The proposal advanced by the Institute for Democratic and Economic Analysis (IDEA) for a Kids Kiwisaver scheme raises interesting questions.

Under IDEA's plan, which is effectively a compulsory savings scheme by stealth, every child would be automatically enrolled in Kiwisaver at birth. There would be a government kick-start to each new Kiwisaver account and thereafter a government matching of small annual contributions by low- and middle-income families to a child's account.

IDEA estimates that the overall cost to the government would not be high, and that by the age of eighteen, each child so enrolled would have about $10-20,000 in their Kids Kiwisaver account, which could then be converted into a full adult Kiwisaver account. Along the way, IDEA hopes that those young people will have developed a strong savings habit to see them through the balance of their working lives.

When Kiwisaver was established in 2007 its purposes were two-fold. The first was to provide a long-term savings vehicle for New Zealanders to boost their retirement savings and lessen their reliance on National Superannuation after the age of 65. The second was to boost New Zealand's poor national savings record by effectively locking up access to Kiwisaver funds until the age of 65, so that invested Kiwisaver funds could be utilised for infrastructure development.

A limited exception was subsequently introduced to allow access to a portion of one's Kiwisaver funds for purchasing a first home. Over the years there have been calls to allow access to Kiwisaver funds - such as repaying student loans or meeting health costs - but governments have so far sensibly resisted these. Kiwisaver’s strength – both from a personal and a national perspective – is that funds are locked in until the saver turns 65, providing a measure of certainty for the future.

For the IDEA plan to succeed, it will be important to ensure that this aspect is preserved across the board and that young savers will not be able to withdraw their funds at age 18. Some may argue that 18-year-olds ought to be able to access funds saved through Kids Kiwisaver to pay for their tertiary education. However, that misses the point of what a long-term savings scheme should be all about. Any compromise on this point simply diminishes the value of a long-term retirement savings scheme and is contrary to Kiwisaver’s founding principles.

In any case, savings by parents, through whatever form, to meet their children’s future educational costs, while laudable, are a personal choice, reflective of their circumstances, and should not something the government becomes involved in supporting through matching contributions.

When Kiwisaver was introduced, it was a voluntary contributory scheme. It quickly proved more popular than originally anticipated, raising the question of whether it should be converted to a compulsory national scheme. However, successive governments have demurred on this point, perhaps mindful of the result of the 1997 referendum on a proposed Compulsory Retirement Savings Scheme when 91.8% of voters rejected the idea, although this result is generally thought to have been influenced by a negative reaction to New Zealand First which had promoted the referendum.

Nevertheless, the reluctance to apply overt compulsion notwithstanding, Kiwisaver has since its introduction in 2007 automatically enrolled new employees, who have up to 56 days to opt out of Kiwisaver if they wish. So, the scheme has become a de facto compulsory savings scheme.

However, IDEA’s plan for a Kids Kiwisaver scheme enrolling every child at birth raises again the question of whether the government should grasp the nettle and remove the current opt-out provisions altogether. As it stands, it is estimated that 96% of the workforce are currently in Kiwisaver, so removing the opt-out provisions is hardly likely to be controversial and would be simple to do legislatively.

So far, there have been no signs of any moves to make Kiwisaver compulsory. While some political parties’ policies favour compulsory Kiwisaver, the issue is not a priority for the current government. Nor was it for its predecessor. Both governing blocs seem content to let the sleeping dog of compulsion lie, figuring that 96% voluntary membership of Kiwisaver makes the final step to compulsion unnecessary.

Similarly, there has so far been little political reaction to the IDEA plan, suggesting that the parties are not persuaded that a separate Kids Kiwisaver scheme is necessary. After all, there is nothing to stop parents opening Kiwisaver accounts for their children now, although there is no government incentive to do so. But the current arrangement is skewed towards better off families that can afford to make regular savings contributions for their children, a point IDEA’s plan seeks to rebalance through its proposed government matching contributions to low- and middle-income households. However, whether those families will be in a financial position to make meaningful contributions is doubtful.

There is also the question of whether better-off families would use the Kids Kiwisaver plan to shelter income and thereby reduce their tax liability, raising tax avoidance issues, sure to attract the attention of Inland Revenue.

Nevertheless, the IDEA Kids Kiwisaver plan is a useful contribution to the ongoing wider debate about promoting a better savings culture in New Zealand and long-term retirement planning generally.