Employer contribution and Kiwisaver

Posted by: Matt Nolan on: May 30, 2008

In: New Zealand Economics
6 Comments

Tracy Watkins indicated that the National is in a pickle surrounding compulsory employer contributions in Kiwisaver. One way of keeping these contributions and regaining the support of business would be for National to allow wage cuts on the basis of entry into Kiwisaver (with its compulsory employer contribution). The Standard laments such a move, however there are two reasons why I don’t think it’s a big deal:

In most cases such a policy won’t change anything,
In this cases where the policy leads to lower wages it may actually be “fairer”

Let me explain myself:

Firstly I said that in most situations this policy won’t change a thing. Why? Because wage increases will be a function whether someones in Kiwisaver – whether firms say it explicitly or not! The reason this can occur is because:

Employees cannot easily compare wages,
Wage increases are based on increases in productivity – which is subjectively measured by the firms owner
Employees willingness to work and provide effort depends on their renumeration – not just their take home pay
Firms want to create their output at the lowest cost

Taking these factors together, in most industries, it would be difficult if not impossible for the government to prove that employees wage increases were based on whether they were in Kiwisaver or not. Furthermore, in the industries where this is possible, it is unlikely the employee will find out and complain. As a result, the probability of getting in trouble for doing this is low for the firm – so it is more likely they will do it.

But what about fairness – whats fair about a pay cut!

Assume that it is fair for two employees who do the same job, are just as productive, and work just as hard to get the same total renumeration. If one of these individuals is in Kiwisaver and one is not it is not fair for their total renumeration to differ (ignore the tax credit for now – as that merely makes the employee with Kiwisaver more productive and so some of the surplus should be passed on 🙂 ).

However, current government policy demands that someone in Kiwisaver should get higher renumeration than someone not in Kiwisaver, because the employer will soon have to pay the Kiwisaver employee an extra 4%.

Although the government may want to favour people in Kiwisaver – it doesn’t make it fair. As a result, the firms choice to cut employee wages so that both employee types are treated equally is the fair result.

6 Responses to "Employer contribution and Kiwisaver"

1 | Lew
May 30, 2008 at 10:00 am

The purpose of KiwiSaver isn’t to be fair – it’s to encourage retirement saving. Offering a tax credit (pareto advantage) to those who take the opportunity to save achieves this goal.

Bringing fairness into it is nice in theory, but nothing to do with the policy itself.

2 | Matt Nolan
May 30, 2008 at 10:09 am

Hi Lew,

“Bringing fairness into it is nice in theory, but nothing to do with the policy itself.”

Agreed in a sense, looking at it as one instrument one goal we should only be worried about the impact on aggregate savings.

However I think fairness is an important normative consideration and when it comes to determining policy it is one way of defending this potential change.

3 | Lew
May 30, 2008 at 10:41 am

G’day Matt,

Yes, it is a rationale for the change, but it would require a shift in the policy’s purpose to be a genuine rationale – essentially an emphasis shift away from `encouraging retirement savings’ to something like `enabling retirement savings but not at the cost of [other things]’.

It’s occurred to me that a pareto advantage is only gained from KS tax credits and employer contributions if overall wages don’t fall as a result of the policy. I believe it’s illegal for employers to deny an increase on the basis that the employee costs the employer 4% more due to KS, for instance. This creates the possibility of real wage growth slowing across the board (not just those of KS enrollees) because of pressure from KS on employers. If this happens, non-enrollees are doubly-disadvantaged: they don’t get the advantage of KS employer contributions and tax credits, and they get the disadvantage of a real wage decrease.

This cost in `fairness’ is weighed against the benefit of increased retirement savings. Although it would be objectively `unfair’, this significant advantage of belonging to KS could be a reasonable cost given the main purpose of the scheme. Of course: change the scheme’s purpose and the cost-benefit balance changes.

4 | CPW
May 30, 2008 at 11:15 am

Employment law is not my strength, but I was under the impression that it is already perfectly legal for employers to pay someone in KiwiSaver less than someone not in KiwiSaver doing the same job. Hence this is a non-issue.

Details here

5 | Lew
May 30, 2008 at 1:09 pm

CPW: Thanks for pointing this out. The money quote seems to be “After [13 December 2007], your employer can offset their contribution against “pay movements”, so long as this is negotiated in good faith.”

The phenomenon I describe would still be the case despite this, since many unionised employees will receive a given wage rise regardless of whether they personally are enroled in KiwiSaver; and indeed even non-union members working in unionised workplaces often have union-negotiated benefits extended to them. My analysis stands to a large extent.

6 | Matt Nolan
May 30, 2008 at 1:23 pm

“If this happens, non-enrollees are doubly-disadvantaged: they don’t get the advantage of KS employer contributions and tax credits, and they get the disadvantage of a real wage decrease”

This is an interesting issue. As long as the employer contribution “increases the cost of employees” this will lead to a reduction in labour demand, which will decrease real wages – true.

However, if a non-KS person can commit to staying out of the scheme this should not happen, as they can commit to being a lower cost labour resource and so can get an appropriately higher real wage.

As a result, we have to ask if there is any way someone can commit to this type of strategy before stipulating that there will be a real wage (growth) fall for non-KS employees.

“since many unionised employees will receive a given wage rise regardless of whether they personally are enroled in KiwiSaver”

All we need is a change in the wage level though – then wage growth can be equivalent. As long as someone in Kiwisaver can be paid 4% less than someone not in Kiwisaver then giving people “union negotiated” pay rises shouldn’t make a difference should it?

If doing this is legal now – then a National government making it explicit isn’t a big deal is it?