Francesca Rudkin: We need to be saving more

So it turns out we suck at saving for retirement.   

We’re really good at ticking the box and signing up for KiwiSaver, go us! The Retirement Commission said yesterday that 90% of people getting paid a wage or salary have signed up to KiwiSaver, and around 80% of self-employed people have. However, when it comes to self-employed people – I wonder how many are just putting in the minimal amount of $521.33 to get the government’s contribution, and that’s it. 

So, we’re pretty good at deciding to jump on board, but we’re not very good at saving what we will need for retirement. 

A recent study called ‘Money and You: The Perception Gap’ found that 56% of New Zealanders, an estimated 2.8 million, aged 18 or over aren’t financially prepared for retirement, increasing to 67% among women. The study also discovered that our understanding of financial concepts isn't as good as we think it is, and we don’t know how much we would need to retire. In other words, I think they are gently telling us that just ticking that box and feeling like we’re being proactive isn’t enough to make sure we can live the retirement we want.   

Yesterday, the Retirement Commission released a comprehensive analysis on how KiwiSaver is working and have made 15 recommendations to improve this scheme. They too acknowledge we all need to be saving more for our retirement but know it is challenging against the current backdrop of high inflation and cost of living crisis.   

There is talk of making the scheme compulsory – but the numbers signed up to the scheme would indicate we’re pretty keen to be involved already.   

However, one of the main changes the Retirement Commission would like to see put in place is a higher default contribution rate of at least 4%, with employers required to match that level or higher. The current default rate is 3% but you can choose to contribute 3, 4, 6, 8, or 10%. Apparently 42% of New Zealanders contribute only the minimum of 3%.   

The default rate hasn’t changed in 17 years since KiwSaver began, and we’re a long way behind Australia and other developed countries when it comes to being prepared for retirement.   

I like it being voluntary – I like that you can make your own decisions depending on what is going on in your life. Are you using extra savings to pay off a mortgage, meet a new higher interest rate, or making investments on your own which you can access when you like? Maybe you just can’t manage any more than 3% at present.   

But for as much as a I like the freedom this system gives us, we’re not likely to pay more unless we have to, so legislating to raise the default setting for both employees and employers isn’t a bad idea, as long as it’s done sensibly.   

Sam Stubbs, founder of KiwiSaver Scheme Simplicity spoke to Mike Hosking about the Retirement Commissioner wanting to increase contribution rates by individuals and employers. 

“Well she wants the contributions to rise 1%, but if you look at Aussie, you know, they’re paying 12%. So the Aussies have got five times our population, but they’ve got 35 times our savings. So we are saving, but we’re not saving nearly enough. But she has to introduce this idea gradually because, you know, everyone’s going through a cost of living crisis right now, right. You know, if she was to say that KiwiSaver contributions were going to go from 3 to 12%, everybody would laugh. But that, that’s possible, it just takes a long time. I think we should do it about half a percent a year and take an awful long time to get there, but we have to go there.” 

So keen to hear your thoughts and as Sam Stubbs said, we have to go there, and I think we have to do it in a really common sense way for both employers and employees. Half a percent. Maybe you do that year on year until it rises, 2, 4, or six? Sounds like the way to go. 

We’re not saving enough. I’m not so sure we need to make it compulsory. I feel like an increase in a default rate is a good approach, as long as it's done sensibly. I like the idea of a half a percent increase, but as an employee, is that doable for you at the moment with what may be going on in your life, because we’re all dealing with different things aren’t we? Do you kind of admit to yourself that actually, unless somebody raises that right, you’re probably not going to think about it. You’re probably just thinking right, I’ve got my 3% contribution going and I’m doing the right thing. Yeah, tick the box, I’m not going to think about it again. So actually, is it what you need to motivate you to increase. 

If you are an employer, is doable? Could you manage half a percent increase a year? I’m sure there are probably some small or medium sized businesses out there who are just wincing at the idea right now as we deal with these difficult economic times. So, keen to hear from you. 

We’ve got to save more, we’re way behind everybody else. I don’t necessarily think making it compulsory is going to make a huge difference, but I do think raising that default rate at a sensible common sense amount each year for the next few years might just do the trick. 

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