Get tough and make super compulsory
The clear message coming from the Beehive is that New Zealand is living way beyond its means and some stringent austerity measures can be expected in the Budget to put the brakes on borrowing and spending. Yet changes to KiwiSaver foreshadowed by the Prime Minister yesterday do not match the dire warnings.
By Mr Key's own reckoning, the scheme takes more than $1 billion a year from the Government in the form of tax breaks and subsidies. Unfortunately this money is raised through borrowing.
As the Government has indicated that reining in the country's rapidly expanding debt is its key objective, it is not surprising that the focus has been on KiwiSaver as one area in which significant savings might be made.
And yet the reductions mentioned by Mr Key do not appear to be drastic, more a light bruising than a deep cut. The $1000 grant to kick-start new members is to remain. What happens to the tax credit, generally reckoned at costing about $20 a week or just over $1000 a year for each member, which accounts for the bulk of the Government's annual outlay is not so clear.
It seems that it, too, will be reduced gradually but not eliminated. Hardly a spending cut likely to impress the likes of Standard and Poor's. The Government's aim seems to be to have employees and their employers pick up some of the slack to keep the fund going.
Opposition parties will predictably criticise the move as being hard on the people who can least afford it. But the real test will be whether the cuts go far enough and make a significant contribution to the stated aim of reducing spending so borrowing, which is running at more than $300 million a week, can also be reduced. The Government has made it plain that the scheme as it stands is unaffordable. While it might look good on paper, with $8 billion in savings, to a great extent this is illusory because nearly half the amount is borrowed. In other words, as Mr Key pointed out, it is like taking a loan from one bank, putting it in your savings account at another and kidding yourself that you have a good savings record.
Mr Key has stressed that any changes are aimed at prolonging KiwiSaver's life by making it affordable. If that can be believed, it is a commendable objective. New Zealand has a lamentable history when it comes to encouraging savings, and KiwiSaver is an important element in rectifying past failures.
But the present economic difficulties have exposed a serious fault with the scheme. The cost of the carrot to encourage people to invest might be acceptable in good times, but it threatens its sustainability when times are tough. What is needed is a scheme for all seasons.
To achieve that, it would be far better to use a stick rather than a carrot. For some reason, politicians have never been able to make the idea of compulsory superannuation fly in New Zealand. The compelling reason to do it can be seen in Australia which has had compulsory super for more than 20 years.
There is no doubt that such a fund can win popular acceptance. Only last year Australians supported an increase in contributions from 9 to 12 per cent.
And no wonder; their fund was then worth about $1.4 trillion and was credited with helping to reduce Australia's dependency on raising money overseas.
Given the dire state of the New Zealand economy as outlined by the Government, now would be a good time to abolish KiwiSaver incentives and move to a compulsory scheme. Not only would this make a significant contribution to addressing the short-term problem of excessive borrowing but it would ensure the fund could be sustained well into the future.
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