Guest Post: KiwiSaver – is it ‘working’?

A guest post on Kiwiblog by Michael Littlewood.

So, John Horner of the Financial Markets Authority thinks that KiwiSaver’s reaching $100 bn “…is something to celebrate; for a relatively small country like New Zealand, it represents a coming of age of KiwiSaver.” (FMA 24 September 2024 here). Others in the financial services industry praise KiwiSaver while some call for higher minimum contributions or even for it to be made compulsory. So, is $100 bn saved through KiwiSaver that big a deal?

I thought it might be interesting to look at the top-down data for all households to see whether KiwiSaver has actually changed things since it started 17 years ago.

Michael Cullen was KiwiSaver’s principal sponsor. He thought that traditional workplace superannuation didn’t ‘work’ so, in 2004, he set up the Savings Product Working Group to develop a “generic work-based savings solution”. Michael Cullen thought the SPWG’s recommendations didn’t go far enough and a much beefier KiwiSaver emerged, with some chaotically organised, last-minute changes, in 2007.

Initially, change to KiwiSaver was a constant but things have settled down in recent years.

Here’s the question: is KiwiSaver working? Are households actually saving more? Are they better prepared for retirement? What do the numbers look like?

The Reserve Bank used to produce quarterly data on all households – what, in aggregate, they owned and owed. Statistics New Zealand now gathers those numbers and publishes them here as ‘National accounts (income, assets, and liabilities)…supplementary table 1.5B’.

These numbers summarise the top-down position for all households. We can work out an average for each household but that isn’t very useful, given the uneven distribution of assets. We can’t uncover a ‘median’ household’s position, nor distributions around the median. That would make an interesting analysis over time and is what we need to test the real benefits of KiwiSaver to the country and to savers.

Regardless, the total numbers are interesting, particularly as we have them in a consistent sequence over the 25 years since December 1998.

Can we tell whether KiwiSaver is working? As Michael Cullen originally intended, KiwiSaver has largely supplanted the traditional workplace superannuation schemes, helped by the removal of their tax preferences in the late 1980s.

Here are the numbers from Column G1.2 of Table 1.5B or ‘Net equity in superannuation funds’. This now includes KiwiSaver.

• December 1998: Superannuation $30.8 bn.
• June 2007 (KiwiSaver started): Superannuation $31.7 bn.
• December 2023: Superannuation (including KiwiSaver) $138.7 bn.

These are all dollars of the day, so let’s compare them with total net household wealth at each of those dates to see whether KiwiSaver has shifted households’ perceptions about saving specifically for retirement:

• December 1998: superannuation was 7.1% of total net wealth.
• June 2007: superannuation had fallen to 3.3%.
• December 2023: 6.0% (4.5% for just KiwiSaver).

As might have been expected, the relative importance of superannuation savings fell between 1998 and 2007, due in part to the withdrawal of tax breaks. Employers that were driven by those tax breaks wound up their schemes. The general uncertainty surrounding the government’s initiatives would not have helped.

The numbers do show that, despite KiwiSaver, total superannuation savings are lower today, as a proportion of households’ net wealth, than they were 26 years ago, in 1998. Despite the savings industry’s claims for KiwiSaver’s success, I would not rate that performance very highly.

Taxpayers have spent about $14 bn in direct subsidies to KiwiSaver contributions in the 16 years to 2023. The administration costs incurred by Inland Revenue alone, never mind by the industry and employers (and the FMA), would also be relatively significant.

Has New Zealand received good value for those subsidies and costs? That’s at least questionable. Should taxpayers continue to spend about $1 billion a year in subsidies to members’ contributions ($1.06 bn in the year ending 30 June 2024)? We should at least ask that question and start a debate.

So, what to do?

But we can’t start a proper debate about KiwiSaver without better data. The ‘top-down’, aggregate data on households’ assets and liabilities are interesting, but not good enough.

A colleague and I wrote a comprehensive submission for the Retirement Commissioner’s 2019 Review. We listed herenine key ‘reforms that really matter’, in our suggested order of priority. Number 2 on our list was a proper longitudinal survey of households’ finances. Unless we know, over time, what households are doing in their financial lives and what their aspirations are for the long term, public policy debates must take place in a vacuum. Endlessly analysing KiwiSaver numbers in the absence of wider household data is pointless.

We can’t know whether things need changing, nor the chances that any proposed change might actually work. We can’t even see whether current policy is achieving its objectives.

Is KiwiSaver working? At a high level, seemingly not but we just don’t know. I think we should find out.