Review of fiscal costs for the
proposed Kids’ KiwiSaver
for the Green Party
May 2015
2
Fiscal Costs of Kids’ KiwiSaver – May 2015
Authorship
This report has been prepared by Dave Grimmond.
Email: [email protected]
All work and services rendered are at the request of, and for the purposes of the
client only. Neither Infometrics nor any of its employees or partners accept any
responsibility on any grounds whatsoever, including negligence, to any other
person or organisation. While every effort is made by Infometrics to ensure that
the information, opinions, and forecasts are accurate and reliable, Infometrics shall
reliance of any report provided by Infometrics, nor shall Infometrics be held to
have given or implied any warranty as to whether any report provided by
Fiscal Costs of Kids’ KiwiSaver – May 2015
Objective
The Green Party has proposed the introduction of a government backed savings
scheme for New Zealand children: the
. We prepare cost estimates
here with two general aims: first to obtain an estimate of the maximum likely cost
to the Crown of this proposed scheme and, second, to present the extent that the
cost estimates are sensitive to key design and outcome assumptions.
The Scheme
The proposed saving scheme would be universal but would offer more government
assistance to children in low-income families. There are four types of opportunities
and responses to the proposal:
1.
The child in a low-income family receives $1,000 at birth, and the government
makes further annual contributions of $200, with no private contributions.
Assuming an after tax interest rate of 5%, this would enable the scheme to
accumulate to $7,60
2.
The child in a low-income family receives $1,000 at birth, the government
makes further annual contributions of $200, plus it matches the $100 private
annual contribution. Assuming an after tax interest rate of 5%, this would
enable the scheme to accumulate to $12,90
3.
The child not in a low-income family receives $1,000 at birth, plus the
government matches the $200 private annual contribution. Assuming an after
tax interest rate of 5%, this would enable the scheme to accumulate to
$12,90
4.
The child not in a low-income family receives $1,000 at birth, but neither the
private family nor the government make any further contributions. Assuming
an after tax interest rate of 5%, this would enable the scheme to accumulate
to $2
Key assumptions
In line with the prime objective of est
Crown, our calculations presume that:

There will be full take-up by individuals, ie all low income families will behave
as in option 2 and all other families will adopt option 3.

The annual rate of return on investments in the scheme will average 5% (after
fees, but before tax).1

The tax treatment will be the same as currently applies to KiwiSaver schemes,
and that in the central scenario all scheme members will select a prescribed
investor tax rate of 10.5%.

The scheme is presumed to be introduced in mid-2018 (ie beginning in the
2018/19 fiscal year) reaching full maturity by 2036/37 when the initial birth
cohort reaches the age of 18.

The size of future birth cohorts conform with Statistics New Zealand median
population projections.
1
This assumption is based on the average return since inception for balanced portfolio investments in
the Kiwi Wealth KiwiSaver Scheme, see http://www.gmi.co.nz/kiwisaver/performance-returns.aspx.
Note this implies we are adopting a conservative rate of return as the Kiwi Wealth average rate of
return is after fees and tax, calculated at the top PIR of 28%.
3
4
Fiscal Costs of Kids’ KiwiSaver – May 2015

Although the calculations account for natural survival attrition (based on
Statistics New Zealand 2010-12 Population Period Life Tables), and thus
presume that migrants not born in New Zealand are ineligible for the scheme,
no allowance is made in the central scenario for the permanent outward
migration of New Zealand born children before the age of 18.

The real value of contributions are maintained, ie the results can be
interpreted as being expressed in constant prices.

The qualifying criteria for additional annual contributions from the
government will be determined as families with household incomes 60% of the
median income. Based on our analysis of 2013 Census results this is taken to
imply that 27% of families with children will qualify for these extra annual
contributions.
Sensitivity tests
Cost estimates are tested for their sensitivity to adjustments in the following
assumptions.

Different before tax (but after fee) rates of return: 3.5% and 6.5% per annum.

Different tax rates: a high tax rate of 28%, and a split system where low
income families pay 10.5% and others pay 28%.

Different assumptions about which families qualify as low income families.
The first approach was to differentiate between families with children
receiving and not receiving Government benefits (unemployment, sickness,
domestic purposes and invalids). Although this different qualification criteria
would target different families and children, from a cost estimation
perspective there are very small differences, with Census analysis implying
that the beneficiary criteria would result in 24% of children qualifying for low
income government support compared with the poverty definition (60% of
median income) implying 27% of children would qualify.

A more generous contribution scheme for children from poorer households.
The central scenario is for children from poorer households qualifying for
annual government contributions of $200, plus matching $100 private annual
contributions. In this sensitivity test the size of the annual contribution in
qualifying households is increased to $400, plus matching $200 private
annual contributions. Based on 5% rates of return, the personal saving results
for children in qualifying families increases from $7,600 accumulated savings
by age 18 to $12,900 for those who do not make any private contributions (ie
type 1 families on p3 of this report). For qualifying families making private
contributions of $200 per year (and matched by government), ie type 2 on p3,
the savings accumulated by age 18 increase from $12,900 to $23,600. There
is no change for children in non-qualifying families (ie $12,900 accumulated if
families contribute $200 per year and this is matched by the government).

The central scenario makes no allowance for families emigrating from New
Zealand with their children. In practice this is likely to mean a reduction in
suggests (based on recent movement patterns) that perhaps as many as 14%
of children born in New Zealand permanently move overseas before their
eighteenth birthday. Children born in New Zealand would still receive the
initial $1,000 government kick-start, but would stop receiving annual
contributions once they emigrate. We develop a scenario allowing for children
to continue emigrating from New Zealand at a rate consistent with patterns
estimated for the five year period to 2013.
Fiscal Costs of Kids’ KiwiSaver – May 2015
5
Results
Central outlook
The estimates for the annual fiscal costs associated with the proposed
KiwiSaver is presented in Table 1. The fiscal costs calculated incorporate:

the $1,000 per child start-up government contributions

annual top-up contributions, assumed to be $300pa for 27% of children and
$200pa for the remaining 73% of children

a reduction for tax paid on earnings in the saving scheme, calculated using a
10.5% tax rate

Statistics New Zealand forecasts of the size of birth cohorts over the period
from 2018 to 2037.
Table 1: Central estimate of Government costs for proposed Kids’ KiwiSaver
Year end June
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
NPV
First three years
% of 2037 expenses
$m
61
75
89
102
115
128
141
153
165
176
186
196
206
215
223
230
237
243
248
1,379
224
0.12%
The results are for a first year fiscal cost of around $60m, with annual costs
initially increasing by around $14m per year. The implication is that the fiscal cost
for the first three years is estimated to be $224m. The rate of increase in annual
fiscal costs declines due to the offset generated by taxes earned on income earned
by funds invested in the scheme. Thus the annual fiscal cost of the scheme is
estimated to reach $248m when the scheme reaches maturity in 2037 (ie when the
first birth cohort reaches the age of 18).
6
Fiscal Costs of Kids’ KiwiSaver – May 2015
To put this in context this compares with Treasury projections of total fiscal
expenses in 2036/37 well in excess of $200 bn2. The implication is that the scheme
would constitute 0.1% (or one-thousandth) of total government activities.
Using an 8% discount rate implies that the present value of the scheme over the
period 2018/19 to 2036/37 is estimated to be $1,380m.
Sensitivity tests
The scheme costs are potentially sensitive to:

Average rates of return earned from the scheme

The tax rate applying to scheme holders

The rules governing which families qualify for extra government support

The rules governing the size of government contributions

Assumptions about migration patterns
Full results from these sensitivity tests are presented in Table 3 at the end of this
report. A summary of the impact of the assumptions underlying the cost estimates
are presented in Table 2. In each case the results are presented as comparisons
with the central cost estimates (ie those presented in Table 1). The results are
presented in three dimensions:

The overall cost of the scheme (present value over 19 years)

The cost of the introduction phase (first three years), and

The long term ongoing costs (annual cost in 2037).
A higher rate of return reduces the fiscal cost of the scheme.
Increasing the average annual return from 5% to 6.5% reduces the 19 year present
value by 4.4%, and the long run annual cost by 14%. Conversely reducing the
average return to 3.5% increases estimates of the 19 year present value by 3.7%,
and the long run annual cost by 11%. The reason for this impact is that higher
returns mean that the government will receive higher tax revenues from the
scheme. This is also the reason that the impact on introduction costs is quite
minor: the tax impact in initial years is quite low.
2
Long term forecasts prepared in 2013 projected total crown expenses (excluding losses) in 2037 of
around $245 bn (see http://www.treasury.govt.nz/government/longterm/fiscalmodel). The more recent
2014 Half Year Economic and Fiscal Update suggests a lower outlook expenses (see
http://www.treasury.govt.nz/government/fiscalstrategy/model), which if used to rebase the long term
outlook implies expenses in 2037 of $215 bn.
Fiscal Costs of Kids’ KiwiSaver – May 2015
7
Table 2: Relative Impact of Assumptions
% change in fiscal cost estimates relative to central assumptions
Scenario
Before tax rate of return
6.5% pa cf 5% pa
3.5% pa cf 5% pa
Present
value over
19 years
Fiscal cost
for first three Annual cost
years
in 2037
-4.4%
3.7%
-0.2%
0.2%
-14.0%
11.1%
Tax rate
28% cf 10.5%
Split tax rates cf 10.5%
-15.4%
-11.2%
-0.9%
-0.7%
-41.3%
-30.0%
Government support rules
Benefit cf poverty line
Larger contributions
-1.0%
21.9%
-0.3%
6.6%
-1.5%
30.8%
Migration impact
-3.7%
-0.3%
-7.4%
A higher tax rate reduces fiscal costs
For the same reasons, higher prevailing tax rates can have a large impact on fiscal
costs by increasing the tax revenue offset to contributions. A prevailing tax rate of
28% would reduce the scheme
also offers large fiscal savings: 11%. In this scenario, poor families are subject to
the 10.5% tax rate, but other families face the 28% tax rate.
Both of these scenarios are likely to overstate the likely tax take from the scheme,
but they indicate that the ultimate fiscal costs of the scheme will be quite sensitive
to the tax rates that will prevail.
Qualification rules for extra government support will have a relatively small impact
Using benefit receipt or family income criteria had just a minor impact on the
number of children qualifying for extra government scheme contributions.
Although the different rules might have a more substantive impact on which
children qualify, the fiscal cost estimates are determined simply by the proportion
of children qualifying. The benefit rules implied that around 24% of children would
qualify for higher government contributions, which is only marginally below the
27% that qualified in our central 60% of the median income qualification rule.
The overall impact is to reduce the estimate of
More generous government contributions increase fiscal costs
Doubling the annual contribution from government to children in qualifying
households (from $300 to $600) is estimated to increase the present value of the
22%. The fiscal cost in the first 3 years would be just 6.6%
higher, but the annual cost in 2037 is estimated to be 31% higher than in the
central scenario. In dollar terms the government would be spending 48% of its
contributions on the 27% of children qualifying for greater government support. In
the central scenario the equivalent figure would be 35% of government
contributions going to the 27% qualifying children.
8
Fiscal Costs of Kids’ KiwiSaver – May 2015
Migration will potentially moderate the scheme’s fiscal cost
The migration of families overseas is estimated to reduce the present value of the
by 3.7%. This estimated fiscal impact is small relative to the
14% assumed movement of children that underpins this scenario because children
will potentially receive considerable government contributions before leaving. All
children will receive the $1,000 government kick-start, and many will potentially
receive multiple years of government contributions prior to emigration.
Qualifying points
As noted in the Key assumptions section, the approach used here has generally
been generous in the assumptions used in estimating potential costs. In particular,
the estimates have assumed full take-up so that all families maximise their receipt
of government contributions. Also no allowance has been made in the central
scenario for the impact of outward migration of families from New Zealand. Both
of these assumptions mean that the estimates presented here could be
significantly greater than actual outcomes, perhaps by as much as 10%. On the
other side, we have not presented any estimates of government costs for
introducing and administrating the scheme. Although such administration costs
will not necessarily be trivial, we think they are likely to be well within the margin
already built into the estimates (ie from full take-up and no outward migration).
Finally these estimates of fiscal costs should not be interpreted as providing a full
analysis of the economic implications of the proposed scheme. No assessment has
been made of the benefits that might emanate from the scheme, of its potential
redistributive impact or of the opportunity cost associated with the scheme.
Fiscal Costs of Kids’ KiwiSaver – May 2015
9
Table 3: Details of sensitivity analysis, $m
Average market return
Year end June
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
NPV
First three years
% of 2037 expenses
Central
61
75
89
102
115
128
141
153
165
176
186
196
206
215
223
230
237
243
248
High return
(6.5%)
61
75
88
101
114
127
138
150
160
170
179
187
194
200
205
209
212
213
213
Low return
(3.5%)
61
75
89
103
116
130
143
156
169
181
193
205
216
227
237
247
257
266
275
1,379
224
0.12%
1,319
224
0.10%
1,430
224
0.13%
Applying tax rates
High tax
Split tax
rate (28%) (28%/10.5%)
61
61
74
74
87
87
99
100
110
112
121
123
130
133
138
142
146
151
152
158
157
165
161
170
163
175
164
178
163
180
161
180
158
179
152
177
146
173
1,167
222
0.07%
1,225
223
0.08%
Benefit
qualifying rule
61
75
88
101
114
127
139
151
163
174
184
194
203
212
220
227
233
239
244
Migration
impact
61
75
88
101
114
126
137
148
159
169
178
187
195
203
209
216
221
226
230
Larger
Government
contributions
61
80
98
117
135
153
170
187
203
218
233
248
261
274
286
297
307
316
324
1,366
223
0.11%
1,328
223
0.11%
1,681
239
0.15%