$300m KiwiSaver plan 'adds little to savings'
A Treasury report to Finance Minister Bill English reveals officials doubted whether a $300 million one-off auto-enrolment in KiwiSaver would deliver a worthwhile boost to national savings.
Treasury initially advised against the Government's plan because of the small impact it would have on savings.
One concern was that people would see government money building up in their accounts and reduce their own savings accordingly, making the subsidy ineffective.
If a one-off auto-enrolment was considered then taxpayer subsidies should be reduced, said Treasury – advice the Government took when it slashed subsidies in the May 2011 Budget.
The Treasury advice is contained in newly released parts of a January 28, 2011, report entitled KiwiSaver – Options for Budget 2011.
Parts of the report remain secret but one passage says: "As a first best intervention to boost national saving, Treasury would not recommend a one-off auto-enrolment of all wage and salary earners. The impact on national saving is likely to be modest, although we acknowledge that the adverse welfare impacts are likely to be much smaller than [if KiwiSaver was made compulsory]."
The "adverse welfare impacts" referred to are effects on people who cannot afford to save or would be better off not saving.
"On balance Treasury considers that the benefits of extending auto-enrolment are unlikely to have a large impact on the Government's objective of boosting national saving," the report says.
National announced in October that it would stage a one-off auto-enrolment in KiwiSaver for all workers in 2014-15 if its books had returned to surplus. Workers will have the option to leave again.
Treasury went on to help the Government design a package of changes to KiwiSaver including auto-enrolment.
The idea was first suggested by the Savings Working Group as a way to improve New Zealand's savings position.
Treasury put the benefits lower than the Savings Working Group did partly because it assumed that government top-ups would give people an excuse to lower their personal savings.
"As subsidies add to individuals' balances those individuals that are saving towards a target may reduce the level of other saving," it said.
If that happened, "the low level of additional private saving that these subsidies are drawing represents, in our view, poor value for money".
Treasury noted that the cost of extracting private savings through KiwiSaver was significant – about $1 billion was paid into members' accounts in 2009-10.
A Colmar-Brunton survey has suggested about 29 per cent of contributions are new savings that would otherwise be spent while the rest would be saved regardless.
Following Treasury's recommendations the Government cut tax credits in half and reintroduced tax on employer contributions, reducing costs by $500m a year. However it did not adopt a recommendation to raise the default level of contribution by KiwiSavers to 4 per cent with a minimum fallback of 2 per cent.
Instead, workers and employers will be required to lift minimum contributions from 2 per cent to 3 per cent in April 2013, a move supported by Treasury in a later paper.
Including the suggested 4 per cent default contribution rate, Treasury had estimated one-off auto-enrolment would increase national savings by 0.18 to 0.2 per cent of gross domestic product a year.
Staging a one-off auto-enrolment in KiwiSaver will cost $300 million to $430m over four years, according to a Treasury email dated September 30 and released to BusinessDay under the Official Information Act.
That includes $200m to $250m in $1000 kickstart payments (about $40m of which would have been paid out anyway to people joining the scheme over the following three years), and additional member tax credits amounting to $60m to $75m in the first year and $70m to $90m in the second year, then falling.
An email from the Inland Revenue Department on October 11 advised that the estimated cost to it was $4.5m to $5m to handle the spike of about 250,000 new enrolments, not including marketing costs.
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