Friday, August 05, 2011

Against automatic KiwiSaver enrolment

When KiwiSaver was introduced, Michael Cullen engaged in a bit of social engineering, signing people up by default when they switched jobs, and letting them opt out. Since then, 1.75 million kiwis have joined the scheme. But more than a million remain outside it. And now, the government is considering automatically enrolling them and forcing them to opt out.

I can understand why they want to do this: a low savings rate has been one of our long-term economic problems, and wider KiwiSaver uptake will boost it. At the same time, I don't think its a good idea. Why? Because its just not the right time for such a move. KiwiSaver has always had low uptake at the bottom end because people on low wages living paycheck to paycheck simply can't afford to save. And in tough times, with stagnant wages, a rising cost of living, and more people feeling squeezed, trying to force people to sign on to save 2 - 4% of their income isn't such a good idea. Not only do you make them actively worse off; you also suck money out of the economy, deepening the recession.

(I am of course assuming that they don't opt out, because that's how its meant to work; the whole idea of opt-out enrolment is to exploit people's laziness so that they don't. And that seems to be borne out by the numbers; two thirds of automatic enrolees stay in the scheme, with only a third opting out)

So, how can we boost savings and encourage enrolments then? The obvious answer is to make the scheme more generous by boosting the employer contribution. At the moment, this is set at a mere 2%, compared to 9% in Australia. Gradually increasing it would significantly boost the scheme, and wouldn't cost the government a cent. Sadly, I don't expect to see such a policy from National. The question is whether we'll see it from Labour.