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Thursday, January 8, 2009

KiwiSaver - a mess

KiwiSaver is a basically flawed system and is only a good investment for someone in the 19.5% tax bracket (who is unlikely to have money to invest).

Firstly, the government uses our own tax money to entice us into the system. They then must either:
a) collect more taxes*
b) reduce services.
c) or put us into greater debt.

*Question: Could the 2010 proposal by the government to raise GST be due in some part to the money they use for KiwiSaver bribes.

Secondly, the employer contribution isn't. A CEO will simply calculate how much he can afford to pay his new employee, deduct his contribution and offer the remainder. For employees already working, salaries won't rise as fast as they otherwise would have. Same result. The CEO's have been given 4 years to adjust which is plenty of time to make sure KiwiSaver doesn't cost them anything. The present economic crisis presents the perfect excuse not to increase salaries.

Thirdly, and most important, KiwiSaver is a very poor investment. Consider someone in the 33% tax bracket. Contributions are after taxes (unlike many other countries) so our middle income investor has to earn $150 in order to have $100 to invest. Then his interest and/or dividends are taxed. I am somewhat disillusioned with capital gains and anyone who would put money with a New Zealand investment company must have been sleeping for the past 5 years. I would rather have a 6% fixed interest investment in the bank which is is easily obtained in normal times when inflation is running around 3%. Lets use this as an example.

At age 20 I invest $100. I get 6% so at the end of the first year I have $106 in the bank. I earned $6 so the government takes $1.80*. I gain $4.20 from an investment of $100. With 3% inflation, I need $103 to break even. Real earnings $1.20 or 1.2%. At that rate it will take over 34 years to get back to the buying power of the original money I earned. It is hardly fair to ask us to lock up our money for most of our life with almost zero return. Other countries have got it right. Why can't we.

*Note - the government has lowered the tax on dividends within KiwiSaver to 30% for people in the 33% and 38% brackets.

#Note also that to a significant extent inflation is controlled by a government. As inflation occurs, the buying power of money you have saved is reduced. In other words, without ever touching your bank account, the government is taking money out of it. A hidden tax.