Understanding its history helps understanding where it is going.
The ideas which underpin Kiwisaver entered into the New Zealand political dialogue in the late 1960s when the Labour Party, then in opposition, was looking at how to progress the welfare state. It observed that many European nations had occupationally based, earnings-related retirement pensions funded by contributions made during a working lifetime into a personal fund which was invested and paid out at retirement. This is the basic idea underpinning Kiwisaver. In effect, it universalises (makes compulsory) the occupational pensions (i.e. those provided as a part of the worker’s remuneration package) which, particularly, many/most white-collar workers were already receiving.
In contrast, the then existing scheme, introduced in 1898 and elaborated in 1938 – today we call it ‘New Zealand Super’ (more on this below) – was a universal flat-rate (i.e. the same for everybody – there are caveats) retirement pension paid out of general taxation. *
When it became the government in 1972 under Norman Kirk, Labour progressed the European contributory idea. The scheme was called ‘New Zealand Superannuation’ but that name is today used for the entirely different flat-rate scheme which started in 1898. So, I shall call Labour’s 1974 scheme ‘Kiwisaver’. (Apologies for this nomenclature bog-up; politicians often muck round with names, which confuses superficial history.) Its chief driver was cabinet minister Roger Douglas; we shall see an irony.
It quickly became obvious that at any plausible contribution rate the Kiwisaver scheme could not provide an adequate income to replace the existing traditional scheme. (There were also problems about those who did not earn throughout their entire working life – the majority were women. Labour was not particularly sensitive to their circumstances at the time.)
It is usual to credit Henry Lang, the Secretary of the Treasury, with the key insight (although it may well have been a more junior Treasury economist). He envisaged retirement provision being in three tiers which one would be entitled.
The bottom tier is the universal flat-rate provision, New Zealand Superannuation (NZS) which everyone above a certain age (with a few exceptions) receives.
The middle tier is an occupational pension, Kiwisaver being, in effect, a compulsory occupational scheme in which every worker belongs to. It is on top of first tier. NZS. Since it related to the worker’s lifetime earnings, those who earned most during their lifetime would have bigger occupational pensions than those who earned less (as is already true). **
On top of the two tiers is the income from the savings and investments which an individual has made voluntarily, including private savings and inheritance. The most important component of the top tier (the ‘cap’) for most people is a mortgage-free house. In practice, for most people the top tier is a minor supplement to their total retirement income, their housing aside. ***
Labour began implementing its three-tier retirement provision in 1974 although it would have taken 40 years to come fully into effect (because only workers beginning their jobs would contribute the entire period which the scheme envisaged for full implementation).
National, led by Robert Muldoon, strongly objected to Kiwisaver. In the 1975 election they promised to repeal the scheme and to improve the existing scheme. Muldoon said it would cost no more than Kiwisaver, but what he does not seem to have understood was that he was comparing the fiscal cost of National’s scheme in 1975 with the cost of a full Kiwisaver scheme in 2015. In comparison, the costs of Kiwisaver in 1975 were a tenth of the full costs. ****
National was elected on the policy in 1975 – it is said it was the single most important factor in its win. It meant that Muldoon’s government of 1975 to 1984 was lumbered with a fiscal blowout while the economy was already struggling with high inflation.
Oddly, the Lange-Douglas Government of 1984 to 1990 did not revive Labour’s Kiwisaver plans. Even more oddly, after he left government Douglas advocated a quite different scheme from Kiwisaver in his 1993 Unfinished Business. It could be thought of as a ‘two-pier’ scheme, with the cap of voluntary savings sitting on the piers. The critical difference from the tier system is you could have only one of the piers.
Pier One would be NZS.
Pier Two would be a compulsory occupationally based scheme similar to Kiwisaver, except that holders would no longer be entitled to the enhanced 1898 traditional scheme.
The difficulty with the two-pier scheme is that many people would not contribute enough for their pier-two pension to give them sufficient income in retirement. They could abandon their pier-two income and take the pier-one option which would give them a (perhaps almost) decent income. But that seems hardly fair, because a person who had made, say, 80 percent of the necessary contributions to make their pier-two retirement viable would receive the same retirement pension as someone who, say, had made only 20 percent of the contributions. How to deal with this inequity is quite muddling – it involves incomes testing and possibly means testing. ***** The way we usually put it is they have ‘fallen into the gap between the two piers’.
Douglas did not address the gap problem. (He has a poor record on dealing with incomes testing, sometimes proposing a 100 percent, and higher, clawback.)
As a part of the post-1996-election, coalition negotiations, Winston Peters commissioned me to prepare an enhanced retirement provision. His only direction was that it had to be implementable within the three years of the next government. Knowing how much work had been done in 1973 and 1974, I set out a 1974-Kiwisaver three-tier approach.
I made only one substantive change. The 1974-Kiwisaver had a single investment fund managed by the government. The New Zealand First scheme gave members the choice of investing in any number of private funds (as happens for Kiwisaver funds today). I suggested this because the single state-managed fund had been a major National objection in 1975, and I thought that post-Rogernomics Labour could live with private-sector fund management. (No one knew at this time which party NZF would back).
As Treasurer in the National-NZF coalition government, Peters instructed Treasury to prepare an extended retirement provision. For reasons that I have not understood, Treasury recommended a scheme based on the Douglas two-pier approach. (The scheme could not have been implemented by the time of the election.) ******
It was badly designed with many people (particularly women, but also low-paid males) ending up with inferior provision to their existing prospect. Peters accepted the Treasury scheme – he is a big-ideas man with little interest in the details of economic policy. Interestingly, and relevant to the subsequent story, when the Treasury scheme was introduced into Parliament, Michael Cullen, the Opposition spokesperson on finance, pointed out that it was not based on the 1974-Kiwisaver scheme as set out in the Coalition agreement.
The Treasury scheme went to a referendum and was rejected by a whopping 92.8% of voters. ********
In 2006 the Clark-Cullen Government passed the Kiwisaver Act which commenced deductions in July 2007. (Peters was part of the government at that time.) Basically, it was a development of the 1974-Kiwischeme except there would be a multiple of funds to choose for investing as in the Peters proposal of 1996. The Act was supported by all parties in Parliament except National. The Kiwisaver scheme has proved to be very popular since.
National has recently changed its position and is proposing to extend the Kiwisaver scheme. Given National opposed the scheme in 1975 and in 2006, this represents a major reversal. (ACT, which was not in Parliament in 2006, opposes the extension.) All the other parliamentary parties support the current Kiwisaver scheme and may well propose extensions. (NZF already has.) Especially interesting will be Labour’s response since Kiwisaver was its baby in the Kirk-Rowling and Clark-Cullen Government (but not the Lange-Douglas one).
I leave National to explain its turnaround. It is not the first time it has changed its mind. Leader Sid Holland called the 1938 Social Security Act ‘applied lunacy’ in response to Michael Joseph Savage’s description of it as ‘applied Christianity’. Yet in 1974, John Marshall, then National’s leader, claimed that now National was the party of social security. (In 1990 Ruth Richardson and Jenny Shipley reversed Marshall’s claim by instituting a ‘redesign of the welfare state’ which transformed the one Marshall was defending into a meaner American-style minimalist one.) Is National changing its mind again?
This column has been a simplified description of the history of Kiwisaver; it has had to leave out a lot of detail to remain within column length. I leave the economics of the scheme to a subsequent column, when the other parties have announced their proposals.
Notes
* To simplify, I have left out the 1972 Royal Commission on Social Security which refined the 1898/1938 approach. See my Pragmatism and Progress: Social Security in the Seventies and Chapters 26 and 51 of Not in Narrow Seas: The Economic History of Aotearoa New Zealand.
** Much of the opposition to a universal Kiwisaver has come – whether they be on the left or right – from those who already had generous occupational pensions.
*** Again for simplification, I have skipped the important role of housing in savings and retirement provision.
**** This is not the only occasion that politicians have made promises which did not stack up. It happens more frequently when they are in opposition because they do not have access to official advice; party research units are rarely as competent.
***** Means testing traditionally involved looking at the individual’s assets as well as income. Before means testing was abolished on social security beneficiaries in 1960, it included counting their pairs of underpants. Nowadays, those unfamiliar with the history and theory use the term ‘means testing’ instead of ‘incomes testing’.
****** I have looked at the Treasury working papers and there is no indication that the 1974-Kiwisaver scheme was even looked at. The most common explanation is that the 1993 Douglas scheme was more neoliberal and Treasury was so besotted with neoliberalism they could think of no other.
***** One might contemplate what might have happened if Peters had offered a scheme that had been accepted by voters. Because of his resulting popularity, it seems likely that National would not have been so keen to dump him, as they did in 1998.