When it works, KiwiSaver is one of the best savings schemes in the world. But it doesn’t work for everyone. With the government aiming to ‘refresh’ KiwiSaver over the next year, it’s the perfect time to pick apart its flaws.

We don’t know when or how, but KiwiSaver is changing. The government has declared its intention to reinvigorate New Zealand’s saving scheme as figures show low contributions.

KiwiSaver has been widely embraced by New Zealanders, but it still struggles to entice further savings beyond the percentage deducted from their wages. Now the government is searching for ways to incentivise higher savings, considering the removal of its current subsidy in favour of one that applies only to voluntary contributions.

Nothing has been finalised, but one thing is clear: the current system doesn’t cut it.

While the scheme itself is strong, we just aren’t saving enough, says economist Rosie Collins.

“People think 3% is enough,” she says. “Until [contribution percentages] are in the double digits, I don’t think we’re quite there. We need to ratchet up to 8-12% as the normal range.”

That lack of enthusiasm is partly because many New Zealanders don’t view KiwiSaver’s goals as attainable. As house prices continue to increase, the prospect of ever buying a first home, let alone retiring, seems much less realistic.

“If young people don’t even see the first hurdle as attainable, why on earth would they think the second is attainable?” asks Collins. As an example, she points to Taiwan, Singapore and Korea, which have schemes pointed towards different goals across a person’s lifetime.

“You start in a childhood account that becomes an education and health account in your 20s and 30s, then there’s an option for a first-home deposit or mortgage, and then eventually it rolls into a retirement saving scheme,” she explains. “I think that’s the model New Zealand should head towards, so when you’re 25 you’re saving for goals that actually matter to you.”

Furthermore, the cost of housing needs to be addressed before many can even consider saving for one. “Until the housing situation is solved I think it will be harder for us to have comfortable retirements,” she notes. “After that, our systems set us up well thanks to our universal pension and KiwiSaver. The tools are there to get us where we need to be.”

But that’s only part of the issue. The largest problem facing KiwiSaver is that it doesn’t work well for those on lower incomes. Fundamentally, KiwiSaver is most useful for those who are already wealthy.

“That’s by design,” says Collins. “When Kiwisaver was first designed in 2007 there were treasury papers saying ‘we don’t think retirement savings are worth it for the bottom 40% of households’ – that it’s economically irrational for those groups to save.

“Until it’s logical for someone on a low income to participate, then it’s just a scheme for the wealthy. It needs to change, and the goals need to be relevant to someone who’s living paycheck to paycheck.”

Last year, Te Ara Ahunga Ora, the Retirement Commission, released a report monitoring New Zealand’s retirement policy, and reached a similar conclusion.

While many of the indicators studied by the Retirement Commission, such as coverage and income replacement, were rated excellent, income gaps were fairly wide compared to the rest of the world. “Inequality is high,” the report notes. “This is a result of differences in accumulated wealth and ability to work.”

In another paper focused on KiwiSaver, the Retirement Commission notes that “as a result of ethnic and gender pay gaps, and a gender segregated labour market where female-dominated industries generally pay less, those with lower balances are more likely to be non-Pākehā and women”.

Due to KiwiSaver’s close connection to the incomes of those participating, the Retirement Commission suggests that the current set-up “perpetuates labour market inequality into retirement”.

Thankfully, KiwiSaver isn’t the sole mechanism for funding retirement and works in conjunction with NZ Super to deliver what is effectively a universal income for the elderly. That system works really well for us right now, and has made poverty rates low for the retired.

However, the Retirement Commission expresses concern that the effectiveness of NZ Super could decrease over time. “A major future risk to the performance of New Zealand’s pension system is that the purchasing power of NZ Super would decline,” they note. If this were to happen, further pressure on KiwiSaver could upset the balance.

“If KiwiSaver, with its current settings, became a necessary component of retirement income, the transfer of risk from the state to the individual would be more far-reaching than in many other countries.”

“Any changes that increase the role Kiwisaver plays in retirement income present a risk of less equitable outcomes,” the commission warns.

Collins suggests that KiwiSaver be changed to better support people throughout their entire lives, so as to minimise the inequality that currently plagues the system. “The goal should be financial resilience across the lifetime, so by the time you hit the end of your life you’re in the best position you can be,” she says.

“That change would be radical to some people. They say ‘but it’s a retirement scheme’, but who is that retirement scheme targeting? Are you comfortable with it just being for the rich?”