KiwiSaver at a crossroads: budget another missed opportunity to fix NZ’s underperforming retirement scheme

When KiwiSaver was introduced in 2007 it was built on a stark reality: New Zealand Super alone will not be enough for most people to retire with dignity.

As the population ages and the cost of superannuation continues to climb, the gap between what the state provides and what retirees actually need is only going to grow. KiwiSaver was designed to bridge that gap – to give New Zealanders a fighting chance at financial independence in retirement.

But changes to KiwiSaver laid out in this year’s budget undermine what was already an underperforming scheme.

Despite 17 years of operation, KiwiSaver balances remain shockingly low. As of mid-2024, the average sits around NZ$37,000. That’s barely enough for a couple of years’ worth of modest top-ups, let alone funding a comfortable retirement.

For many nearing retirement, balances are even lower. And about 40% of members aren’t actively contributing. That includes people on contribution holidays, in irregular work, or who opted out altogether. Many accounts are effectively dormant “ghost accounts” created by auto-enrolment and never activated.

Let’s be blunt: a retirement savings scheme that doesn’t result in meaningful savings for the majority of its members isn’t working.

Small cuts, big consequences

KiwiSaver’s design isn’t its only problem. Political decisions have steadily chipped away at the scheme’s effectiveness. Every tweak and cut might seem minor on its own. But together they’ve eroded the core engine of the scheme: compounding contributions over time.

Take the $1,000 kick-start payment from the state, scrapped in 2015. Left invested in a growth fund for 40 years, that single payment could have grown to over $8,000.

Or look at the member tax credit – an annual payment made by the government to eligible members. The reduction from $1,042 to $521.43 might seem modest, but over a working life, that change alone could shave more than $70,000 off your KiwiSaver balance. This year’s budget has cut it further to $260.72.

Then there’s the tax on employer contributions – the amount paid into KiwiSaver by employers. For someone earning $80,000 a year, that tax can reduce total contributions by around 1% of salary annually. Over 40 years, that means nearly $100,000 less at retirement.

These aren’t just numbers on a spreadsheet. They’re the difference between retiring with options and retiring with anxiety. The $200,000 that past policy changes have stripped from the average KiwiSaver balance could have provided an extra $170 a week in retirement – enough to cover basics like food, power or transport.

By eroding those balances now, we’re not saving money. We’re simply passing the bill to future governments and taxpayers who will have to pick up the slack.

The worst time to weaken saving

There’s never a good time to undermine a long-term savings scheme, but doing it during a cost-of-living crisis is especially reckless. People are already struggling to keep up with everyday expenses. Contributions to KiwiSaver – despite their long-term benefits – are one of the first things households cut when budgets are tight.

If people start to believe KiwiSaver won’t be there for them – or that it’s not worth the effort – they’ll opt out or reduce contributions. And the scheme, already struggling with engagement, will lose even more ground.

Which brings us to the current budget.

The changes to the member tax credit will undermine the core purpose of KiwiSaver, reducing the amount people will retire with by another $35,000 for someone investing for 40 years in a growth fund.

Income-testing the member tax credit, coming into effect on July 1 this year, is pitched as targeting support where it’s needed. But that assumes income is a good proxy for need. It isn’t. Plenty of people have high incomes now but low KiwiSaver balances due to career gaps, home purchases or starting late.

If we want to better target support, base it on balances, not income. That would help those with low savings regardless of their current salary – and encourage rebuilding after big life expenses, such as buying a first home.

Raising the minimum contribution rate from 3% to 4% of gross salary sounds promising. Nudging people into saving more is smart policy – in theory. Plus requiring higher employer contributions is a welcome benefit.

But with households stretched thin, there’s a real risk people will just cease contributing at all. The danger is we end up with a headline policy that looks bold but delivers little – or worse, backfires.

The bottom line

The bigger issue? These are tweaks around the edges. They don’t address the fundamental problem: KiwiSaver is not set up to deliver retirement security at scale.

Plenty of experts have put forward good ideas to improve it. But right now, the urgent priority isn’t invention – it’s protection. Every time we reduce incentives, chip away at contributions or confuse the message, we undermine the very idea that long-term saving is worth it.

A retirement savings scheme only works if people trust it. That means policy stability. That means recognising KiwiSaver not as a cost, but as a commitment – a promise that if you put money aside during your working life, the system will have your back when you stop.

KiwiSaver is at a crossroads. It can continue its slow drift into irrelevance –eroded by short-term thinking and piecemeal reform. Or it can be treated as the critical infrastructure it is: a tool for ensuring financial independence in retirement and relieving future pressure on the public purse.

Budget decisions should honour KiwiSaver’s original promise. We owe future retirees – and future taxpayers – nothing less.

Aaron Gilbert does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.