New Zealand’s pension problem

To shore up New Zealanders' retirement, Wellington is gearing up to launch a unique program called KiwiSaver next year, says the Wall Street Journal.

The scheme directs 4 or 8 per cent of an employee's gross salary into a limited set of mutual funds. Once enrolled, savers can opt out of the program altogether. So, to tempt them to stay, the government will grant every participant NZ$1,000 ($604) to get started. However, these funds can only be accessed on retirement, except in some very special circumstances.

On the face of it, it sounds like a bright idea to force people to save. However, KiwiSaver just doesn't give sufficient incentives to save; it is merely a mechanism that facilitates retirement savings, says the Journal:

Unlike most developed countries' private or quasi-private pension schemes, KiwiSaver does not come with tax incentives attached -- rather, the employee's contribution is 4 or 8 percent of an employee's gross, pre-tax salary, with no change to the individual's total taxable income.

KiwiSaver also won't receive ongoing top-up contributions from government or employers, as in America's 401(K) savings scheme.

More worryingly, KiwiSaver does little to address the root cause of New Zealanders' atrocious savings habits; namely, the country's generous welfare system:

Today, Wellington guarantees 65 per cent of the national average wage upon retirement at age 65.

These payments aren't income or asset tested, meaning everyone receives the same treatment, regardless of wealth.

Observers ask: Why would New Zealanders save today if the government will look after them in their old age?

Source: Shamubeel Eaqub, New Zealand's Pension Problem, Wall Street Journal, April 5, 2006.

For text (subscription required): http://online.wsj.com/article/SB114418524382616904.html

For more no International: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 18 April 2006