Hon Dr Michael Cullen

Deputy Prime Minister, Attorney-General, Minister of Finance, Minister for Tertiary Education, Leader of the House

14 September 2007 Speech Notes

Embargoed until: 10:00 Friday, 14 September

KiwiSaver morning tea for Auckland Pacific leaders

I am delighted to have the chance to talk to you about KiwiSaver. This is a landmark new scheme, which will have enormous benefits for New Zealand and for the KiwiSavers who join up. It is also proving to be a very popular scheme, with well over 100,000 New Zealanders already participating.

I am particularly pleased to be here with all of you as leaders in the Pacific community. It is my belief that KiwiSaver is very important for Pacific families and that we need to do all we can to help Pacific people to save for the futures they deserve.

Most of us know we need to prepare for our future. We know that if we want to enjoy a secure standard of living in our later years, we need to put something away. But it can be hard to get started. And it can be very hard to get started if there's not much money in the house. There is always a high priority for the cash on hand. It is always something we can put off until later, and then as we get older we find we are suddenly older and it is still hard to get going.

What we know is that this is more than just a problem for some of our families. It is a major problem for New Zealand as a whole. The Reserve Bank estimates that for every dollar an average household earns, it currently spends about $1.15. That is just not sustainable.

Of the money we do save, we tend to keep most of it in our homes. When Treasury officials looked at the figures, they advised most people still need significant savings in their retirement, in addition to their homes.

Under a Labour-led government, there will always be NZ Superannuation for your retirement (and that has been made even more secure by the NZ Superannuation Fund). But even though we have invested heavily in raising the rate of NZ Super, it is not going to provide enough income for most people to enjoy in their retirement a standard of living similar to the standard they enjoy while they are working.

This affects our Pacific community, just as it affects every New Zealander.
Pacific families on low incomes have a harder time getting started. The government is committed to working with community leaders to help move more Pacific people further up the income ladder. The huge fall in the number of Pacific people on the unemployment benefit is just one of the successes that we have had by working together.

It is my hope that improving the savings rate of Pacific people can be another.

The government acknowledges that for people on very low incomes, savings is a challenge and it is true that KiwiSaver won't be the answer for everyone. That is why under Labour we have continued to raise the minimum wage every year, invested heavily in family tax credits through working for families, lowered the cost of seeing the doctor, and focused heavily on improving the quality of life for people on modest incomes.

But it is also true that KiwiSaver is making it easier than ever for more New Zealanders to start saving for their futures. Lower income people actually get the biggest benefit from the tax credits announced in the Budget – someone on $26,000 a year could contribute four per cent of their income, but actually save three times that amount thanks to government and employer contributions.

KiwiSaver is not just important for Pacific families on low incomes, but also for the large number of people in the Pacific community who own their own businesses. Entrepreneurial Pacific people who want to expand a business, like other business people, do not have such deep pools of cash to call on. And, although our economy has been growing quite strongly over the last eight years and creating hundreds of thousands of new jobs, a higher rate of savings will help us to lock in our growth, and increase the value of those jobs.

In other words, if we save more, we will reap long term benefits personally, in a higher standard of living for our own households, and in a higher performing New Zealand economy.

But they key is to make it easier to save, especially for low and middle income New Zealanders. If we want more Pacific people to save, we have to make it easier for Pacific people to get started.

KiwiSaver is the simple solution the government has put in place.

KiwiSaver is even more important, given the recent finance company failures.

I want to make a brief comment about that, because it's a very important issue for New Zealand.

I am confident that strong, well run finance companies will emerge from the current trouble in the sector in good shape.

It is inevitable that consumers will begin asking hard questions about the security of their investment. That's a good thing! Many objective observers have felt for a while that the returns investors achieve have not adequately reflected the risk, and so the market is likely to re-price risk.

If riskier funds want to attract investors who have been frightened off by recent failures, they will have to offer very attractive returns or very attractive security. That's the way the market should work.

If investors understand risk better, that will be very good.

If financial advisors are more careful with their clients' money, that will be very good too.

Better transparency in the financial sector, through the regulatory framework I announced Wednesday and the positive moves my colleague Lianne Dalziel has announced, should make it easier to scrutinise companies.

What we don't want to see is investors being put off from investing in finance companies altogether. Their operations provide crucial liquidity for enterprise lending.

What we don't want to see is people thinking saving is too hard. KiwiSaver makes it easier to save.

And what we definitely don't want is people confusing finance company trouble with superannuation schemes, especially KiwiSaver. Finance companies borrow and lend, and are essentially in the business of pricing risk. Superannuation schemes invest savers’ money in a wide range of assets.

Since the current legislation on superannuation schemes came into force in 1989, no such scheme has fallen over. Indeed, the design of KiwiSaver would make it almost impossible for there to be a run on KiwiSaver schemes.

KiwiSaver is a workplace based savings scheme that makes it simple to get started.

This is how it works:

Everyone gets automatically enrolled when they start a new job. You can opt out if you want to after two weeks (and before eight weeks are up).

Once you are signed up, four per cent of your pay gets put into your KiwiSaver account. You can choose the KiwiSaver account that suits you - there are a lot of them out there. If you don't choose, you get allocated to a default scheme.

Since most of us get a pay rise when we start a new job, it is a bit easier to put that money aside. And to kick-start your savings the government puts $1000 into your KiwiSaver account.

Then, every year the government will make further contributions up to $20 a week into your account.

Now on top of that - your employer will make a contribution as well. Once KiwiSaver is fully running in 2011, your employer will match your contribution up to four per cent of your pay. They will get reimbursed up to $20 a week.

Plus, the fund managers who run the KiwiSaver accounts charge a management fee - so the government makes a contribution toward that, as well, of $20 twice a year.

For someone earning a modest income of, say, $26,000 a year… if they put in $20 a week, the government will put in another $20 a week, and their employer the same.

All of a sudden that KiwiSaver is putting aside twelve per cent of his or her wages every week.

It all adds up to much more security in retirement.

Of course our needs a change as we go through life. We might start out in the workforce wanting to be KiwiSavers, and then realise we need money a first home.

KiwiSaver has been designed to help first home buyers too.

If you have been in KiwiSaver for three years or more, you will be able to withdraw your savings, or part of them, to put towards buying your first home.

And if you have been paying into KiwiSaver, you might be eligible to get a first home deposit subsidy. Once you have been in KiwiSaver for five years, you can get a subsidy up to a maximum of five thousand dollars - for a couple, that is a kick-start into your own home worth ten thousand dollars. (A couple has to be earning less than $140,000 a year and buying a house for less than $400,000 here in Auckland).

And if you have been in KiwiSaver for a year, you can split half your KiwiSaver contributions into repaying your mortgage.

How might this work in practice? Take a couple we’ll call Keri and Mike. Let’s say they are both thirty and together earn $75,000 a year - an average income for a two person household.

If they save four per cent of their income, they will have a deposit for their first home in five years - $35,500 in today's dollars. When they retire at age 65 they will have total savings of $390,000. That is enough to generate an income in retirement of $20,000 to $25,000 a year.

So let's take another look at what this all means for Pacific people:

- It means better retirement incomes and better security in retirement for Pacific people who join KiwiSaver.

- It means a leg up for families to help buy their own homes.

- And it means - for everyone - a stronger New Zealand economy because we are saving our earnings and using them to build our future, instead of borrowing other people's savings and in-debting our future for today.

KiwiSaver is a landmark social and economic policy and I believe it works very well for the Pacific community. I hope that the information we are launching today in Pacific Island languages will be a useful tool in our work to help more Pacific families save and plan for the futures they want.

ENDS

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