KiwiSaver and beyond
Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister for Tertiary Education, Leader of the House
14 August 2007 Speech Notes
Embargoed until: 9.10am Tuesday, 14 August 2007
KiwiSaver and beyond
Speech notes for address to ASFONZ forum, Deloitte Lounge, Westpac Stadium, Wellington
Thank you for the opportunity to talk about
KiwiSaver and beyond.
This has been an historic year for superannuation.
In August last year KiwiSaver in its original form was passed into law.
In the Budget in May I announced an expansion.
And since the new scheme began operating on 1 July progress has been very encouraging.
At the end of last week IRD had received 92,000 enrolments just five weeks after the launch date.
Treasury forecasts that 345,000 will enrol in the first year - around 30,000 a month. The initial data suggests take-up is well ahead of that level.
33,000 people actively chose a provider and leapt into the scheme. 47,000 actively chose a provider and enrolled through their employer.
These are early days, but I am most heartened that some many have actively embraced KiwiSaver.
Some 12,000 people were automatically enrolled in a default scheme or their employers preferred scheme.
One of the most important design features of the scheme is that we use inertia to make it easier for people to start saving: everyone is automatically enrolled when they start a new job. They then have to actively choose to opt out if they feel KiwiSaver is not right for them. With some 700,000 changing jobs every year, this is the unique feature that will drive uptake over time
In the first five weeks, Inland Revenue received just 3,000 opt-out forms.
KiwiSavers have a maximum of eight weeks from their start date to opt out, so it's too soon to be sure how many will stay in.
But the very early signs show the scheme is successful in making it much easier for New Zealanders to build a nest egg for retirement.
Of course there was a surge of interest with the initial publicity around the launch of KiwiSaver. I understand that inquiries about the scheme have been heavy - showing New Zealanders are weighing joining.
Although the initial publicity will wane a little, there are some events coming up that will help to renew interest.
First, I expect providers to bump up their promotional activities to entice KiwiSavers into their schemes. Anecdotal evidence suggests most providers did 'soft launches' because they didn't want to stress their systems on the first day. But as they get their schemes up and running we will see attractive advertisements inviting New Zealanders to join individual schemes.
And then we can expect another another surge of activity next April when the proposed phase in of employer contributions begins. Employer contributions start at one per cent, rising to four per cent of gross salary by 2011 - partly offset by a tax credit.
At that point there will be very significant incentives to join the scheme.
The launch of KiwiSaver caps a broad suite of new policies the Labour-led government has introduced to secure the future of retirement incomes.
New Zealand is now recognised as being better prepared than most developed countries to deal with the fiscal challenges of an ageing population.
The first step was to reverse the cuts made when Bill English was finance minister and restore the floor to New Zealand Superannuation of sixty-five per cent of the average ordinary time weekly wage. In line with our support agreement with New Zealand First this has risen to 66 per cent.
Building on that, we established the New Zealand Superannuation Fund to pre-fund the future cost of superannuation.
Since the Fund began in October 2003 its assets have grown to $13.3 billion (at May 2007) and the Fund has achieved an annual rate of return of 15.3 per cent. It has comprehensively out-performed the benchmark risk-free rate of return of 6.45 per cent. The fund's guardians have set a target of beating the risk free rate by 2.5 per cent, so the Fund's performance has been excellent.
In addition to improving the government's funding of New Zealand Super, we have also been active in encouraging New Zealanders to save for themselves.
The State Sector Retirement Savings Scheme was set up with an employer subsidy.
And when we reduced the corporate tax rate to thirty per cent in the budget this year the government also opted to encourage savings. A new top tax rate of thirty per cent was set for individuals investing in managed funds and superannuation funds. The new rate will apply to widely held unit trusts, group investment funds, life insurance savings products and other widely held funds.
Less tax paid on income from savings vehicles will encourage more people to save.
Beyond all of these measures, of course, KiwiSaver has been introduced to make a simple, affordable workplace savings scheme available to New Zealanders.
By now your industry will be very familiar with the operational details of KiwiSaver.
But let me recap the reasons why the scheme is so important to New Zealanders.
We simply need to increase our levels of household savings.
Our household savings record remains very poor by international comparison. On one measure the typical New Zealand household last year spent $1.15 for every dollar earned.
We are seeing a wide and increasing gap between a few households who have enough to provide for their retirement - and the rest. When household savings were last surveyed, only fifteen per cent of individuals and seventeen percent of couples in the $15 - $50,000 income bracket had superannuation assets.
Those low and middle income families with no financial assets - that, is most of them - know they need to save if they are to have something to look forward to in their retirement. Three quarters of household wealth is tied up in housing and less than ten percent in life, superannuation and managed funds. Owning your own home is a very good thing, but it should not be relied on to replace other saving. A Treasury study shows that most people will not save enough by paying off their home alone.
If we want to have a better standard of living in retirement than NZ Superannuation alone, we need to save more.
More saving also helps the strength of the economy generally. Saving builds the wealth of New Zealanders and helps build the pool of assets needed for business investment.
Saving will help us own more of our own businesses and it will produce deeper capital markets that provide the oil for a well-functioning business sector.
If we save more, we consume less, so we will also reduce inflationary pressure, and take pressure off interest rates. Lower interest rates in turn help to take pressure off the dollar, helping to increase our exports and reduce imports.
So increasing the level of household savings is a priority for the health of our economy.
Australians know the value of retirement savings to their economy. Their compulsory scheme has created a trillion dollar deep pool of capital and their private equity firms are using those funds every time they come over here and invest in our economy.
I am often asked whether I think KiwiSaver will one day evolve to emulate the Australian scheme's compulsion.
I am confident the current design of our scheme will prove to be the best design in the long haul. It's important to recall the Australian scheme was created at a time of rigid, centralised tripartite bargaining. Those conditions cannot be replicated here.
Nor would it be desirable. The government should not intrude too far into personal decisions about how to spread consumption over the life cycle. A compulsory scheme necessarily replaces informed personal decisions with blunt broad prescriptions.
KiwiSaver also helps to assure the future of New Zealand Super. That's because, having contributed extra savings throughout their working lives, New Zealanders would rightly be outraged if a future government were to come along and tax them for their efforts later (by, for example, trying to means test or abate NZ Super.)
So for this reason, when we look to the future of KiwiSaver there are real issues for any party that is not committed to it.
This is important, because the National Party has been very unclear about its intentions.
It is worth taking a moment to consider what this means. There should be a consensus around retirement issues because you cannot change your retirement plans every three years as elections come and go and change the mix of parties in Parliament.
Instead I think KiwiSaver will be a major election issue because National won't tell us what it plans to do. We are entitled to ask why National is so vague. The obvious explanation is that its real intentions would make it unelectable. We can guess those intentions. In July the opposition finance spokesperson Mr English argued in the NZ Herald that the current provision for New Zealand retirement income is too generous. One is entitled to infer from that statement - and his preference for a tighter fiscal stance - that he thinks provision for retirement incomes should be cut. In other words, that KiwiSaver or NZ Superannuation should be cut.
He has a bit of form. He sat in a Cabinet in 1998 that did cut superannuation to fund tax cuts.
Any party that wants to meddle with KiwiSaver should be upfront about their plans. But New Zealanders will not want to see the retirement entitlements of KiwiSavers confiscated.
KiwiSaver will also have some important effects on the fundamentals of the saving industry in the future.
For quite a few years now there has been in a tone in some quarters of the savings industry that has encouraged fear about the future of Super. While they were right to warn New Zealanders to make extra provision for the fuller enjoyment of retirement, the number of people who believed there would be no Super for them when they retired was worryingly high.
The introduction of KiwiSaver provides a new direction for the super industry to compete and attract custom. The government is providing an incentive in the initial $1000 contribution, tax credits and fee subsidies. Providers will increasingly compete to entice savers on the performance of their funds.
At the same time, there are new challenges for the industry in its self-regulation. There are a large number of scheme providers registered. It is inevitable that some will be stronger than others and I am asking the industry to prepare strategies to maintain confidence in the industry. These should involve contingency plans covering issues such as the failure of a scheme and how savings would be taken over and put under new management. The industry should take a lead in reassuring investors and safeguarding their interests.
As you look to the future as an industry, I hope ASFONZ as an industry organisation and other industry players take positive initiatives in this area.
This is a time of change for your industry. The introduction of KiwiSaver is a new challenge for the workplace savings industry and it is one that I encourage you to see as an opportunity that will grow and benefit New Zealand long into the future.