Everyone assumes the scheme is working. But no one can prove it.
The only rigorous evaluation of KiwiSaver’s impact on wealth was published in 2017 by Treasury economists David Law and Grant Scobie.
Law and Scobie found that KiwiSaver members accumulated no more total wealth than non-members. Two-thirds of contributions had simply been shifted from bank accounts and term deposits into a KiwiSaver account. New Zealanders were not saving more. They were saving differently.
Economists have long understood this. In 1954, Franco Modigliani showed that households plan their savings across a lifetime. If forced to save through one account, they save less through others. They pay down less debt or put less into the bank. Modigliani won the Nobel Prize for this work.
Evidence from the US, Denmark and the Netherlands has since confirmed the pattern: between 50% and 80% of every mandated retirement dollar is offset by less saving elsewhere.
The Law and Scobie study is now nine years old, and no more recent study has shown that the $110 billion programme does what it was designed to do. Regardless, we are about to make it much bigger.
When advocates talk about raising “employer contributions,” they imply your boss is giving you something extra. Australia’s Grattan Institute studied 80,000 workplace agreements over three decades and found the opposite: when compulsory super went up, pay went down by almost the same amount.
So why does everyone believe KiwiSaver is a success? Because $110 billion in accounts looks like new wealth. Much of it would exist anyway, in other forms. But big numbers are persuasive, and over two decades, KiwiSaver has built a constituency whose livelihoods depend on the scheme growing.
There is also another problem. The bigger the pool gets, the more politicians eye it as a potential way to fund their preferred projects. What was sold as your retirement nest egg risks becoming a pool of capital for others to direct.
After nearly 20 years and billions in subsidies, no one has shown that KiwiSaver has made New Zealanders wealthier. Still, the instinct across the political spectrum is to make the scheme bigger.
Before we do, we might want to ask why we expect KiwiSaver’s next decade to deliver what the first two did not.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE
Economists have long understood this. In 1954, Franco Modigliani showed that households plan their savings across a lifetime. If forced to save through one account, they save less through others. They pay down less debt or put less into the bank. Modigliani won the Nobel Prize for this work.
Evidence from the US, Denmark and the Netherlands has since confirmed the pattern: between 50% and 80% of every mandated retirement dollar is offset by less saving elsewhere.
The Law and Scobie study is now nine years old, and no more recent study has shown that the $110 billion programme does what it was designed to do. Regardless, we are about to make it much bigger.
When advocates talk about raising “employer contributions,” they imply your boss is giving you something extra. Australia’s Grattan Institute studied 80,000 workplace agreements over three decades and found the opposite: when compulsory super went up, pay went down by almost the same amount.
So why does everyone believe KiwiSaver is a success? Because $110 billion in accounts looks like new wealth. Much of it would exist anyway, in other forms. But big numbers are persuasive, and over two decades, KiwiSaver has built a constituency whose livelihoods depend on the scheme growing.
There is also another problem. The bigger the pool gets, the more politicians eye it as a potential way to fund their preferred projects. What was sold as your retirement nest egg risks becoming a pool of capital for others to direct.
After nearly 20 years and billions in subsidies, no one has shown that KiwiSaver has made New Zealanders wealthier. Still, the instinct across the political spectrum is to make the scheme bigger.
Before we do, we might want to ask why we expect KiwiSaver’s next decade to deliver what the first two did not.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE
3 comments:
This is a simplistic take on our scheme. Distribution of those savings, and the socio-economic status of the survey populations in non-Kiwisaver and Kiwisaver groups needs to be examined carefully. Behavioural studies for young people also need to be done. The overall macro result is not contested here, but the micro results of 'forced' saving for young people especially is likely to be in favour of Kiwisaver. And you might find the macro result contested by studies of Australia's experience since 1992, notwithstanding the Grattan Institute result. It's what is saved, not earned, we are talking about.
I'm surprised Hartwich has omitted the most powerful component of KiwiSaver - namely the inability of the saver to access their savings until age 65. Cullen recognised that people simply couldn't be trusted to exercise the discipline necessary to save for retirement. So, even if people are still not saving more, at least they are preserving what savings they've got, and enjoying the magic of compounding returns along the way. The main weakness of the scheme is that it's not mandatory.
I'm a bit skeptical about "treasury economists / government stooges"
Even if "two-thirds of contributions had been shifted from bank accounts and term deposits into a KiwiSaver account" New Zealanders are still likely saving more AND differently.
Did they forget you can't access KiwiSaver until you are 65 but you can easily blow a term deposit upon maturity.
Maybe that was the main reason?
Some people wanted to thwart temptation.
And where is the evidence that $110 billion "... would exist anyway, in other forms"?
Perhaps it would ...
But not in the same pockets of those who contributed to the scheme.
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