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Why bother joining Scheme when nasty Super sting may be added?

Q.        I am 38 years old and earn $55,000 p.a. I have been in my job for the past 12 years and the company looks after me well. Most of my colleagues are in KiwiSaver but I haven’t joined – what’s the point? By the time I get to 65 the Government will probably make me live on my KiwiSaver before I get any Government Super. With all the tax I’ve been paying, I don’t think that’s fair.

A.         Your attitude reflects what economists call the “rational prodigality” problem – people who intentionally under-save in order to qualify for Government welfare benefits when they retire. Some countries make retirement saving compulsory to solve this problem. KiwiSaver is not compulsory but it is improving the lives of many ordinary New Zealanders. Can I convince you to reconsider?

Imagine you reached the age of 65 and got a windfall of $160,000. Would you give it away?  According to Sorted’s KiwiSaver calculator that is the likely size of your KiwiSaver if you join now.
KiwiSaver is not quite the same as an unexpected windfall, but for a modest contribution of around $33 per week that is what you may have after 27 years if the Scheme continues in its present form. Many people fritter away $33 or more each week and have nothing to show for it. As a good employer your company would contribute their 3% (after tax) and then the Government would top up your account by $521.43 per year in Member Tax Credits, as well as the $1000 ‘kickstart’. 

At age 38 retirement is still a long way off and I can see that it is hard for you to have confidence in the sustainability of the current level of NZ Super. We are frequently warned of the demographic bulge of the ‘baby boomers’ which will see the number of retired folk increase significantly in relation to those working.   It was partly for this reason that the Labour Government set up the New Zealand Superannuation fund to partially pre-fund the future cost of NZ Super. The fund is now worth over $25 billion having achieved an average return of 9.55% per annum since 2003. The fund has a long term strategy and the first withdrawals are not expected until 2030. 
Across the Tasman we have seen the Australian Government tinker with the age of entitlement. The former Labour Government raised the age from 65 to 67 by 2023 while the current Government is looking at continuing that extension to age 70 by 2035. Here in New Zealand the National Government claims to have no intention of changing the age of entitlement, while Labour plans to progressively shift the age from 65 to 67 by two months per year from 2020. 

NZ Super is generally available at age 65 to those people who have been resident and present in New Zealand for 10 years, including five years since the age of 50 years.   An individual living alone currently receives $21,931 gross per annum.  NZ Super is paid at a flat rate and is not adjusted for income, assets or employment status. 

Not yet convinced? I will leave you with a quote from the KiwiSaver Act: “The purpose of this Act is to encourage a long-term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement. The Act aims to increase individuals’ well-being and financial independence, particularly in retirement, and to provide retirement benefits.”

The easiest way to join KiwiSaver is to hand a KS2 form to your employer. They will do the rest.

Hawkes Bay Today 3 June 2014