Cullen details KiwiSaver's workings
In a speech to the CTU Finance Minister Michael Cullen provided more details of the savings package which was announced in this year's Budget.
Tuesday, July 12th 2005, 9:40PM
This year’s Budget completes the second cycle of budgets presented by the Labour-led government. It cements in some of the major initiatives we have made as a government, around economic growth and innovation and a return to quality public services.
And it also completes the task we began almost as soon as we took office in 1999: to place superannuation in New Zealand, public and private, on a sustainable track that will deliver real security for New Zealanders in retirement while maintaining strong public finances into the future.
Savings is important not just because it is good for individuals, but because it will create a greater degree of local investment in the local economy.
Our vision as a government is for ordinary New Zealanders to have a stake in the future that goes wider than that, to have an investment in the new economy we have been creating.
Budget 2005 commits a further $2.3 billion in 2005-06 to the Super Fund which is projected to have a balance of $19.4 billion by June 2009.
The Labour-Progressive Government can take significant pride in the Fund. Although it was only set up a few years ago in 2001, it has won wide public support.
On the basis of current fiscal policies, we will be able to reduce our level of gross debt to just above 20 per cent of GDP. That is a comfortable level of gross debt, and enables us to build up the Superannuation Fund.
We know that there will be considerable pressure on the fiscal position from an aging population driving up health care and superannuation costs – and we are ensuring that New Zealand is well placed to deal with this.
What we have achieved with Budget 2005 is a balanced set of initiatives aimed at: growth; security; and opportunity. Staying within the fiscal parameters we have set ourselves, we have been able to create a targeted set of tax cuts aimed at encouraging investment in business.
The major new set of initiatives in the Budget are around making it easier for people to develop a long-term savings habit and helping New Zealanders buy their first home.
The package has three components:
- KiwiSaver, a government sponsored work-based savings scheme;
- A substantial extension to the Mortgage Insurance Scheme, introduced in 2003; and
- Education programmes for financial literacy and for first home buyers.
KiwiSaver has been designed at every step to make saving easy and to minimise compliance costs to the employer.
KiwiSaver is a voluntary scheme, and is available also to the self-employed and beneficiaries.
Nevertheless, we are trying to tilt the playing field towards participation with several important features of the scheme:
- New employees aged 18 to 65 are enrolled automatically by their employer as they take up their job. They can choose to opt out if they wish. Conversely, existing employees can choose to opt in.
- The government makes an upfront contribution to the employee’s account of $1000.
- To make payments ‘painless’, employers make deductions from wages and forward them to the IRD along with PAYE. They can also choose to make contributions on their employees’ behalf.
The scheme imposes minimum administration costs on employers. IRD forwards the payments to the private fund providers, oversees the automatic enrolment and contribution holidays, provides information and maintains records of scheme members.
Those already paying into a scheme can enjoy the benefits of KiwiSaver. Existing registered superannuation schemes can choose to convert OR be exempt from automatic enrolment, so long as:
- The scheme is portable,
- It is open to all permanent employees,
- Has a total contribution rate [employer and employee] of at least 4 per cent of earnings.
Members of exempt schemes are eligible for the home deposit subsidy, but not the kick-start payment for obvious reasons. KiwiSaver avoids the pitfalls of the failed Roger Douglas scheme of the 1970s, by spreading the funds around a number of registered funds managers and providing maximum flexibility for members.
Choice is the watchword of the scheme. For example, individuals can:
- choose to opt in to KiwiSaver if they are already in a job, under 18 or self-employed;
- choose their own provider or be allocated to a default, conservative scheme if no choice made;
- choose to change provider; and
- choose their own risk profile (e.g. conservative, balanced, growth).
There are definitely opportunities here for unions to add value for their members, by providing advice on options and assisting in the task of increasing the financial literacy of New Zealand workers.
There is a quid pro quo for all this, of course. This is a scheme that aims to increase the overall level of domestic savings, not just shift around the current savings.
In return for the benefits of the scheme:
- · Funds are locked-in until age of eligibility for NZS (age 65); and
- · Funds can be accessed prior to retirement only for:
- first home ownership;
- financial hardship; or
- permanent emigration
However, members can take a contribution holiday for up to five years, to accommodate situations such as withdrawal from the workforce to care for children.
We have long recognised that the foundation for security for most New Zealanders is a freehold home.
That is why we have designed an option within KiwiSaver to deliver a first home deposit subsidy of up to $5,000 per person. It is available to those who have contributed at least $1,000 per year to the scheme and can be accessed after 3 years of contributions.
It is subject to an income test.
We are also expanding the mortgage insurance scheme so that it will assist up to 5,000 households a year. The savings package, Securing Your Future, is the centrepiece of Budget 2005. It has the same long-term focus as the Working for Families package in last year’s budget and in many ways complements it.
Working for Families looks to the future by raising the living standards and life opportunities available to New Zealand children.
Securing Your Future looks to the future by assisting individual New Zealanders to save for their retirement and to buy their first home. It also completes the superannuation double by complementing the New Zealand Superannuation Fund.
Within the space of two terms of office we have put an end to decades of turmoil during which New Zealanders struggled to prepare for retirement while politicians kicked superannuation around like a football.
We have now stabilised the long term funding of the basic state pension so that it will remain a secure bedrock for all New Zealanders. And this year we have introduced a savings scheme that will place an achievable programme of retirement savings within the grasp of every working New Zealander.
We are giving New Zealanders a tangible stake in their future, and ensuring that that future is a solid one.
This is an edited version of a speech Finance Minister Michael Cullen made to teh CTU Forum in Rotorua
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