Analysis by Keith Rankin.
Role: Economic historian.
Keith Rankin, 20 May 2026 – Recently, the New Zealand First Party released its KiwiSaver policy, promising to make this retirement savings scheme compulsory for New Zealand born citizens, and setting them up with a $1,000 startup deposit at birth. (See Winston Peters unveils KiwiSaver-from-birth NZ First policy, bank takeover plan, Scoop, 18 May 2016.)
The New Zealand First Party also promised that no government which they are a part of will be allowed to raise (from 65) the age of entitlement to New Zealand Superannuation, which is New Zealand’s universal pension. The National Party, on the other hand, plans to campaign on a promise to raise that age of entitlement. What National did not confirm or deny, is whether it will raise the age of entitlement for KiwiSaver.
I cannot imagine the age for KiwiSaver entitlement staying at 65 – what today is loosely called the ‘retirement age’ – while the age of pension entitlement is raised to 67 or higher. Requiring people to wait until they are 67 before they can access their retirement savings may prove to be even more unpopular than raising the pension-entitlement age.
But, back to Peters’ KiwiSaver startup plan.
In the last 24 hours I have heard references on RNZ (publicity excerpt from The Panel) and on Stuff News (TV3) to such start-up retirement savings. And how we can all become retirement millionaires on the basis of ‘the miracle of compound interest’.
The RNZ item considered a savings plan – at five percent interest – commencing at age 18, which would result in a lump-sum at 65 of well over a million dollars.
The TV3 item (This KiwiSaver change could give Kiwis a $53,000 retirement boost. It’s gaining high-profile support across the political divide, Damien Venuto, 19 May 2026) goes like this: “If $1000 was invested into an aggressive account for a New Zealander from birth that would compound to $53,000 by the age of 65 even if nothing else was invested. The one disclaimer here is that inflation will eat into that over time, making the buying power of that $53,000 far lower than what it would be in today’s terms.”
Two Examples of ‘Miracle’ KiwiSaver savings
In my first example, I start with $1,000, and put that aside in a ‘conservative account’ which we expect to yield five percent interest per annum. The result, after 65 years (daily compounding), is $20,081. That’s assuming tax-free interest. To get to $20,000 while paying withholding taxes, a gross interest rate – gross yield – of about seven percent would be required.
In the second example, I go for Damien Venuto’s target: $53,000. You would need a net annual yield of 6.62 percent. Venuto claims that this is possible in an “aggressive account”. We note Venuto’s inflation proviso, though clearly Venuto presumes that average inflation over the next 65 years will be well under 6.62 percent.
(Given that inflation compounds in the same way as savings’ deposits do, we can say that, if inflation averages five percent over those 65 years, our savers at birth would end up multiplying their birth ‘investments’ by a factor of 2.65; meaning that, after correcting for inflation, their $1,000 seed deposit becomes $2,650. However, if inflation averages 2.95 percent, the $1,000 starter rises to $9,000 after adjusting for inflation. My best guess is that inflation over the next 65 years will average over ten percent, given both the present state of the world and the demands on goods and services which will arise from baby boomers and Gen-Xers eventually cashing in their private pensions. At ten percent average inflation, the initial $1,000 would be worth just $132 in 65 years’ time.)
Risk and Uncertainty.
If you are looking for a risk-free Saver account, you should be expecting a gross interest rate of about the rate of inflation; that means a net interest rate below the rate of inflation. Otherwise, you have to accept risk (estimable) and uncertainty (unknown unknowns can be predicted, at best, with intelligent guesswork).
If you transport yourself back to 1961 (New Zealand’s year of maximum births, 65 years ago) and try to guess your way to the year 2026, what inflation, yields, and risks would you have predicted?
(Inflation has compounded since then at an annual average rate of 5.3%. $1000 saved in 1961 would have to have compounded to $29,400 in 2026 just to break even. Money passively – yet ‘aggressively’, in Damien Venuto’s sense – ‘invested’ in shares or property would have achieved an excellent long-run return, however. Money in a savings account would have fallen well short of break-even. It’s highly unlikely that the next 65 years will be as favourable as the last 65 years were. What actually happened in the last 65 years was not necessarily the best prediction; you might win a game of roulette, but the best prediction is that you will lose. In 1961, most people would have predicted some kind of nuclear war by 2026; indeed, with hindsight, the chances of such a war in 1962 may have been as high as 50:50.)
In an ‘aggressive account’, there are many associated risks. The essential difficulty relates to the fact that the returns are principally capital gains, which may or may not occur, and may or may not be taxed.
Capital gains are largely self-fulfilling in economies with a high degree of inequality, because those people with lots of money tend to use it to buy and sell financial assets from and to each other, boosting the prices of those assets in a financial merry-go-round. This situation can go on for a long time, though never forever. The break happens when more than a few people want to cash in their inflated financial assets at the same time; and such ‘corrections’ are almost certain to happen with rapidly aging (‘first world’) populations in the ‘global north’. After all, much of this money is in pension funds and sovereign wealth funds, which are both going to come under extreme pressure when those older persons seek to spend their savings (and require more services); savings which individual savers cannot take to the grave. And, while sovereign nations may not have an imminent grave, their Treasuries have certain expenditure obligations towards their aging populations, and towards the younger people struggling to support the older people.
While investment yields can be real, capital gains by their very nature are largely illusory, dependent on most of the ‘invested’ funds not being withdrawn. These financial assets will largely disappear in the event of another ‘levelling event’, such as the Great World War of 1914 to 1945; noting that that event included the Great Depression, part of the levelling process.
Who Pays the Interest?
Whenever we hear about the magic of compound interest, we hear very little about who pays that interest. Let’s start with a static, non-growing economy. This may be called the ‘zero-sum’ case.
In such an economy, interest (unless the interest rate is negative) represents an unrequited flow of money from debtors to creditors. In the twentieth century world, when it wasn’t at war, that largely meant from private businesses investing in growth to private savers ‘investing’ in financial assets. Governments tended towards balanced budgets from 1950 to 2000, so were more on the financial sidelines than they are today.
In the twenty-first century world, the debtors are mainly small businesses, relatively poor households, and governments. (In some but not all cases, the same governments which have trillion-dollar sovereign wealth funds.) There are other situations, especially around large leveraged ‘investments’, where interest is paid by the very rich to the very rich; these situations ‘net out’, so can be ignored when looking for the big picture around systemic interest flows.
Once netted out, the main flows of interest today are from small and medium size businesses and relatively poor households to the richest ten to fifteen percent of households. Interest flows from poorer households to richer households. And from younger households to older households. Further, dwelling rents constitute a form of interest; they represent a yield paid to landlords by tenants. The words ‘interest’ and ‘yield’ are close synonyms.
What this tells us is that it’s impossible for all of us to benefit from the ‘miracle of compound interest’. Every dollar of interest received must be paid by someone. It also tells us that one of the risks associated with the miracle is the possible default – or bankruptcy – of a smaller or larger proportion of interest payers.
An interesting finding in New Zealand in the late-2000s, when finance companies were going broke, was that there were actually two types of finance company. One was mainly financing property investments, and the interest payers were relatively affluent people. This type of finance company – eg Hanover – failed during or prior to the global financial crisis (GFC) of 2008 to 2009. The second type of finance company were funding distress loans to the poor; they continued to thrive through the GFC. The poor struggle on, conscientiously.
Looking at this second type of finance company, we can see the emergence of a new ‘lower working class’ – many of them denizens rather than citizens of the countries they live and work in – who may be considered to be ‘debt slaves’ or something close to it. In that sense, the lucky Kiwi Savers are enjoying their credit miracle (in the cases when that miracle is not a mirage) at the expense of a global proletariat of debt slaves.
Now consider economic growth, real and nominal. Real economic growth is the ‘positive-sum’ case.
The standard growth story about ‘who pays the interest’, is that the savings are’invested’ in businesses that are creating economic growth. In this story the creditor ‘passive investors’ – the Kiwi Savers – and the debtor ‘active investors’ (small, medium and large businesses) are both receiving the yields arising from the societal process of economic growth. The yields are the increased amounts of goods and services made available through the growth process.
That’s real growth; indeed, exponential real growth. However, high-paced real growth can never go on forever. Eventually – later or sooner – it must crush the planet through depletion, waste, and (probably) the ‘laying waste’ of warfare.
If we don’t have indefinite real growth, we return to the ‘zero-sum’ case discussed above.
Now consider the forms of the nominal economic growth case. This is when apparent economic growth turns out to be inflation. This is benign compared to the zero-sum case outlined above, because inflation erodes both debts and savings. So, it means that the flows of interest from the poorer debtor community to the richer creditor community become sustainable, because these flows are always being ameliorated by inflation.
In the extreme form, the nominal economic growth case is a zero-sum case, because there is no real economic growth. In a less extreme form, there is a mix of some real growth and some inflation. This is probably the optimum. Modest real economic growth is sustainable if it does not intensely use non-renewable resources. And some inflation addresses the debtor-creditor inequity that the miracle of compound interest is predicated on.
In this relatively optimal case, interest rates will on average be approximately equal to the inflation rate. So the miracle of compound interest disappears. If interest approximately equals inflation, then $1,000 today will buy approximately the same amount of stuff in 65 years’ time. And that’s what should happen; we should save when we have a relatively high income, and withdraw our savings when we have a relatively low income. No interest, on balance. We should not kid ourselves that simply sitting on a nest-egg of magic money is going to make us fabulously rich!
Finally
There is another case where the debtor-creditor relationship becomes too exploitative, and when that broken relationship induces socio-economic breakdown. The result is a negative-sum game, whereby everyone – or just about everyone – loses.
Anyone trying to play the compound interest miracle game should understand that they are trying to get something for nothing; that they are playing the role of ‘exploiter’. Capitalism as we know it is a game of exploitation; indeed, low levels of ongoing exploitation can be sustainable.
Under our present order, of liberal private capitalism, the best possible option is a mix of low inflation and low sustainable growth based on renewable resources and accumulation of benign knowledge. Keeping this balance is a bit of a tight-rope walk. Today too many of us have slipped on the rope, and are hanging by our fingers. The more people who slip, the more the tight-rope wobbles, leading ever more people to slip in their wake.
There is a better capitalist order; a more democratic more sustainable form of capitalism which fully incorporates public equity – public property rights alongside private property rights – with appropriate public equity dividends to stem the growth of income inequality. This is consistent with a balanced mix of sustainable growth and sustainable inflation. It is not consistent with interest-rate exploitation.
In the meantime, why do we look kindly upon compound interest alchemists while lampooning conspiracy theorists? The worst offenders in both groups are equally bogus.
About the writer:
Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.