KiwiSaver policy won't help students, says AUT finance expert
As other commentators have pointed out, New Zealand First’s KiwiSaver Kick Start policy would potentially undermine the true purpose of KiwiSaver (to ensure people have enough to retire on comfortably). But another more fundamental challenge needs to be made: simply put, the policy would fail to achieve any meaningful reduction in student debt or borrowing.
The policy as it is articulated promises $1,000 per child at birth, to be invested in a KiwiSaver fund that they can later access to contribute towards the costs of tertiary education. Those costs include fees, which for a typical three-year degree course at a university costs between $5,000 and $7,000 per year. In addition there are course-related costs and living expenses. For students who are ineligible for student allowances and are borrowing the full amount of living expenses, their loans over a three year degree will be well in excess of $40,000. Even just borrowing for fees and course related costs will leave a student around $20,000 in debt. So how much of a difference would the New Zealand First policy make?
Assuming a person starts studying around the age of 18, and has made no contributions before they study then the answer is not much. As with all KiwiSavers, if no decision is made about where to invest, then the funds will be placed in a conservative default fund. If we assume that the past five years’ returns are representative of expected future returns and use fees and returns information from Morningstar, we find that on average the KiwiSaver account of an 18 year-old would have a balance of $1872, with the best case being $2438 and the worst case just $1285. So after 18 years of investment, the KiwiSaver Kick Start would give a student the ability to pay at most, half of one year’s fees. However, that overstates the efficacy of the policy, as tertiary fees increase by around four to five per cent per year. Assuming a four per cent per annum increase over 18 years, one year’s fees on a degree currently costing $5,000 per year would be over $10,000.
If the funds of a young KiwiSaver member were put into the highest risk category, which should have the highest expected return, then the policy would be slightly more effective. The expected return at 18 on an aggressive fund would be $3,625 with a best case of $5,223 and a worst case of $1,796. Although, it is important to note, that while the expected return for the aggressive fund is greater, there is also considerably more risk, with the possibility of ending up with less than the initial $1,000.
So why is this policy so ineffective, offering at best the potential to pay for just a fraction of the costs associated with tertiary education? For a start the fee structure of KiwiSaver funds is an issue. All KiwiSaver funds charge a fixed fee, between $24 and $50 per year, and a percentage fee based on the total amount invested. With just $1,000 invested, the effect of the fixed fees would be considerable. For the average conservative fund, the fees over 18 years would come to $693, or 80 per cent of the returns earned. And for the average aggressive fund the fees would total $1145, around 45 per cent of the returns earned. As KiwiSaver balances increase, the impact of fees reduces markedly, but without ongoing contributions to boost the KiwiSaver balance quickly, the fees reduce the value of the returns considerably.
The other major issue with the policy is the lack of ongoing contributions. The announcement by Winston Peters notes that as children get older they will start to make contributions. However, in most cases this is unlikely to occur until the last four to five years, once children are old enough to work. However, the power of investing is that it rewards money invested early, with far less impact from contributions occurring later. In this case, the extra returns earned on the contributions would occur too late to really boost the loan balances.
Overall, this is a policy that would make little real impact on the plight of student debt, offering at best just a fraction of the real costs of a tertiary education and would therefore, also do little to reduce student borrowing. At the same time, it risks doing further damage to the credibility and objectives of KiwiSaver.
In short, the benefits of this policy to its supposed targets seem negligible. In fact, only fund managers are likely to benefit.