KiwiSaver was originally based on the concept that New Zealanders could be induced to save long term if the government provided the right incentives. Although these incentives came at a cost to the country they also helped the government achieve wider objectives. Not only did KiwiSaver get people saving; it also helped employers to assist their employees to save, mopped up excess liquidity when consumer spending was high, raised awareness of how savings products work, has provided an additional source of taxation from the additional investment income and helped first home buyers save for a deposit.
The National government however has regarded those incentives as an unnecessary cost at a time when government spending is being cut (even while expressing concern at the NZ’s low savings rate). As a result it has progressively reduced the KiwiSaver incentives, thereby making KiwiSaver less attractive to savers.
When the employer contribution becomes taxable on 1 April 2012 the only remaining government incentives would be the $1,000 kick start for new joiners and up to $521 pa member tax credit – for which the member would have to contribute $1043. The benefits would still be locked in until age 65. This will reduce private sector savings by $0.75 billion per year.
In Eriksens opinion KiwiSaver, without the tax exempt employer contribution, does not make much sense. Why lock your funds away to age 65 when regular superannuation schemes allow benefits to be paid on leaving service? Is the loss of liquidity worth $521 per year? The critical issue is whether employers would be willing to contribute 2% to a superannuation scheme without the compulsion of KiwiSaver. Most have already closed their schemes because of the success of KiwiSaver.