While KiwiSaver is a great way for top and middle earners to save for a house and for retirement, does it work for those living week to week? Economist Rosie Collins doesn’t think so.

A national savings scheme is a critical way to set many of us up for a comfortable retirement and a first home purchase. KiwiSaver gives us subsidies, matched employer contributions and mechanisms to automate and lock in saving until retirement. But those same things make little sense if you’re living week to week. 

Generous subsidies and matched employer contributions are great for those who save into the scheme. But this is difficult – or outright unrealistic – if you’re on a chronic low wage or out of work. 

KiwiSaver is locked in until retirement, to save us from ourselves. Our nature is impulsive and we wrongly think money in the future is worth less than money in the hand now. But for many people on low incomes, accessing those funds now could be a matter of survival. 

For three in 10 households living week to week, they simply don’t have a few thousand dollars in basic savings before they could comfortably enter KiwiSaver in the first place.

We need to reimagine KiwiSaver – and its $875m government subsidies each year – to extend it beyond a retirement savings scheme for the top half of New Zealand and include those in the bottom half too. KiwiSaver subsidies need to be directed to those who need it, designed with flexibility to use funds in times of need. 

KiwiSaver is for the well off

KiwiSaver has 3 million participants. About a third of these accounts are dormant: contributions are irregular and have to be made voluntarily; or aren’t being made at all. 

Some dormant accounts belong to those under the age of 18 or over 65 and the self-employed. About two thirds belong to those in insecure work and those who’ve left the workforce, perhaps for disability or illness, as caregivers, to have kids, or to study.

Another 245,000 people have opted out altogether, mainly those on very low incomes. Then there are 117,000 people who are in KiwiSaver but on savings suspensions. That brings us to around 800,000 people who the scheme isn’t actively supporting to save. 

A massive chunk of New Zealand’s population is not being served by KiwiSaver. And they’re missing out on government subsidies because of it.

Hostile by design

The heart of the problem is a policy design that is hostile to poor people. It’s as if policymakers forgot to design a scheme for these lower-income groups. 

Those working as contractors don’t get employer contributions, for instance, so there’s a missing incentive to contribute, coupled with long-term saving goals that seem too big to try for.

Without these incentives, the logic for participating gets pretty murky. Contributions have to be made manually – requiring cognitive effort that someone on a permanent contract doesn’t have to think about. 

The rules for withdrawing for financial hardship are also punishing and difficult. While it is hardly surprising to imagine households face unexpected costs, the current rules say that if you need to withdraw because of hardship, you first have to prove your other options for taking out debt are exhausted. Applicants must prove they can’t afford living expenses, are suffering a serious illness or need it to pay for a funeral. The money can’t be used to pay for fines or debt.

But in the last year, the number of KiwiSaver hardship application withdrawals has soared by 41% – an indication that the retirement designs of KiwiSaver are not realistic for a growing number of people struggling right now.

It seems like we would rather send people to get expensive payday loans than design a flexible saving scheme that can accommodate setbacks in lifting out of poverty. If you do withdraw and close your KiwiSaver because of financial pressures, as an extra sting, you’ll forfeit any accumulated government subsidies for doing so. And you can’t use the money to pay down debt. 

Emergency vs retirement

Everyone benefits from institutional support to save. Whereas richer groups get plenty of natural mechanisms for asset accumulation, via mortgages, access to investment funds, relatively higher tax returns, and, recently, uplifts in asset values from unconventional monetary policy, these same opportunities aren’t available to New Zealand’s poorest groups. 

There is no stepping stone built into KiwiSaver – it’s for saving a house deposit or retirement, nothing else in between, even if that design is sending families into debt and offers no alternative pathway for lifelong renters.

In reality we want both retirement savings and emergency savings. For those in regular hardship, emergency savings is a higher priority. They are what helps to exit out of debt spirals. Basic assets come before retirement adequacy; they create opportunities to plan for the future, take risks, invest in education, and lift out of poverty.  

We can imagine options to meet this need. Those who do manage to withdraw for hardship take out on average about $6,000. For comparison, the average withdrawal for a house deposit is about $30,000. Targeting a policy at this level of hardship would make it easier for everyone to participate. 

A more inclusive KiwiSaver

Changing KiwiSaver is a far simpler approach than creating a new scheme for emergency savings for the poor, which would be expensive, stigmatised, and easier for politicians to get rid of. Sidecars – as they’re known overseas – could tag the first few thousand dollars of KiwiSaver for emergency expenses. 

We could halve the tax credit for regular income earners (saving $440m per year) and make the first $6,000 of a KiwiSaver account accessible twice a year to those on low income or benefits, with generous subsidies for the first few thousand dollars. 

Withdrawals wouldn’t be monitored, but would require some administrative effort to deter unnecessary withdrawals. Incentives to keep the money in KiwiSaver could be trialled, though we’d want to be careful about how to design these. Any money not drawn down is bucketed into a long-term KiwiSaver like everyone else’s. 

A $10-$25-per-week government contribution for benefit recipients could also complement income support, and send a clear signal about the value of basic assets in reducing poverty (costing $190 million per year for 360,000 recipients at $10/week, about a quarter of our current KiwiSaver spend). 

While the exact design may vary, it is clear a one-size fits all approach is only good for compounding the assets of the wealthy. This has to change if we’re serious about tackling wealth inequality. To do this, KiwiSaver needs to mature so it’s fit for purpose for all New Zealanders, not just those on comfortable incomes. 

A third of our households live week to week – many for years at a time. KiwiSaver has an obligation to reflect and change this reality.

This article was adapted from the author’s research paper, which won the Finbarr Livesey Prize in the MPhil in Public Policy programme at the University of Cambridge.