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Abstract
KiwiSaver is a new saving incentive program in New Zealand that requires automatic enrollment of all new employees, with an option to opt out. KiwiSaver also subsidizes participation, but its subsidies are smaller than tax subsidies for saving in qualified retirement plans in the United States. Recent research shows that using automatic enrollment as a default rule substantially increases participation in retirement saving plans, but evidence on whether saving incentives plans increase net saving is mixed. KiwiSaver is the first large-scale test of whether default rules can be more effective than financial incentives in increasing retirement saving.
Executive Summary
New Zealand is introducing a new saving incentive scheme called KiwiSaver on 1 July 2007. The goals of KiwiSaver are to improve the financial position of New Zealanders in retirement, increase aggregate private saving in New Zealand, and reduce New Zealand's reliance on external debt.
The main innovation in KiwiSaver is a provision for automatic enrolment of all new employees, with 4 percent of earnings withheld and contributed to employee investment accounts and an allocation of the savings among assets selected automatically if an employee fails to make a choice. Employees have up to 8 weeks from the start of a new job to opt out from the scheme, but may also increase their contribution to 8 percent. KiwiSaver provides financial inducements for participation, including a $1,000 initial subsidy, a subsidy for the purchase of a first home of up to $5,000 (subject to income and house price limits), and exemption from tax of up to 4 percent of employer contributions into the accounts. But the financial incentives are smaller than the incentive provided by exemption of all income accrued within qualified retirement plans, which is a feature of incentive plans in the United States, the United Kingdom, Canada, Australia, and other countries.
KiwiSaver will supplement New Zealand Superannuation (NZS), which provides flat benefit amounts for singles and couples when they reach the Superannuation age (currently 65). While NZS provides a basic level of income for all retirees, middle-income New Zealanders are at risk of seeing a substantial drop in their living standards at retirement unless they can supplement NZS with income from employment-based superannuation plans or their own saving. But superannuation plans provided by private employers cover only a small share of workers and many New Zealanders do not save much on their own. KiwiSaver intends to fill in the gap in the retirement security system by creating a new employment based saving plan in which most employees will participate.
Recent research shows that both financial incentives and default rules have a powerful effect on decisions on whether to participate in and how much to contribute to retirement saving plans. The evidence on default rules is particularly striking, with automatic enrolment substantially increasing participation in the same tax-favored saving plans, compared with a default rule that requires employees to make an active decision to participate. Studies also show that individuals maintain the default contribution amount and choose the default asset portfolio option, in the absence of extensive advertising of alternative choices. The studies suggest that the automatic enrolment provision in KiwiSaver will induce a high level of participation.
The effect of saving incentive plans on net private saving is less clear. Individuals can finance their contributions to subsidized saving plans by saving more (reducing consumption), by reducing saving outside the plan, or by borrowing. Many studies have examined the effect of saving incentive plans on net saving by comparing overall wealth accumulation of those who are eligible for or participate in a tax-favored plan with the wealth accumulations of non-participants, but these studies suffer from an inability to compare similar groups with identical tastes for saving. Researchers have used a variety of methods to identify similar individuals with different exposures to saving programs, but have not reached a consensus on whether the saving programs they examined increased net saving. Some found substantial increases in net saving, others found virtually no effect, and still others identified positive effects, but only for selected groups, such as individuals with lower earnings or wealth or individuals who do not own homes. No studies have specifically examined whether the large increase in participation induced by an automatic enrolment rule is associated with an increase in net saving or a transfer of wealth from other accounts. Overall, therefore, while the literature on saving incentives provides strong reasons to expect a high level of participation in KiwiSaver, it provides limited insight on how much that participation will boost net personal saving.
Broader issues must be considered in assessing the effects of an incentive program on national saving. There can be indirect on effects on saving, investment, and risk-taking if people allocate assets within an employer-sponsored plan differently than they do for assets outside one. There is some evidence, for example, that the expansion of tax-favored plans in the United States has promoted the growth of more conservative investment portfolios with higher shares of bonds and large-company stocks. These portfolio shifts and associated changes in asset prices and relative yields could affect saving outside of incentive plans and government revenues. Positive effects on national saving from an incentive plan will grow over time, as people reduce their stock of other assets over time and need to finance additional contributions from new saving and as any increases in total assets in the economy boost government revenues. Studies have produced mixed results, however, on both the extent of any increase in national saving and the length of time before an increase materializes. Finally, the net effect of an incentive program on national saving depends on whether its fiscal costs are paid for by government borrowing or higher taxes and the form of any additional taxes. Because KiwiSaver relies relatively less on costly financial incentives as a tool to induce people to save more, it might increase net national saving more, for any increase in net private saving, than programs that rely more heavily on larger and more costly tax subsidies that increase government deficits.
KiwiSaver is a unique program that is applying the results of new and exciting empirical research that shows how automatic enrolment can increase participation in saving programs. KiwiSaver will be the first large-scale attempt to test whether a saving program that relies more on a change in the default rule than on financial incentives can be more effective in increasing retirement saving. A careful evaluation of its effects should generate widespread interest, as countries around the world look towards developing more effective ways to ensure financial security for aging populations.
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