Total Pageviews

Thursday, January 8, 2009

KiwiSaver - a mess

KiwiSaver is a basically flawed system and is only a good investment for someone in the 19.5% tax bracket (who is unlikely to have money to invest).

Firstly, the government uses our own tax money to entice us into the system. They then must either:
a) collect more taxes*
b) reduce services.
c) or put us into greater debt.

*Question: Could the 2010 proposal by the government to raise GST be due in some part to the money they use for KiwiSaver bribes.

Secondly, the employer contribution isn't. A CEO will simply calculate how much he can afford to pay his new employee, deduct his contribution and offer the remainder. For employees already working, salaries won't rise as fast as they otherwise would have. Same result. The CEO's have been given 4 years to adjust which is plenty of time to make sure KiwiSaver doesn't cost them anything. The present economic crisis presents the perfect excuse not to increase salaries.

Thirdly, and most important, KiwiSaver is a very poor investment. Consider someone in the 33% tax bracket. Contributions are after taxes (unlike many other countries) so our middle income investor has to earn $150 in order to have $100 to invest. Then his interest and/or dividends are taxed. I am somewhat disillusioned with capital gains and anyone who would put money with a New Zealand investment company must have been sleeping for the past 5 years. I would rather have a 6% fixed interest investment in the bank which is is easily obtained in normal times when inflation is running around 3%. Lets use this as an example.

At age 20 I invest $100. I get 6% so at the end of the first year I have $106 in the bank. I earned $6 so the government takes $1.80*. I gain $4.20 from an investment of $100. With 3% inflation, I need $103 to break even. Real earnings $1.20 or 1.2%. At that rate it will take over 34 years to get back to the buying power of the original money I earned. It is hardly fair to ask us to lock up our money for most of our life with almost zero return. Other countries have got it right. Why can't we.

*Note - the government has lowered the tax on dividends within KiwiSaver to 30% for people in the 33% and 38% brackets.

#Note also that to a significant extent inflation is controlled by a government. As inflation occurs, the buying power of money you have saved is reduced. In other words, without ever touching your bank account, the government is taking money out of it. A hidden tax.


Anonymous said...

I believe your view is flawed - not the KiwiSaver system. KiwiSaver has been hailed as an excellent scheme by economists throughout the World. True if you have saved money and put it in the bank you can withdraw it. Under KiwiSaver it is tied up until you are eligible to withdraw, but that is the benefit of superannuation savings - you save until you get to the age for retirement - not spend it when you feel like an upgrade on something. Also the KiwiSaver investment options are flexible and wide ranging, whereas putting the money into the bank locks you into the term you sign up for - under KiwiSaver you can move your funds around as you see fit. You emplyer contributions are actually better off going into KiwiSaver than as part of your salary or wages, as these deductions at 2% are tax free, so you get the full amount going into the fund, not have PAYE deducted when it goes into your pay packet. KiwiSaver is about helping New Zealanders for the long term - not about thinking about what it costs today. In general, New Zealanders are poor savers and we expect to get handouts when we don't sufficiently look after ourselves. KiwiSaver is a balances these two aspects and provides an excellent platform to start saving.

William Hughes-Games said...

Anonomous, I agree with much of what you say with regard to the importance of KiwiSaver to New Zealand and the huge need for us to save more. See but unless I have missed something, all the money you put into KiwiSaver is taxed before you put it in. Forget about the employee contribution - it is a cruel hoax. Insofar as KiwiSaver makes you think that you are getting somethin for nothing while giving you nothing for something, I think it is a con.