KiwiSaver cuts 'affordable for most'

Despite an anti-budget protest at Parliament today, the Government remains adamant that changes to the KiwiSaver scheme will be affordable to most contributors. Photo / NZPA / Ross Setford

The Government says most workers and employers will be able to afford the larger KiwiSaver contributions announced in today's budget, but there are also warnings that the scheme's compliance costs for businesses are continuing to climb.

The Government has announced it will halve the member tax credit - the subsidy it pays to savers in the scheme - to a maximum of $521 a year, from June next year, as part of a raft of changes designed to slash government borrowing and encourage taxpayers to save more for their retirement.

Under the present tax credit, the Government matches contributions by up to $1042.86 a year, or about $20 a week.

A larger share of contributions to the scheme will come from individuals and employers, with both the minimum employer and employee contribution rising from 2 per cent to 3 per cent - though these changes won't come into effect until April 2013.

"We believe most people will find 3 percent affordable," Finance Minister Bill English and Revenue Minister Peter Dunne said.

The tax-free status of employer contributions to KiwiSaver will end from April next year, but the Government's $1000 kickstart, given to savers who join the scheme, will remain.

Mr Dunne said the changes outlined in today's Budget ensured KiwiSaver remained an attractive and subsidised savings option to the scheme's 1.68 million members.

"The employer and government contributions, alongside the $1000 kick-start payment, will continue to offer a very attractive rate of return for the money employees put in themselves," he said.

The Government said it was giving workers and employers two years to adjust and plan for the increased contribution rates, which would kick in at a time of strong forecast economic growth.

But there has also been a warning that businesses were becoming increasingly frustrated that compliance costs for businesses of administering KiwiSaver contributions continued to mount with each change to the scheme, according to Deloitte tax partner Greg Haddon.

Mr Haddon said there have now effectively been many different versions of KiwiSaver since the scheme was introduced and it risked becoming the political football that got kicked around every election year budget.

"The continual tinkering will make it more and more confusing for both employers and employees, and potentially act as a disincentive to join the scheme."

While Mr Haddon admitted that the changes were unavoidable from an economic perspective, he said businesses needed to have some certainly about the future of the scheme.

"The Government's predicament is that by borrowing to fund KiwiSaver, there is no real increase in national savings - the Government's debt acquired as a result of borrowing the funds cancels out the impact of savings through KiwiSaver."

A summary of the changes to KiwiSaver include:

* From April 1, 2012: The tax-free status of employer contributions will be removed. These will be taxed at an employee's marginal tax rate.

* For the year to June 30, 2012 and beyond: The member tax credit rate will be halved from $1 to 50c for every $1 contributed by members, up to $521 a year - half the current maximum.

* From April 2013: The minimum employee contribution rate will rise from 2 per cent to 3 per cent.

* From April 2013: Compulsory employer contributions will also rise from 2 per cent to 3 per cent.

While KiwiSaver had been effective in attracting new members, it had done so at a high cost to taxpayers, with the scheme costing the Government more than $1 billion a year in subsidies and tax breaks, Finance Minister Bill English said.

Just over 43 per cent of all KiwiSaver contributions have been funded by the Government to date.

The Government contributed more than $1 billion to members' accounts in the year to March 31, 2011. Employee contributions totalled about $1.1 billion, and employer contributions were $700 million during the same period.

The changes to KiwiSaver are expected to save the Government $2.6 billion over four years, though they will not significantly alter the expected inflows into the funds, English said.

"Budget 2011 includes changes that will see KiwiSaver funds continue to grow rapidly, but with a larger share of contributions coming from members and employers, and a lower share from the Government."

"This is expected to raise national savings, as it will reduce the amount the Government is borrowing, largely from foreigners, in order to fund private savings."