Readers of Long John’s first blog might have got the impression he is not a big fan of KiwiSaver. Nothing could be further from the truth. Long John loves his KiwiSaver account. Being not too far off the magical age of three score and five, his conservative fund is a virtual term deposit which is doing better than the real thing – without much additional risk. Mrs John is a bit younger and in a life stages fund which is balanced now, but automatically becomes more conservative as she gets older. That suits her because frankly, she pays little attention to what her KiwiSaver is doing.
The Little Johns have a KiwiSaver account too. They stashed away the thousand dollar kick-start while it was still available and being young, followed their father’s advice and invested in a growth fund. Unfortunately, that hasn’t worked so well. Long John is not infallible, and neither are KiwiSaver providers. But it’s not too late for the “young uns” to swap and maybe a simpler strategy, with lower fees over the long term, will be the answer.
Aside from these personal elements, KiwiSaver has some brilliant features as part of New Zealand’s overall retirement income framework. The best is the ability to follow the member from one employer to another. The Aussies and the British would love to have this. Very few people in the 21st century are going to stay with one employer for forty plus years, and KiwiSaver is designed to match.
On the other hand (there’s always another hand) KiwiSaver is not a silver bullet, either for individuals or for the nation’s retirement income future. According to the Financial Market Authority’s recently released KiwiSaver Annual Report for 2014-15, over one million members are regarded as non-contributors – i.e. they have not made a contribution in the previous two months, or they have failed to make their contracted payments. That’s 42.6% of members.
These are big numbers, though they need some unpicking. For example, they won’t include members who bunged in lump sums more than two months past. Then there are children (about 350,000 members aged 17 and under) who might reasonably be expected to not be making regular contributions.
It’s still a lot of people not contributing. And then there are the 127,360 members on contribution holidays, which have recently been the cause of much wailing and gnashing of teeth.
But are these non-contributors acting rationally? Some will be. If you know where to look, you can find data on Inland Revenue’s website that shows 600,000 KiwiSaver members earned between $1 and $20,000 in the 2015 tax year. If you take out the children, you are still left with a quarter of a million members earning under $20k. This is a very crude calculation. Retired KiwiSaver members, beneficiaries and students aged over 17 should also be excluded, but these are ballpark figures and this is only a blog.
A key point remains: New Zealand Super pays someone living alone $20,000 per year (net). Why would anyone forgo a chunk of a current income of under $20,000 to invest in KiwiSaver when they can expect that same level of income from NZS in retirement? It would make more sense to consume the low income now, or to invest in training or housing. Given current settings, KiwiSaver doesn’t stack up for people on low incomes. Maybe they know this to be true.
Long John-October 2016