Although this website is about New Zealand Superannuation, it should be mentioned that NZ Super is not the only source of retirement income, at least for future retirees.

In addition to NZ Super, which is the main source of retirement income for about 60% of New Zealand pensioners, personal savings and investments (funds, shares, property) play a significant part in covering elderly people's cost of living. A third source of retirement income beside savings and NZ Super is KiwiSaver, an individual savings scheme. It is a personal choice to join the scheme, i.e. KiwiSaver is not compulsory. And, of course, some people keep on working to supplement their income.

As NZ Super is tax-funded and the cost for future taxpayers could become a heavy burden in the face of changing demographics, the former Labour Government introduced the New Zealand Superannuation Fund. (Not to confuse with the grossly underfunded Government Superannuation Fund/GSF which pays generous pensions to politicians and other civil servants who could join the scheme until 1992; it is topped up and mainly paid by the taxpayer. See here: The real double-dippers.)

Only the future will tell if both changes were brilliant ideas.

KiwiSaver – a work-based, contribution-funded Tier-2 pension

KiwiSaver is a voluntary, earnings-based savings initiative aimed at people who work, encouraging them to maintain a regular, long-term savings pattern. It was initiated by the Government in 2007. Until 2015, when National scrapped it, the scheme included a NZ$ 1,000 kick-start payment from the Government. It requires regular contributions from both an individual and his or her employer, and comes with the reward of a generous tax credit.

Savings will generally be locked in until the person becomes eligible for NZ Super, i.e. currently until age 65, or has paid into the scheme for at least 5 years if they joined over the age of 60. There are, however, provisions for early withdrawal of part or all of the savings under certain circumstances.

Although KiwiSaver is a Government scheme it is managed by private sector companies. Those who join are free to choose which KiwiSaver provider they invest their money with. However, KiwiSaver is not guaranteed by the Government. This means that people make investment choices in a KiwiSaver scheme at their own risk.

What is particularly interesting to note: the Government points out that joining KiwiSaver does not affect a person’s eligibility for NZ Super or reduce the amount of NZ Super they will be entitled to. This is relevant to the discussion on the Government’s Direct Deduction Policy applied to NZ Super because KiwiSaver is, in essence, very similar to many work-related, contribution-funded Tier-2 overseas pensions - however, paid out as a lump sum. While overseas pensions are deducted, KiwiSaver isn’t. This is fuzzy logic and one of the many inconsistencies of the New Zealand pension system.

False claims

To claim that there is no government involvement is blatantly wrong, given that the government has even made a kick-start payment in the early years, makes direct contributions every year, commits the employer to make contributions if the employee joins, and grants a tax credit. It is a government scheme that is managed by the private sector.

It is equally wrong to claim that KiwiSaver is not a retirement scheme. Even IRD (Inland Revenue Department), New Zealand’s tax authority, writes on their website that “KiwiSaver is a voluntary savings scheme to help set you up for your retirement”.

The NZ Superannuation Fund – a Government investment scheme

Other than KiwiSaver and successful private investments, the NZ Superannuation Fund does not increase your retirement income. It is only a way for the Government to generate monies by investing current taxes. This should, if successful, reduce the tax burden on future New Zealand taxpayers in the face of the ever-increasing cost of Superannuation.

The New Zealand Superannuation Fund was created in 2003. Those who were 44 years old in 2010 will be the first to have part of their NZ Super paid from the New Zealand Superannuation Fund. However, payments into the fund were suspended by the National Government in May 2009 due to falling revenues and rising Government spending. Contributions resumed in December 2017 under the new Labour government.

In mid April 2010 Finance Minister Bill English had announced that Government contributions to New Zealand's retirement nest egg could resume within six years. English said that an improving economy could lead to resumption earlier than expected. But it didn't eventuate under National.

The key facts of the fund

An article published in the New Zealand Herald on 21 July 2009 sums up the key facts of this fund. Following is a part of this article:

“The New Zealand Superannuation Fund, which started investing at the end of September 2003, is designed to partially pay for the future cost of New Zealand superannuation. Because the population is ageing, the cost of providing super is predicted to double over the next 50 years. It was designed to make its first payout in 2031.

Also known as ‘the Cullen Fund’ after its founder, former Labour finance minister Michael Cullen, the fund was valued at NZ$ 13.1 billion at the end of May. The National Government, in its first Budget, stopped the annual NZ$ 2 billion contributions into the fund, saying it could not be afforded in the current climate.

The Treasury has estimated that by 2050, with an 11-year contribution 'holiday', the fund would pay for 8 per cent of New Zealand's superannuation bill that year, compared with 11 per cent if there had not been an 11-year holiday. - NZPA”

An ongoing topic of discussion - "Dump the white elephant"

The Cullen Fund is an ongoing topic of discussion, with avid supporters on one side and others who rubbish it completely. Economist and fund manager Gareth Morgan, for example, said after the suspension in June 2009 that "the Government should dump the 'white elephant' New Zealand Superannuation Fund and give about NZ$ 3,000 back to people through KiwiSaver". Morgan suggested that putting NZ$ 12.5b from the fund into KiwiSaver would effectively make KiwiSaver compulsory overnight. "The alternative would be to give the NZ$ 12.5b back to people in tax cuts, though that may be too radical for the Government."

Calculations from April 2010 showed that the freeze of the fund might have cost taxpayers NZ$ 30 billion. The Press reported that "the Government paid NZ$ 250m into the fund this year. Under Treasury's normal track it would have paid NZ$ 15.5 billion. [...] That would mean by 2050 the fund would be worth NZ$ 49 billion less than if contributions were maintained."

As the history of the fund suggests, Labour criticised National for being "stupid" (then party leader Phil Goff): "It has undermined the certainty and future of the Super Fund. It was a short-term decision taken for purely ideological reasons because National has never been committed to the Super Fund." National justified the suspension of payments as the right economical move in tough times. Some analysts argued it was the wrong time to stop contributions, because it was best to invest more when prices were low.

And so the discussion went on. It was not the last argument. But since late 2017 the Super Fund is on track again.

The main characteristics of KiwiSaver

Employee contribution: Employee participants can choose to contribute 3%, 4%, 6%, 8% or 10% of their gross pay.

Employer contribution: Employers are required to contribute at least 3% of an employee's gross pay to the employee's KiwiSaver account.

Government contribution:

1. From the start of the scheme in 2007 until May 2015, those who joined KiwiSaver received a $1,000 tax-free "kick start" to their KiwiSaver account from the government. The Fifth National Government removed it effective from 21 May 2015.

2. Those aged 18 and over also receive from the government a "member tax credit" (MTC) of 50 cents per dollar contributed (or part thereof) for the first $1,042.86 contributed per year (1 July to 30 June). The MTC is not a true tax credit; it is a monetary contribution paid by the government via Inland Revenue, mainly to offset the tax paid on interest earned.