Kiwibaggers

There is an interesting series of comments on Phil Macalister's comments on KiwiBaggers. Careful readers with good memories will note my past comments that cautiously endorsed KiwiSaver on two counts: some Public-Private schemes exist almost everywhere else in the developed world, and that if this was all the tax relief we were going to get out of this government then you might as well take it. Of course, there are more ideal worlds... but I digress. The following from the comments thread attracted me:

"Let’s say I am an employee aged 60 on, say, $26,000 (just to keep the numbers simple and to illustrate the ‘maximum value’ point). Each year for five years until I am 65, I borrow the 4% (OK, let’s say I have the ‘headroom’ on my card to do that). The interest rate is 20% p.a. but each year, my KiwiSaver account has added to it the money I’ve borrowed ($1,040), the initial $1,000 kickstart, the annual “member tax credit” of $1,040 and the employer’s contribution that, over five years, will total an accumulated 14% of my pay.

By the end of five years, my credit card will stand at about $9,300. Meanwhile, a total of $15,000 odd will have gone into my KiwiSaver account (ignoring investment income). How good a deal is that?"

You should go over there and read it all to make sure you have the context. Next up, we have to consider, as, why more people haven't taken up the scheme. I think the answers are one or more of the following three.

• Poverty
• Ignorance
• Risk

The first two get plenty of attention. The last - Risk - does not. I am 37, the funds are mine only at the age of eligibility for NZ Super. So there are risks, which might prevent me from valuing the $15,000 odd as much as the cash in the meantime. Here are the big ones:

• I may die (a modest, but significant risk)
• The rules may change (a reasonably high risk - the largest versions of which are: a) change of age of eligibility, b) forcing an annuity or c) reducing NZ super or some combination thereof)
• I prefer an investment I control (a preference for lower perceived risk)

It's interesting to note that some commentators as diverse as the Retirement Commission, Matt McCarten, and David Farrar for example, believe that the scheme design is so generous that it means a change in the rules is likely - some say it almost guarantee changes in the rules - to the extent that KiwiSaver is effectively the death knell for "universal" NZ Super.

Were that to happen, your KiwiSaver account may offset your NZ Super - whereas, on current trends, other tax sheltered investments (such as property - don't laugh!) may not...

Remember, in any long term investment, risk is the largest factor to take into account. If some potential KiwiSavers are hanging back because of risk, then - while I made a different decision - I do understand their thinking.