KiwiSaver subsidies would end up paying for themselves in future tax revenue, according to a new report published last week.
In a sharp critique of recent moves to scale back state support for KiwiSaver, the New Zealand Institute of Economic Research (NZIER) study says the government relied on a short-term historical report rather than a “forward-looking Monte Carlo analysis” to evaluate the scheme’s success.
“[Monte Carlo analysis] is the industry standard approach for analysing pension systems, and its omission from the evidence base used by the joint agency [government KiwiSaver report] is striking,” the NZIER study says.
“In brief, Monte Carlo analysis enables the projection of the distribution of potential outcomes under differing assumptions on returns, asset allocations, and fiscal parameters such as the kick-start,” the report says. “It would likely show that as balances grow the net Crown contribution into the scheme would fall and at some stage turn negative under present policy settings – the Crown will eventually take more out through taxes than it puts in through the member tax credits (and the kick-start).”
The government removed the $1,000 KiwiSaver ‘kickstart’ payment in the May budget, leaving the annual member tax credit (of a maximum $521) and HomeStart subsidies as incentives.
In its decision, the government relied heavily on a paper by Treasury researchers, Grant Scobie and David Law, that drew on a study covering only the first 3.5 years of KiwiSaver.
Scobie now works with the Productivity Commission.
Aaron Drew, author of the NZIER report prepared on behalf of the Financial Services Council (FSC), said a more holistic view of the evidence over a longer time frame shows KiwiSaver has been beneficial to its target market – middle-income New Zealanders.
“Middle and lower income KiwiSaver participants are the group most likely to benefit and enjoy a standard of living in retirement that is both superior to what they would be able to obtain without KiwiSaver, and closer to what they are able to achieve pre-retirement,” the NZIER study concludes.
Drew said as well as introducing good savings habits to middle-income New Zealand, KiwiSaver has also diversified their asset exposures.
“New Zealanders tend to have most of their assets concentrated in New Zealand,” he said. “Whether that’s in residential property, commercial property or their own businesses.”
Drew said that left New Zealanders exposed to higher risk if the country’s economy performed poorly relative to the rest of the world, “even over a short time period”.
Based on Reserve Bank of New Zealand data, the NZIER study found “that only around 5% of assets in New Zealand are held offshore”.
“New Zealanders are not compensated for taking that country-specific risk,” Drew said.
He said KiwiSaver, which in aggregate is exposed more to offshore financial assets, provides a useful bulwark against home bias.
The NZIER study says based on the high sign-up rates, KiwiSaver subsidies have been good value, especially as growing balances would probably result in net fiscal gains over time.
“… the KiwiSaver subsidy is likely a small fraction of the other investment tax distortions in the economy, and the [subsidies] can be interpreted as a means of offsetting the other investment distortions,” the report says.
KiwiSaver sign-ups, especially in the under-24 year old cohort, have slumped since the KickStart was removed.