What will National do to Kiwi Saver?

STUFF.CO.NZ: There's much that's unclear about the National Party's policy on KiwiSaver, including whether it will do anything to get them elected.

But one thing is certain: KiwiSaver nest eggs under Labour are bigger and go further towards securing your retirement.

A friendly fund manager, who did not want to be named in order to avoid hacking off a potential future government, ran off a set of figures for us to test what National policy would do to KiwiSaver nest eggs.

The Nats would cut the minimum contribution rate required of employers to 2% (from the target under Labour of 4%), and remove the tax credits the government (i.e. the taxpayer) would have forked over to employers to help them meet the 4% they were to chip in.

Therefore a $45,000 salary earner saving into KiwiSaver for 15 yearswould have about $31,250 less in his or her nest egg at retirement.

If that person were saving for 30 years, the difference would be just over $92,300.

Invested to produce income, that would mean a good few thousand less to spend each year enjoying your retirement years.

All such calculations need to be qualified.

In this case the calculations assume a couple of things firstly, that savers put money away at the minimum rate (4% under Labour and 2% under the Nats). It also assumes a 4% real rate of return and 2.5% inflation, though such assumptions, which have held true in recent history, look rather too rosy in a world where investments seem to be going to hell in a handbasket, and if the majority of KiwiSavers leave their savings in cash funds where they currently have them, they can, in theory, expect lower returns.

They also assume that there is no further tinkering with KiwiSaver, and quite frankly, that is something the Nats have proved just won't happen.

As a result of the Nats' policy, the flood of cash into KiwiSaver would slow by around a third.

The fund manager estimates the annual flow of cash into KiwiSaver accounts would drop from about $3 billion a year (again there are assumptions behind this figure, including 30% of workers saving from their salaries) to about $2b, though a worst-case scenario could be $1.5b.

These are not random calculations. The $3b figure was the sum the fund manager predicted in the run-up to the launch of KiwiSaver, and it says, its assumptions have all been borne out.

Under the Nats' policy, however, around $600m of employer contributions a year would not flow into KiwiSaver accounts.

And those paid more than $52,000 would probably cut their contributions from 4% to 2% that would be enough to get the maximum member tax credit of $1040 from the government, so why lock up any more of their money?

There might be some rise in poorer people contributing because they could better afford 2% contributions rather than 4% ones, but that wouldn't compensate for the loss of savings from higher earners.

A $1b-a-year reduction in funds flow would be a pretty tough pill for fund managers to swallow after spending up large to get ready for KiwiSaver in a short period of time.

Having said that, National is planning on giving the savings back as cuts in tax, so mortgages could be paid off faster, which is saving of a kind.

It's more likely, though, that most of it would be spent on the general costs of life.

The net result of all of this is, however, that under the Nats, KiwiSaver nest eggs would shrink.

The party has left the door open to raising the minimum contribution rate to 3%, but it is hard to believe a National government would ever actually do that.

To be fair, the Nats' view that KiwiSaver is a scheme planned in better economic times, under the assumption they would continue, is not to be dismissed out of hand.

But there are some unanswered questions, which do need clarifying before voters can decide whether this policy is worthwhile.

Firstly, National should confirm it will realign other tax rules to match its new tax bands, or stay-at-home spouses, low earners and children will be overtaxed. (for example, National is proposing a new tax tier of 12.5% for the lowest earners, but the lowest fund tax rate is 19.5%.)

Secondly, the Nats need to dismiss dark rumours that the wording of its KiwiSaver policy could mean it plans to remove member tax credits for non-wage earners such as the self-employed and stay-at-home spouses.