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Michael Cullen's Video Guide To KiwiSaver



Finance Minister Michael Cullen narrates a PowerPoint presentation about the changes to KiwiSaver announced in Budget 2007. 

Budget 2007 deals with one of our toughest economic challenges - our poor savings record, and that's shown by the fact that we now have to borrow many billions of dollars overseas in order to fund investment needs.

We have a high level of net debt as a proportion of our national income, one of the highest in the developed world.

We need to reduce that net debt over time and we can only do that by saving more and investing more.

We are going to achieve a higher level of savings primarily through enhancing the KiwiSaver scheme.

Workers are compulsorily enrolled into the saving scheme at the start of a new job with 4% of their salary deducted at that point.  

They have between two and eight weeks to decide whether to opt out of the KiwiSaver scheme.

In the budget we announced three main changes to the scheme.

Firstly - that employees will get a $20 per week tax credit which will go into their KiwiSaver account if they are earning over $26,000 per year and up to that level we will match KiwiSaver savings and put the equivalent amount into the KiwiSaver scheme.

Secondly - a compulsory employer contribution will be phased in over four years, starting at 1% of employees salary but the costs of that will be offset by the third element which is a tax credit for employers, which is a direct offset against their PAYE obligations.

The result of this is that at full operation the cost to employers will be about 1% of the total national wages salary bill assuming there is a 50% take up rate of KiwiSaver.

For those on low incomes, the Government will meet the full cost of the employers contribution and also completely match the employees contribution so that an employee ends up with $3 for every dollar they save.

Let's take some examples:

Megan and Jack are a couple that earn a bit less than the average full time wage but their household income at $75,000 is the average household income in New Zealand and they contribute 4% each.

After five years they have a home deposit which should be about $35,000 to put down on a starter home.

At 65, they should have savings of $390,000 in 2007 dollars enough for an extra annual income of $20,000 per year, which nearly doubles their New Zealand superannuation.

Savings are boosted in the KiwiSaver scheme by the compulsory employer contributions and by the tax credits.

By 1 April 2011, employers will be providing a 4% matching contribution to the employees 4% and they will be getting a tax credit from the Government, which will cover for an average worker, about half the cost of that.

At the same time, the employee gets a tax credit, which is also about half of the employees contribution on an average wage. 

So for a person on the full time average wage in 2011, they save 4% of their income, they will have 10% of their income in fact going into a KiwiSaver account, of which they will pay 4%, the Government will in affect pay 4% and the employer will provide 2%.

With the KiwiSaver scheme moving into full operation, funds will build up over time in KiwiSaver funds. 

We're anticipating, if we assume a 50% take up after ten years, the funds will grow to about a $100 billion in todays dollars after thirty years, which is about 60% of our total GDP at that point.

While there may be some people switching to KiwiSaver from other schemes, this will still see a very large increase in our total level of savings and it will be a fundamental shift in our savings landscape.

I think it's very important for people to understand that lifting our level of savings produces wider economic benefits.

The immediate benefits are to the individuals who will have a much larger retirement nest-egg in the future.

But for the economy as a whole it means stronger and deeper capital markets and therefore lower interest rates for business over time and easier access to capital.

It will reduce pressure on inflation and reduce pressure on our current account deficit. 

We will be able to own more of our own country and be less reliant on capital from overseas.

From the employers perspective it's very important to note that employers have their cost limited by the tax credit, which is available to them.

And that tax credit will be available to all employers, whether they make a profit or not, whether they are charities or local government, companies making a profit, or companies that are in a loss making situation.

The result of this is that probably about half of the employers contribution will be met by the tax credit. 

On the other side of the equation, employers get greater staff loyalty, there will be greater buy in to New Zealand by workers in the future because of their KiwiSaver scheme and also employers will get lower interest rates, which is a key cost of business.

So while there are some costs for employers, all round it's a good deal from their perspective.

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