Is the minimum 3% Kiwisaver contribution rate going up?

By Paul de Klerk
Investment Specialist (FSP110367)
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New Zealand’s KiwiSaver scheme, a cornerstone of retirement savings for 3.3 million Kiwis with $121 billion invested, is under scrutiny as Finance Minister Nicola Willis considers increasing contribution rates.

This potential policy shift, hinted at in recent statements, aims to bolster retirement security amid economic recovery and global uncertainties.

​This article is my detailed report and analysis of this development, its implications for KiwiSaver accounts, and the broader economic context.

Reference Article:
NZ Herald - Nicola Willis Mulls Upping Kiwisaver Contributions As Treasury Rings Alarm Bells Over Cost of Aging Population


BACKGROUND: 
The Current KiwiSaver Framework

KiwiSaver, launched in 2007, operates on a voluntary basis with a default employee contribution rate of 3% of gross income, matched by a minimum 3% employer contribution (unless offset by a total remuneration agreement).

Employees can opt for higher rates—4%, 6%, 8%, or 10%—but most stick to the default. This structure has built a significant savings pool, yet it lags behind international benchmarks like Australia’s superannuation system, where employer contributions are set at 11.5% (rising to 12% by July 2025) and total assets exceed 150% of GDP, compared to New Zealand’s 40%.

Willis has expressed a desire to see KiwiSaver balances grow, telling the NZ Herald, “I do want to see New Zealanders’ KiwiSaver balances increasing over time, so they have more financial security in their retirement.” She is currently seeking advice and has not yet taken formal proposals to Cabinet, but the push for higher contributions aligns with calls from providers many Kiwisaver providers who advocate for a combined 10% rate to close the retirement savings gap.

Recent Developments Prompting Change
This news provides context for Willis’ considerations:

Economic Recovery and Market Volatility:
New Zealand emerged from a recession in late 2024, with GDP growing 0.7% in the December quarter, per StatsNZ. However, global market turbulence—exacerbated by a 10% drop in the S&P 500 from its yearly highs and President Trumps tarriffs about to be levied on 2 April—has rattled investor confidence. Some KiwiSaver members have shifted to conservative funds, highlighting the need for robust, long-term savings strategies.

Treasury Warnings: Treasury has flagged “chronic” pressures on government finances from an ageing population and the rising cost of NZ Super. Increasing KiwiSaver contributions could reduce future reliance on state pensions, a point Willis has acknowledged: “Not everyone will own their own home at retirement.”

Provider Advocacy: Many Kiwisaver providers see this as a timely adjustment, given KiwiSaver’s 18-year history and the need to future-proof the system.

Potential Policy Options:
While Willis has not detailed specific plans, several options emerge from her statements and industry commentary:

• Incremental Increase: Gradually raising the minimum combined contribution (employee + employer) from 6% to 10% over a decade, mirroring Australia’s phased approach.
• Employer-Led Boost: Mandating higher employer contributions (e.g., 5% or 6%) while keeping employee rates flexible, though this risks pushback from businesses citing cost pressures.
• Default Rate Adjustment: Lifting the default employee contribution to 4% or 6%, encouraging higher savings without making it mandatory.
• Incentives: Enhancing tax credits or government contributions (currently $521 annually for those contributing at least $1,042) to offset the impact on take-home pay.

Impact on KiwiSaver Accounts:

Short-Term Effects:

• Reduced Disposable Income: A higher contribution rate would shrink paychecks, a concern for households already stretched by inflation (easing but still a factor) and post-earthquake recovery costs in affected regions.
• Market Sensitivity: Funds with global exposure may see continued volatility, but regular contributions via dollar-cost averaging could mitigate losses over time.

Long-Term Benefits:

• Larger Balances: A 35-year-old earning $60,000 annually contributing 10% (split 5% employee, 5% employer) instead of 6% could see their KiwiSaver balance grow by an additional $200,000–$300,000 by age 65, assuming a 5% annual return.
• Reduced Pension Pressure: Higher savings could ease fiscal strain on NZ Super, potentially stabilizing taxes for future generations.

Risk Profile Adjustments:
Younger investors in growth funds might benefit most from increased contributions during market dips, while those nearing retirement may prefer conservative options, amplifying the need for tailored advice.

Economic and Political Considerations:

• Economic Timing: With the job market not expected to recover until late 2025 (per Willis’ RNZ comments), businesses may resist higher employer contributions, arguing it hampers hiring. However, Willis remains optimistic about GDP growth, suggesting a window for reform.
• Political Feasibility: The coalition government, including NZ First and ACT, must balance economic growth with voter sentiment. A gradual rollout with long-term signaling—advocated by providers—could mitigate backlash.
• Global Context: Trump-era tariff threats and a lower NZ dollar (noted by Willis on CNBC) could boost exporters, indirectly supporting wage growth and KiwiSaver contributions, but also risk inflation spikes.

Critical Analysis:
Willis’ push reflects a pragmatic response to demographic and fiscal realities, but it’s not without trade-offs. Australia’s higher contribution model succeeds partly due to compulsory participation and stronger wage growth—conditions New Zealand lacks. Critics might argue that forcing higher contributions in a fragile economy risks stifling consumption, a key GDP driver. Conversely, delaying action could entrench retirement inequality, especially for non-homeowners.

My Recommendations for KiwiSaver Members:

• Review Your Fund: Ensure your risk level matches your timeline—growth for the young, balanced or conservative for those nearing 65.
• Model Contributions: Use investment calculators to test how a 1%–2% increase affects your balance over 20–30 years. If you need assistance reach out to me for guidance.
• Engage Now: With policy changes looming, book a free consultant with me to preempt adjustments and optimize tax or first-home withdrawal benefits.

Conclusion:
Finance Minister Nicola Willis’ potential decision to increase KiwiSaver contribution rates is a bold step toward securing New Zealanders’ financial future. While it promises larger retirement nest eggs and reduced state dependency, it demands careful calibration to avoid overburdening workers and employers. As she weighs advice and navigates Cabinet, the outcome will shape KiwiSaver’s role in an evolving economic landscape. For now, staying informed and proactive is your best strategy—let’s unlock KiwiSaver’s full potential together. 

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PAUL DE KLERK

Paul de Klerk (FSP110367) is a Kiwisaver and investment specialist working for the Financial Advice Provider known as De Klerk Business Services Ltd (FSP1105978). Nothing in this article should be considered as personal financial advice. If you need personalised investment advice, speak to Paul for free at www.pauldeklerk.co.nz/contact. For a disclosure statement visit www.pauldeklerk.co.nz/disclosure