We gave them an inch, they took a mile: Can KiwiSaver be saved?

Sunday, 1 June 2025

Vernon Small is a journalist and former adviser to the Labour government.

OPINION: It’s called creeping normality and there’s many a warning metaphor about it.

For instance, the questionable theory that a frog will instantly jump out of boiling water, but if you turn up the heat slowly it will sit there like a backbencher until it is toast.

Then there’s the Saharan caution about the camel’s nose. Once you let it poke its unlovely snout into your tent, the rest of it will soon follow.

In Europe there are variations on “give the devil your little finger and he’ll take your arm”.

Any one of them fits the creeping erosion of KiwiSaver by successive National-led governments since its inception in 2007, all in the name of improved sustainability – with limited public outcry.

In his autobiography the scheme’s architect, Sir Michael Cullen, described National governments “fiddling” with the scheme “which they always disliked”.

The sum of the whole has gone beyond just “fiddling” and the changes announced in the 2025 Budget are the latest additions.

You have to wonder what will be left of it when its 20th anniversary rolls around, because the camel is in past its hump, and up to its rump.

To understand how much has been lost, it is worth harking back to its heyday.

The scheme once boasted:

An annual $40 subsidy for fees and a $20-a-week employer tax credit (both dropped in 2009)

Tax-free employers’ contributions (made taxable in 2009, cutting their value to savers by a third)

A $1000 government “kickstart” (abolished in 2015)

A grant of up to $5000 to buy an existing house or $10,000 for a new build (demolished in 2024)

And an annual $1042 dollar-for-dollar grant from the government (cut to $521 in 2012 and to $260 in last week’s Budget … and to zero for those earning over $180,000).

A single bright spot has been last week’s move to allow 16- and 17-year-olds into the scheme.

There have, at various times, been higher or lower default contribution rates, including the phased increase to 4% in the latest Budget. A higher default rate will obviously lift balances (with some caveats) but none of that comes directly from the Government despite its attempts to “own” the credit for them.

Employees obviously pay the employee contribution from their own income, so lifting their contribution to 4% adds no more than they could have chosen to save.

And a greater and greater share of the employer’s contribution is being loaded on to the employee.

That is happening in two ways.

The first is the growing use of so-called “total remuneration packages” – a loophole closed in 2008 and then reopened after the change of Government.

It allows an employer’s contributions to come out of your pay packet, rather than being paid on top of your salary or wages. The Retirement Commission has said it goes against the spirit of KiwiSaver, and a survey found that about 25% of employers always use total remuneration packages and a further 20% use them to some extent.

The second is the unfortunate but understandable tendency of employers to try and offset increased contributions through lower pay increases.

In the 2025 Budget, Treasury assumed 80% of employers would offset their higher contributions “via lower-than-otherwise wage increases”.

To further complicate matters, employees can opt to stay at the 3% contribution rate, and if they do employers will likewise pay only 3%– raising fears among unionists that there will be pressure to stay on the 3% rate.

The Government needed every dollar it could save in the Budget and the KiwiSaver changes delivered. The subsidy cut to $260 saves $2.3 billion over four years. Axing it entirely for those earning over $180,000 saves $160m. Extending it to 16- and 17-year-olds is small under-age beer; it costs $25m.

Lifting the employer contribution to 4% lowers revenue by $690m, because of employers’ increased costs. But that is set against $1.23 billion more from the tax paid on employer contributions.

What of the nationalistic argument, that lifting the contribution rate boosts the economy and builds investment capital?

Again, it’s a mixed picture.

Treasury assumes 80% of the increased contribution by employees will come at the expense of other forms of savings, such as lower mortgage payments or smaller investments elsewhere. So, household mortgage debt will be higher than if there had been no change, and household spending will be crimped.

Historically KiwiSaver was generous, with attractive benefits and some free cash. Over the years it has attracted more than 3.3 million members, with combined savings of more than $110 billion.

It has been transformational for many Kiwis’ savings habits and balances.

But the average account balance is only $37,000 and 40% of account holders are not paying into it.

Steadily making it less attractive has only exacerbated that trend.

No one wants to say it, because saving for retirement is beyond reproach – like motherhood or chocolate lamingtons.

But KiwiSaver’s cost/benefit ratio has reached a tipping point, unless a future Government introduces more benefits and closes the “total remuneration” loophole.

To be fair, some people prefer to have their savings locked away out of temptation’s reach. The fairly frictionless “inertia” of being in the scheme is attractive and in KiwiSaver they pay marginally lower fees. Accepted.

But we are confronted with a government contribution of only $5 a week and an “employer contribution” that we may effectively pay for ourselves. All in exchange for locking up savings until we turn 65 (unless you are buying a first home or can argue you’re in financial strife). Isn’t there a better alternative for many just starting out?

With the usual caveat that this is not financial advice, why not open a KiwiSaver account, put in $1040 a year to get the remaining $260 subsidy and leave it at that?

Use the rest of your spare cash to lower the size of your mortgage and/or invest in a KiwiSaver-like fund where you cash is readily accessible … and then sit back and lament how much more you'd have if the frog-boiling never started.

What do you think? Email sundayletters@stuff.co.nz. Please include your full name and address.