KiwiSaver - $20???

Do you ever get suspicious when someone wants to give you something for nothing. I'm talking about the $20 the government puts into your KiwiSaver account each week as long as you are putting in at least as much.

Lets look at someone on a medium-good annual salary of $60,000 and here I'm talking about a $60,000 cost to the employer. This is what he is prepared to put out for the privilege of having you work for him. You tell him to keep $2,307.69 to put into KiwiSaver, tax free, for you so your taxable income is $57,692.30. Your Kiwi Saver contribution is 4% of your taxable income or 2,307.69. (the same as your employer puts in). This is a weekly contribution of $44.38 from you and the same from your employer (of your money, remember) Since you are in the 33% tax bracket, you had to earn $66.56 to be able to put your $44.38 into Kiwi Saver. Do you see where we are going. The government $20 doesn't quite make up for the amount they charge you in taxes before you deduct this money to put into KiwiSaver. They would have had to give you $22.18 to make up for the taxes they took and we aren't finished yet.

You then earn a dividend on your money. Lets assume you earn 6% which is a historically pretty realistic figure for reasonably low-risk investments. Inflation is running at 3% so for every $100 you invest, you need $103 at the end of the year, just to break even. You end up with $106 but then since you have earned $6 and are in the 33% tax bracket, the government takes $2. You have $104 in the bank which is only a dollar earned in real terms. Index it back to the time of investment and it is worth $0.97. Your real earnings are only 0.97% Get out your pocket calculator and compound this for 45 years (your first investment at age 20 which you take out at age 65) and you have made a grant total gain of just over 50% for a life time of investment. (1.0097 raised to the 45th power, minus 1, times 100) . All subsequent contributions are in for less time and earn even less at retirement.

We haven't even factored in yet the comission that the financial provider takes.

The problem with KiwiSaver is not that you can't find an acceptable investment to put your money in. Do the sums with a 6% investment for 45 years and see what you come up with. Over 45 years a $100 investment becomes $ 1,376 or,if you factor in 3% inflation to get its true worth in dollars at the time of investment, it is $378. That isn't a very flash return for a life time but many would consider it fairly reasonable. The problem with KiwiSaver is the tax regime which requires you to have to earn $150 for every $100 you invest and then taxes not the money you really earned ($3 on $103) but on the whole $6. The other three is eaten up by inflation. Remember that inflation is, to a large extent, government controlled.

In case you think I am being picky, other jurisdictions have got it right. Our next door neighbours, Australia charge 15% on money its workers invest and $15% on their earnings regardless of their tax bracket. This is from their web site and they probably don't emphasize the fine print so there may be "whichevers" and "wherefores" that detract from this apparently advantageous picture. America and Britain, as far as I can work out, charge nothing on the money they invest and nothing on their earnings. I 'stand under correction' on this and would be very happy to hear comments from anyone who lives under these systems as the web sites are not that easy to follow.

The problem with KiwiSaver is not the plan itself but the government tax structure. They don't have to make it seem that we are getting something for nothing. There is a name for that. They just have to let us keep more of what we actually earn and give over on the idea that since this is a savings scheme, we really shouldn't expect a decent return for tying up a large portion of our disposable income for most of our lives. Do the maths and you will find that it is a far better investment under most economic conditions to invest a greater amount in your morgage. Calculate your net worth at 65 and this will put you far ahead of investing in KiwiSaver.

(disposable income - the income left after you pay off rent, electricity, basic food and so forth).