The following is the government press release pertaining to the changes it has made to Kiwisaver as outlined in today's Budget.

Changes to KiwiSaver will encourage a higher level of private savings, make the scheme more financially sustainable and build a large pool of local capital, say Finance Minister Bill English and Revenue Minister Peter Dunne.

'While KiwiSaver has been very effective in attracting new members, it has done so at a high cost to taxpayers, with the scheme costing the Government over $1 billion a year in subsidies and tax breaks," Mr English says.

'Budget 2011 includes changes that will see KiwiSaver funds continue to grow rapidly, but with a larger share of contributions coming from members and employers, and a lower share from the Government.”

This is expected to raise national savings, as it will reduce the amount the Government is borrowing, largely from foreigners, in order to fund private savings.

'KiwiSaver funds will continue to accumulate rapidly. Total funds are projected to rise from $7.9 billion currently, to about $25 billion by 2015, and almost $60 billion in 10 years. The Budget changes do not significantly change the expected inflows into the funds.

'Reducing Government borrowing and increasing private contributions to KiwiSaver will also lift national savings. That's important, as New Zealand's high levels of foreign debt are a handbrake on growth and one of our major economic vulnerabilities,” Mr English says.

Just over 43 per cent of all KiwSaver contributions to date have been funded by the Government – mainly through Member Tax Credit and Kick-Start payments. This does not include the Employer Superannuation Contribution Tax exemption which, if counted, would bring the Government's share closer to 50 per cent.

The $1000 Kick-Start is unchanged. The Budget changes include:

• From 1 April 2012: The tax-free status of employer contributions will be removed. These will be taxed at an employee's marginal tax rate.
• For the year to 30 June 2012 and beyond: The Member Tax Credit rate will be halved from $1 to 50c for every $1 contributed by members, up to $521 a year – half the current maximum. These payments are made annually after the government financial year, so the first payments at these new levels will occur in the second half of 2012.
• From 1 April 2013: The minimum employee contribution rate will rise from 2 per cent to 3 per cent.
• From 1 April 2013: Compulsory employer contributions will also rise from 2 per cent to 3 per cent.

Budget 2011 changes to KiwiSaver will save $2.6 billion over four years.

Mr Dunne says the changes ensure KiwiSaver remains an attractive and subsidised savings option that is financially sustainable into the future.

'We believe most people will find 3 per cent affordable, and the employer and Government contributions, alongside the $1,000 Kick-Start payment, will continue to offer a very attractive rate of return for the money employees put in themselves,” Mr Dunne says.

'We have given workers and employers two years to adjust and plan for the increased contribution rates, which will kick in at a time of strong forecast economic growth.

'Taxing employer contributions to KiwiSaver at the employee's marginal tax rate makes sense. About half of the benefit of the current arrangements goes to the top 15 per cent of income earners, who get a larger tax break due to their higher marginal income tax rate.

'In addition to these changes, the Government will discuss the Savings Working Group's recommendation of a one-off enrolment exercise with employers after the Budget and look at how that might be done without unnecessary compliance and administrative costs,” Mr Dunne says.

Fact sheet – KiwiSaver changes

Why are changes being made?

• The Government currently spends over $1 billion a year on KiwiSaver subsidies and tax breaks and is borrowing heavily to pay for this. Borrowing money to put into KiwiSaver accounts doesn't make sense as it does not lift overall net savings and may even result in members saving less of their own money.
• Removing the tax-free status of employer contributions will make the scheme fairer – currently 50 per cent of this benefit goes to the top
  15 per cent of income earners, due to their higher marginal tax rate.
• The changes will help the Government return to surplus sooner. The Savings Working Group said achieving this and reducing Government borrowing was the one of the most important things the Government could do to lift national savings.

What is changing?

• Budget 2011 makes changes to KiwiSaver that will reduce Government subsidies, and replace them with increased private contributions. This will reduce Government borrowing and lift national savings, while ensuring KiwiSaver remains an attractive option for savers.

The specific changes are – the $1,000 Kick-Start remains unchanged:

• From 1 April 2012: The tax-free status of employer contributions to KiwiSaver and other complying superannuation funds will end. All employer contributions will be subject to Employer Superannuation Contribution Tax (ESCT) paid at the employee's marginal tax rate.
• For the year ending 30 June 2012 and beyond: The Member Tax Credit rate will be halved from $1 to 50c for every $1 contributed by members, up to $521 a year – half the current maximum. These payments are made annually after the government financial year, so the first payments at these new levels will occur in the second half of 2012.
• From 1 April 2013: The minimum employee contribution rate will rise from 2 per cent to 3 per cent. This will apply to existing and new members. This will also be the new default rate, but members will still be able to select a higher contribution rate of 4 per cent or 8 per cent.
• From 1 April 2013: The compulsory employer contribution rate will also rise to 3 per cent.

Key facts

• The savings from reducing the Member Tax Credit and applying ESCT are estimated to be $513 million in 2011/12 rising to $720 million in 2014/15. This amounts to $2.6 billion over the next four years that the Government no longer needs to borrow.
• When the changes are fully implemented in 2012/13, the Government will still contribute over $600 million a year in KiwiSaver subsidies.
• Officials estimate Budget 2011 KiwiSaver changes will improve the rate of national saving by about 0.2 per cent of GDP a year, with KiwiSaver funds projected to rise from $7.9 billion currently to $25 billion in 2014/15 and almost $60 billion in 10 years.
• They also estimate the changes will reduce our net international liabilities – the amount households, businesses and the Government owes to foreign lenders – by about 2 per cent of GDP over the next decade.
• Even though the Government is reducing its contribution, KiwiSaver remains a highly attractive and subsidised scheme for savers – in fact:

o New members will continue to receive the $1,000 Kick-Start payment.

o Most people on the minimum contribution rate will continue to receive more than $1 in combined employer contributions and tax credits for every $1 they put in.

o Nearly all members contributing at the minimum rate will end up with more KiwiSaver funds at retirement than would have been the case under the current policy settings.

• The Government contributed over $1 billion to KiwiSaver members' accounts in the year to 31 March, 2011, compared to employee contributions of about $1.1 billion and employer contributions of about $700 million. There are currently 1.68 million KiwiSaver members.

Where can I find more information?

• More information about KiwiSaver is available on Inland Revenue's KiwiSaver website: www.kiwisaver.govt.nz.
• Information for employers about ESCT is available on Inland Revenue's tax website: www.ird.govt.nz.

KiwiSaver – how changes affect New Zealanders

1. 35-year old couple on average household income.

Ben and Megan are both 35 years old. Ben works full time and earns $52,000 a year and Megan works part time earning $25,000 a year. Their combined income is equivalent to the average household wage. They join KiwiSaver on
1 April 2013 and both contribute the new minimum rate – 3 per cent of their gross wages.

Ben contributes $29.92 a week and his employer contributes 3 per cent, or $24.68 a week after tax. He receives the equivalent of $10 a week in government contributions through the annual Member Tax Credit. Megan contributes $14.38 a week and her employer contributes 3 per cent, or $11.87 a week after tax. She receives the equivalent of $7.19 a week from the Member Tax Credit.

By age 65 Ben and Megan would have combined savings of about $247,500. This would be enough to provide gross income of about $15,000 a year in retirement over and above the married rate of NZ Superannuation – currently $27,194 a year after tax.

2. 30-year old on average wage

Steven is 30 and earns $50,000 – about the average wage. Steven joins KiwiSaver on 1 April 2013 and contributes the new minimum rate of 3 per cent of his gross wage – $28.77 per week. Steven's employer contributes 3 per cent, or $23.73 a week after tax. He receives the equivalent of $10 a week from the Member Tax Credit.

At age 65 Steven would have about $190,000, which would be enough to provide gross income of around $11,500 a year in retirement over and above the single rate of NZ Superannuation – currently $17,676 a year after tax.

3. 18-year old on the minimum wage

Blair is 18 and earns just over $27,000 a year – around the minimum wage. Blair joins KiwiSaver on 1 April 2013 and contributes the new minimum rate of 3 per cent of his gross wage – $15.60 a week. Blair's employer contributes 3 per cent, or $12.87 a week after tax. He receives the equivalent of $7.80 a week from the Member Tax Credit.

At age 65 Blair would have about $195,000, which would be enough to provide gross income of more than $11,500 a year in retirement over and above the single rate of NZ Superannuation – currently $17,676 a year after tax.

4. 30-year old couple each earning $45,000, contributing 4 per cent and intending to use the first home buyer subsidy

Bechi and Dan are both 30 and each earn $45,000 a year. They both join KiwiSaver on 1 April 2013 and choose to contribute 4 per cent of their gross wage – $34.52 a week each. Their employers contribute 3 per cent, or $21.36 after tax. They each receive the equivalent of $10 a week from the Member Tax Credit.

After three years, if Bechi and Dan decided to buy their first home, they may be eligible for a first home deposit subsidy of $3,000 each, which increases to a maximum of $5,000 after five years. They could also withdraw their own contributions, their employers' contributions and their fund returns to buy their first home. After five years they would have about $36,000 available for withdrawal, and if their combined income remained under $100,000, they would also be eligible for the $5,000 deposit subsidy, pushing their total first-home deposit to about $46,000.

Assuming they withdrew the maximum amount to buy their first home, at age 65 Bechi and Dan would have a combined balance of about $345,000, which would be enough to provide gross income of about $21,000 a year in retirement over and above the married rate of NZ Superannuation – currently $27,194 a year after tax.

5. 45-year old couple with household income of $120,000

Tama and Lisa are both 45. Tama earns $80,000 a year and Lisa earns $40,000 a year. They both join KiwiSaver on 1 April 2013 and contribute the new minimum rate of 3 per cent of their gross wage. Tama contributes $46.03 a week and his employer contributes 3 per cent, or $32.22 a week after tax. He receives the equivalent of $10 a week from the Member Tax Credit. Lisa contributes $23.01 a week and her employer contributes 3 per cent, or $18.99 a week after tax. She receives the equivalent of $10 a week from the Member Tax Credit.

At age 65 Tama and Lisa would have about $200,000, which would be enough to provide gross income of about $12,000 a year in retirement over and above the married rate of NZ Superannuation – currently $27,194 a year after tax.

6. 35-year old earning $80,000

Matt is 35 and earns $80,000 a year. He joins KiwiSaver on 1 April 2013 and contributes at the new minimum rate of 3 per cent of his gross wage – or $46.03 per week. Matt's employer also contributes 3 per cent, or $32.22 a week after tax. Matt receives the equivalent of $10 a week from the Member Tax Credit.

At age 65 Matt would have about $225,000, which would be enough to provide gross income of about $13,500 a year in retirement over and above the single rate of NZ Superannuation – currently $17,676 a year after tax.

7. 40-year old earning $100,000

Lelani is 40 and earns $100,000. She joins KiwiSaver on 1 April 2013 and contributes at the new minimum rate of 3 per cent of her gross wage – $57.53 a week. Lelani's employer contributes 3 per cent, or $38.55 a week after tax. She receives the equivalent of $10 a week from the Member Tax Credit.

At age 65 Lelani would have about $212,500, which would be enough to provide gross income of more than $12,500 a year in retirement over and above the single rate of NZ Superannuation – currently $17,676 a year after tax.

8. 50-year old existing member on average wage

Emma is 50 and earns $50,000 – about the average wage. She joined KiwiSaver in July 2007 and first contributed 4 per cent of her gross wage. She currently contributes 2 per cent, or $19.18 a week and this is matched by her employer. She also receives the same amount from the Member Tax Credit, which will reduce to the equivalent of $9.59 a week for the year to 30 June 2012 and beyond.

From 1 April 2013 Emma's minimum contribution will rise to 3 per cent, or $28.77 a week. Because her contributions rise the amount she receives from the Member Tax Credit will increase to the equivalent of $10 per week. Her employer's contribution will also increase to 3 per cent, or $23.73 a week after tax. At age 65 she would have about $75,000. This would be enough to provide gross income of about $4,500 a year in retirement over and above the single rate of NZ Superannuation – currently $17,676 a year after tax.

9. 30-year old existing member earning $40,000

Nick is 30 and earns $40,000 a year. He joined KiwiSaver in July 2007 and contributes 4 per cent of his gross wage – $30.68 a week. His employer contributes $15.34 a week. He currently receives the equivalent of $20 a week from the Member Tax Credit, which will reduce to the equivalent of $10 a week for the year to 30 June 2012 and beyond.

From 1 April 2013, Nick's employer contribution will increase from 2 per cent to 3 per cent, or $18.99 a week after tax. If Nick leaves his contribution rate unchanged, then at age 65 he would have about $215,000. This would be enough to provide gross income of $13,000 a year in retirement over and above the single rate of NZ Superannuation – currently $17,676 a year after tax.

10. 50-year old couple with household income of $100,000

Jeremy and Chloe are both 50. Jeremy earns $75,000 a year, while Chloe works part time and earns $25,000 a year. They both join KiwiSaver on 1 April 2013. As their children have now left home and they have paid off their mortgage, they choose to contribute 8 per cent of their gross wages. Jeremy contributes $115.07 a week. His employer contributes 3 per cent of his gross wage, or $30.21 a week after tax. He receives the equivalent of $10 a week from the Member Tax Credit. Chloe contributes $38.36 a week. Her employer contributes 3 per cent, or $11.87 a week after tax. She receives the equivalent of $10 a week from the Member Tax Credit.

At age 65 Jeremy and Chloe would have combined savings of about $217,500. This would be enough to provide gross income of about $13,000 a year over and above the married rate of NZ Superannuation – currently $27,194 a year after tax.

If Jeremy and Chloe had contributed only 4 per cent of their gross wage, they would have combined savings of about $140,000, or enough to provide additional gross income of about $8,500 a year in retirement.

Assumptions used in KiwiSaver examples

• Although the Member Tax Credit is paid annually after the government financial year, the estimated annual amount has been averaged on a weekly basis for the purposes of these examples.
• All retirement savings figures are in today's dollars, based on funds earning a real return of
  4 per cent a year and real wage growth of 1.5 per cent a year, unless otherwise stated.
• The Member Tax Credit and tax rates are not indexed for inflation.
• Estimated retirement income is based on life expectancy of 25 years in retirement and an annual real return of 4 per cent a year. Payments are inflation adjusted to preserve real value.