and many disadvantages from having this link to work.
Not the least is the complexity for the employer who must operate a complicated opt-in opt-out system in an environment where the IRD is not coping well with day-to-day administration of the scheme and tracking contributions.
National's changes make the subsidies less generous for both the top and the bottom income earners, but do not relieve administration costs for the employer at all.
Taxpayers should not be funding a widening of relative wealth in retirement based on incomes from work.
Nor should KiwiSaver cause uncertainty over the future of New Zealand superannuation.
It would be much better if both parties could agree to an open and transparent review of KiwiSaver, after the election, with an open discussion about the implications for New Zealand superannuation.
The public deserve much more certainty in retirement income policy than either party is delivering.
* Dr Susan St John is co-director of the Retirement Policy & Research Centre at the University of Auckland Business School.
