NEW ZEALAND'S PENSION PROBLEM
April 6, 2006
To shore up New Zealanders' retirement, Wellington is gearing up to launch a unique program called KiwiSaver next year, says the Wall Street Journal.
The scheme directs 4 or 8 percent of an employee's gross salary into a limited set of mutual funds. Once enrolled, savers can opt out of the program altogether. So, to tempt them to stay, the government will grant every participant NZ$1,000 ($604) to get started. However, these funds can only be accessed on retirement, except in some very special circumstances.
On the face of it, it sounds like a bright idea to force people to save. However, KiwiSaver just doesn't give sufficient incentives to save; it is merely a mechanism that facilitates retirement savings, says the Journal:
- Unlike most developed countries' private or quasi-private pension schemes, KiwiSaver does not come with tax incentives attached -- rather, the employee's contribution is 4 or 8 percent of an employee's gross, pre-tax salary, with no change to the individual's total taxable income.
- KiwiSaver also won't receive ongoing top-up contributions from government or employers, as in America's 401(K) savings scheme.
More worryingly, KiwiSaver does little to address the root cause of New Zealanders' atrocious savings habits; namely, the country's generous welfare system:
- Today, Wellington guarantees 65 percent of the national average wage upon retirement at age 65.
- These payments aren't income or asset tested, meaning everyone receives the same treatment, regardless of wealth.
Observers ask: Why would New Zealanders save today if the government will look after them in their old age?
Source: Shamubeel Eaqub, "New Zealand's Pension Problem," Wall Street Journal, April 5, 2006.
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