KiwiSaver for start-ups can destroy New Zealanders’ savings

KiwiSaver for start-ups spells can destroy New Zealanders’ savings
Peter Dunne

Wellington, August 9, 2020

On the face of it, National Party’s new policy of allowing people to withdraw up to $20,000 from their KiwiSaver accounts to put towards a new busines venture looks attractive, especially as the daunting task of recovery from the economic ravages caused by Covid-19 gets underway.

If it works, it could certainly encourage more business investment, increase activity and jobs, and aid the process of recovery.

But as many analysts have pointed out, it is also extremely risky, given the high rate of new business start-ups that fail, even at the best of times, and could see people losing substantial amounts of their KiwiSaver investments, to their personal longer-term detriment.

Fundamentals missed

National Party Leader Judith Collins’ counter that people should have a choice whether to invest their KiwiSaver funds with a funds manager, or in a new business venture has some merit, but misses the fundamental point of KiwiSaver.

What she describes as money “put aside for a rainy day” is far more than that.

KiwiSaver is a savings scheme for a person’s retirement, both to reduce their long-term reliance on New Zealand Superannuation and to enable them to enjoy a decent standard of living as they grow older. The idea was that everyone joining KiwiSaver had the equivalent of a dedicated fund where their investments were locked away until they reached 65.

An early concession was made to allow first home buyers to withdraw a small proportion of their KiwiSaver investment to go towards the cost of a deposit on a house.

However, successive Labour and National-led governments have properly resisted many other calls for people to be able to access their KiwiSaver funds early, for matters such as student loans repayments or unexpected health costs.

In so doing, they have recognised the long-term nature of KiwiSaver investments, so that individuals get to enjoy the benefit of a substantial retirement lump-sum pay-out at the age of 65.

A vexed issue

Retirement income policy has been a vexed issue since the fourth Labour government introduced a 25% tax surcharge on superannuitants’ additional income above $5200 a year in 1984.

From that time, and through most of the 1990s, superannuation policy was a political football kicked back and forward between the Labour and National parties. Both wanted a viable long-term solution to the rising costs of New Zealand Superannuation as the population lived longer, while, at the same time, not incurring the wrath of older voters in the process.

The Cullen Fund

Eventually, in 2000 Sir Michael Cullen instituted the Superannuation Fund (popularly known as the Cullen Fund) to pre-fund a portion of likely future superannuation costs by setting aside a fixed sum each year for the Fund to invest and build up.

That established a measure of stability in superannuation policy and brought the government time in terms of rising future costs of New Zealand Superannuation due to an ageing population.

The launch of KiwiSaver by Sir Michael in 2007 as a voluntary retirement savings scheme was the next step in making the long-term costs of looking after older New Zealanders more sustainable.

However, the new equilibrium was short-lived.

National suspends contributions

In response to the Global Financial Crisis in 2009 Sir John Key’s National-led government suspended the annual contributions to the Superannuation Fund and did not resume them during its entire term of office.

Meanwhile, projected long-term superannuation costs were continuing to rise, leading Labour in Opposition in 2014 to propose gradually lifting the New Zealand Superannuation entitlement age from 65 to 67. Yet, when the National-led government introduced legislation in 2017 to increase the age to 67 over a 20-year period, the Labour Party opposed it.

It was reminiscent of the superannuation game-playing of the 1980s and 1990s all over again.

Today, the current Labour-led government’s position is that the age of entitlement will not be shifted above 65 years, and that the issue is only being discussed because National cut contributions to the Superannuation Fund back in 2009.

National, on the other hand, remains committed to its 2017 position of raising the age to 67 over 20 years. The upshot is that no-one under about 45 years of age can plan their futures with certainty.

It is generally accepted that the advent of Covid-19 has led to dramatic changes in the way governments the world over will need to respond to the new economic and social challenges now facing their countries.

A new sense of innovation and flexibility will be required.

Doing things the way they always have been done is not likely to work anymore.

However, no matter what new dynamics Covid-19 imposes, some things will not change.

Make it compulsory

Meeting the rising costs of superannuation will be one of them because populations will continue to age. This is hardly the time to be further weakening the mechanisms, like KiwiSaver, already in place to help people save for their retirement.

If anything, the incentives need to be increased, and KiwiSaver made a compulsory savings scheme for everyone entering the workforce, so that they can plan their futures with certainty throughout their working careers, regardless of the external uncertainties.

KiwiSaver is a critical part of that process and is most certainly not just a piggy bank to be raided on “a rainy day” as National is now proposing.   

Peter Dunne was a Minister of the Crown in the Labour and National-led governments from November 1999 to September 2017. He lives in Wellington.

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