Why New Zealand's Retirement System Works So Well
The KiwiSaver program down under has over-the-top results
America, you’ve undoubtedly heard, is facing a retirement crisis. Millions of boomers fear, often justifiably, that they’ll outlive their savings. But what you may not have heard is that some U.S. retirement experts think New Zealand may have the answers that would avert a crisis here.
Yup. It turns out we can learn a lot from the impressively effective retirement system in the stunning land transformed into Middle-earth for the Lord of the Rings films.
At least that’s the view of Benjamin Harris, Deputy Director of the Retirement Security Project (RSP) at the Brookings Institution and David John, Senior Strategic Policy Advisor at AARP and also a Deputy Director of the Brookings' RSP.
They recently spoke about the lessons from New Zealand’s “KiwiSaver” program at a Washington, D.C. gathering of retirement experts run by AARP and Brookings. They were joined by Diana Crossan, New Zealand’s former Retirement Commissioner, who was instrumental in KiwiSaver’s birth.
How New Zealand Is Like the U.S.
In one way, New Zealand is just like us. Although the small nation has a population just two percent the size of ours (about the same as Louisiana’s), it has a similar bulge of post-war boomers who weren't the best savers.
But here’s the big difference: New Zealand’s seven-year-old, popular and voluntary KiwiSaver retirement savings plan is, by all accounts, helping to transform its country into a nation of savers. Everyone can have a KiwiSaver plan for life, and it’s portable from job to job.
In the United States, how much you save for retirement depends greatly on whether you work for an employer with a 401(k)-type savings plan or a pension plan. But “only about half of the U.S. workforce actually has access to an employer retirement savings plan or pension,” said John.
Over-The-Top Results Down Under
The head of New Zealand's trade group of investment firms (which clearly benefits from this surge in retirement saving) calls KiwiSaver “the most successful savings scheme [that’s New Zealand-speak for investment fund] in the last 100 years.”
Since KiwiSaver began, 2.3 million New Zealanders have signed up — more than three times the number originally projected. Half of the general working population, and more than 70 percent of 18- to 24-year-olds, contributes to KiwiSaver.
“Ten years ago, we looked out and saw people who were procrastinating. Personal saving just wasn't happening and people were hitting poverty and we said, 'We can do better. We can help citizens do better than this,'” Crossan recalled.
Why It's Not Like Australia's
So New Zealand's Finance Minister, faced with boomers unprepared for retirement, tasked a team, including Crossan, with developing an enticing savings product for all the country’s workers. Two years later, KiwiSaver was born.
Crossan says they didn't want to copy Australia's compulsory retirement savings system where employees are required to contribute to tax-advantaged retirement plans like 401(k)s. “New Zealanders don't like to be told entirely what to do by their government,” she noted.
So KiwiSaver is a voluntary plan, but it is also an auto-enrollment plan. That means money is automatically withheld from pay and put into a savings fund unless the person specifically opts out.
Why It's Not Like Sweden's
The retirement-product builders also decided they didn't want to emulate Sweden, where workers must choose among 100 savings programs. Said Crossan: “We all knew about that jam study [in a 2000 Columbia University experiment, psychologists concluded that consumers faced with 24 jams were less likely to buy one than those presented with six] and we knew that people procrastinated when faced with difficult choices.”
So KiwiSavers contribute 3, 4 or 8 percent of their annual gross pay by choosing among several dozen “approved” funds or by going with a default fund. Switching among KiwiSaver funds is easy.
Employers generally must contribute 3 percent of an employee’s annual pay to his or her KiwiSaver fund. (Think of this as a mandatory 3 percent match.) The firms or nonprofits can kick in more if they choose, too.
KiwiSaver's Hands-Off Rules
New Zealanders generally can't access their KiwiSaver contributions until age 65 — the year they qualify for their nation’s version of Social Security, called Superannuation. (After three years of contributing to a KiwiSaver, young people are allowed one withdrawal to help buy a first home.)
The KiwiSaver's tough withdrawal rules and portability mean that, unlike in the U.S., there’s no danger of people cashing out of their plans when they leave their employers and draining their retirement funds.
And here’s the cherry on top. The New Zealand government hands out a one-time, $1,000, tax-free government contribution designed to encourage the reluctant to sign up initially. Free money? That's a no-brainer.
Prospects for an American KiwiSaver Plan
Could something like KiwiSaver work here?
“The political environment in New Zealand is very different than in the U.S., so we could never achieve such an impressive and dramatic overhaul of our retirement system in today's political environment,” said Harris.
He and John are more optimistic about prospects for state-sponsored retirement savings plans for private-sector small business employees than a federal overhaul of today’s employer-sponsored savings plan system, especially in an election year. Already, Harris noted, California, Connecticut and Illinois have had a dramatic increase in state electivity.
Who'd Be Helped Most Here
If the United States did adopt a KiwiSaver-like system, John said, he wouldn't expect it to benefit boomers as much as those coming up behind them.
“One advantage the baby boomers have is they're the last generation to have some form of defined-pension assets that have cushioned a significant number of those retiring now and those who will retire in the next five to eight years,” John said. “Where we run into trouble is the next generation — the Gen X’ers, the Millennials — these are people who are going to reach retirement age with just Social Security on the one hand and whatever they've managed to save for retirement.”
A Recent Improvement in the U.S. System
Our retirement system — a mix of Social Security (which the Congressional Budget Office now projects to face a shortfall in 2030) and employer-sponsored plans — is hardly the envy of the world. But John said America is beginning to address a critical question that KiwiSaver hasn't yet tackled: How to convert your lump of retirement savings into guaranteed retirement income you can't outlive.
The Treasury Department just announced regulations making it easier for employers to offer so-called longevity annuities or deferred income annuities. You invest a lump sum in your 50's or 60's and lock in a guaranteed payout beginning when you turn 80 or 85. “The advantage is they're fairly cheap and are guaranteed you won't run out of money regardless of how long you live,” said John.
What Experts Say the U.S. Needs
What’s needed now, according to John and Harris, is better financial literacy education to get the word out that lifelong savings is essential for a comfortable retirement.
Maybe that, and some KiwiSaver-type tinkering, might help avert a retirement crisis. Then, that TV commercial where people are asked how much money they think they'll need to retire (and run out of ribbon representing that amount) could seem quaint and outdated.
Instead of showing that our savings won't stretch as far as we think, perhaps years from now we'll be able to thank the folks in New Zealand for helping us stretch our retirement savings to age 90, 95 or 100.