New Zealand has a very simple retirement income framework comprising a universal state pension, an auto-enrollment savings scheme called KiwiSaver, and supplementary unsubsidized voluntary savings. Widespread home ownership has also underpinned living standards in retirement.
KiwiSaver is designed to build on the basic income protection provided by the state. Since the 1970s, the non-contributory taxable state pension called New Zealand Superannuation has provided a very substantial first tier. Currently, there is no income or asset test, and meeting a low residency test of 10 years is all that is required, although there may be offsets when retirees have overseas state pensions. The rate is adjusted to never fall below a floor of 66 percent of the average wage for a couple, with higher rates for single people and those who live alone.
Unlike in most other countries, in New Zealand, private saving for retirement has been treated for tax purposes much the same as saving in a bank deposit. Where traditional tax regimes treat both employer and personal contributions and income earned in the fund favourably for tax purposes, all tax concessions for retirement saving were abolished in New Zealand in the late 1980s. Since then, contributions to retirement savings schemes are made out of after-tax income and earnings in the fund are taxed at the saver’s tax rate. Then, just like taking money out of a bank deposit, withdrawals are considered to be return of capital and hence tax-free. When the tax concessions were removed over twenty five years ago, many employment-based retirement schemes were closed, and many defined benefit (pension) schemes were replaced by defined contribution schemes. Public-sector pension schemes were closed to new members in 1992.
As a result, by the mid-2000s, coverage of the workforce in employment-based retirement schemes had fallen to only around 14 percent, with very few in pension schemes. In 2007, KiwiSaver, the world’s first national auto-enrollment national saving scheme, was introduced to extend the opportunities of work-based saving.
Over time, KiwiSaver appears to be gradually supplanting other remaining employment-based schemes. Excluding children under 18, there were 2.2 million members by June 2015, representing approximately 75 percent of the working-age population. Membership is not confined to employees; non-earners over 18 who opt in may also benefit from the member subsidy.
Generous subsidies initially fuelled a strong uptake, but these have been progressively eliminated. As of 2016, the only remaining subsidy is a matching 50 percent member tax credit (MTC) on the first NZ$1,040 of member contributions. This limited, progressively designed incentive is in sharp contrast to the regressive and expensive tax concession design common in other countries.
Employers are required to contribute 3 percent of an employee’s gross wages, while members can choose to contribute 3 percent, 4 percent, or 8 percent. The majority of employees (58 percent) contribute only the default rate of 3 percent. In line with the New Zealand tax regime for saving described above, the employer contribution is taxed, while the employee contribution is made out of after-tax income.
One of the clear advantages of the New Zealand approach is the use of the tax collection agency, Inland Revenue, as a central clearinghouse. The employer deducts and sends KiwiSaver contributions to the Inland Revenue, along with Pay As You Earn income tax. The Inland Revenue then send on the KiwiSaver contributions to each employee’s provider, achieving administrative efficiency and full portability. Thus each member holds one personal KiwiSaver account with his or her chosen provider regardless of any change in employment. Small and medium enterprises have found their compliance costs to be low and the scheme has been well received.[i]
Choice and competition are at the heart of KiwiSaver, with competing private providers, a broad choice of investment funds, and a wide disclosure of fees. If KiwiSaver members do not make an active choice, then they are directed into one of nine default providers and into a default investment option. About 25 percent of members are in default schemes.
One of the tensions in KiwiSaver is the balance between increasing individual financial retirement saving and recognizing different circumstances. New employees are automatically enrolled, but between 2 and 8 weeks afterward can opt out and have any contributions refunded. A relatively small number (234,252 by June 2015) have opted out. After 1 year of membership, it is also possible to take a contributions holiday of up to 5 years. This is renewable, and being on a contributions holiday does not preclude making contributions to gain the full MTC.[ii] At the end of June 2015, only 119,153 were taking such a holiday, with most making some contribution.[iii]
While membership has outperformed predictions, as many as 27 percent of members over 18 do not currently make any contributions and get neither an employer contribution nor the MTC.[iv] Nearly one-half of all members who get some MTC make contributions under the NZ$1,040 needed for the maximum subsidy. The explanation appears be that the default 3 percent rate ensures that the contribution for many minimum and part-time earners is low.
Another feature of KiwiSaver is the facility to access savings, excluding state subsidies, after a minimum of 3 years for the purchase of a first home. The state also offers additional subsidies for housing purchases for low-income people. In part, this initiative recognizes the importance of a debt-free home for retirement planning; however, it again provides some tension, as the original purpose of KiwiSaver was to reduce the traditional over-reliance on real estate as an attractive way of saving.
With the demise of pension schemes, few retirees can expect to have private pension income to supplement the state pension. Retirees may take a tax-free lump sum from KiwiSaver and must manage their longevity and other risks, such as inflation. Drawdown arrangements are becoming common, whereby members can leave their funds with the same provider and same portfolio allocation. There is, however, no longevity protection from such arrangements.
KiwiSaver is in its 9th year. It has achieved remarkable acceptance, low administration costs, and wide transparency; however, low levels of contribution, its use for housing, too many in default schemes, low default contribution rates, and lack of longevity protection, remain as concerns.
[i] Inland Revenue, KiwiSaver Evaluation: Final Summary Report. A Joint Agency Evaluation 2007–2014 Wellington, Inland Revenue, 2015).
[ii] Susan St John, Michael. Littlewood, and Claire . Dale, Now We Are Six. Lessons from New Zealand’s KiwiSaver (Auckland: Retirement Policy and Research Centre, 2014).
[iii] Inland Revenue, “Annual KiwiSaver Statistics,” 2016, http://www.kiwisaver.govt.nz/statistics/monthly/.
[iv] Inland Revenue, KiwiSaver Evaluation.
about the author
Susan St John, BSc, MA, PhD, QSO, is an honorary associate professor in economics at the University Auckland Business School and researches retirement incomes policy at the Retirement Policy and Research Centre. Her focus has been on decumulation and the design of an inflation-protected annuity integrated with long-term care insurance.