Innovation in Retirement Savings Policy: The New Zealand Experience

Abstract

New Zealand has adopted a unique approach among OECD countries to the policy issue of retirement savings. New Zealand has no compulsion for retirement savings and, for the 20 years prior to 2007, has also had no tax incentives for retirement savings. In 2007, the KiwiSaver scheme was implemented: a unique compulsory “opt-in”, voluntary “opt-out” scheme, with financial incentives for participation. The reduction of the incentive to 2 per cent of salary, with a change of government in November 2008, has demonstrated that the innovative scheme is vulnerable to political manipulation.

Notes

1. The kiwi is the national bird of New Zealand. It is also a colloquial term for a New Zealander.

2. An alternative measure is the “net replacement rate”, which takes into account taxes and other transfers that may impact on standards of living; for example, in some countries tax rates are lower on retirement or additional social welfare benefits are provided (which may reduce the level of private savings required). The “gross replacement rate” is used in this discussion, as there are no additional benefits provided in New Zealand at retirement.

3. As might be expected, replacement rates will be higher for low-income earners and lower for high-income earners.

4. A number of countries have social security taxes, which are compulsory taxes used to fund social welfare expenditures, including state-provided pensions. These social security taxes may have a link between contributions paid and benefits payable or may require a minimum period of participation to qualify for a flat-rate benefit. Typically, these benefits funded by social security taxes provide a basic level of income to ensure that elderly individuals do not live in poverty. The policy tools discussed here have the objective of encouraging individual saving for retirement to supplement the basic state-provided pension. New Zealand does not have any social security taxes.

5. Adapted from the Task Force on Private Provision for Retirement (1992: 34).

6. There are indications that a number of other countries are exploring this policy option. For example, Ireland has raised the possibility of this option in a recent green paper and the United Kingdom and the United States have recently introduced reforms that will make it easier for employers to automatically enrol employees in occupational schemes (Antolin and Whitehead 2009: 23).

7. However, the dollar-for-dollar subsidy will remain at $1,040 per year. This will benefit low-income earners.

8. The New Zealand Superannuation Fund was implemented in 2001 to partially pre-fund the future costs of New Zealand Superannuation. It attempts, to some extent, to restore an element of inter-generational equity to the provision of a universal pension. The fund will take contributions from government budget surpluses until 2025, at which time the fund will be drawn on to help fund the cost of New Zealand Superannuation.

9. New Zealand Government Actuary (2007). It is acknowledged that this figure has significantly increased with the introduction of KiwiSaver accounts in 2007.

10. Mercer, ‘KiwiSaver incentives wiped out by investment tax’, Press Release, November 3, 2008. Available at www.mercer.co.nz (accessed December 2008). Mercer describes the tax incentives at the current rate as “self-funded by the individual”.

Additional information

Notes on contributors

Lisa Marriott

Lisa Marriott is a Lecturer in Taxation and Financial Accounting at the School of Accounting and Commercial Law, Victoria University of Wellington, New Zealand.