Michael Littlewood argues Tax Working Group members must ask themselves whether KiwiSaver has lifted NZ's overall savings & if its tax subsidies are worth it

By Michael Littlewood*

The Tax Working Group’s report Future of Tax – Interim Report made three recommendations on the tax treatment of retirement savings:

  • Remove ‘employer superannuation contribution tax’ on the 3% mandatory contributions by employers to KiwiSaver for employees’ earning up to $48,000 a year.
  • A five percentage point reduction for each of the lower PIE tax rates but only for savings in KiwiSaver.
  • Simplify the way PIE rates are applied for KiwiSaver members.

The TWG’s focus on KiwiSaver suggests that New Zealanders, particularly those on lower incomes, aren’t saving enough for retirement.  The TWG also seems to think that KiwiSaver is the only, or the main way, that New Zealanders should be saving for retirement.

In a startling contradictory admission, however, the TWG acknowledges that New Zealanders might be saving enough for retirement.

The truth is that no-one knows whether that’s actually the case. The TWG offered no evidence on this but there have been several relatively recent reports to suggest that New Zealanders seem to be rational about their financial preparations for retirement. That should not be surprising.

By the end of this financial year, we taxpayers will have spent more than $10 billion since 2007 on taxpayer-funded subsidies for KiwiSaver. In 2019/20, another $840 million will head in the same direction, on current rules. The TWG thinks its suggested changes will add a further $215 million to that making a total annual spend of more than $1 billion.

Here’s the thing: we don’t know whether KiwiSaver is working (raising overall savings); nor do we know whether the billions spent so far on KiwiSaver have changed anything overall. But now the TWG proposes spending even more of our money; to achieve what, exactly?

KiwiSaver was Michael Cullen’s baby and he understandably takes a great deal of interest in its ‘success’, however he measures that. However, I hope that other TWG members can stand back and ask themselves some key questions:

  • Is KiwiSaver really working? The number of members, contributions and assets are only a small part of the answer to this. What really matters is whether KiwiSaver has lifted overall savings.
  • Are New Zealanders saving enough for retirement? Even if they aren’t, should that justify direct intervention through public policy initiatives?
  • Have the $10 billion tax subsidies to date and the expected annual $1 billion tax spend actually changed things?
  • Why is it that only KiwiSaver qualifies for this special tax treatment?

Where is the evidence for the TWG’s proposals on KiwiSaver? There is none but there should be if we taxpayers are to spend more than $1 billion a year. If the TWG’s objective is really to make the “tax treatment of retirement savings fairer” (page 6), how can it possibly support enhancing the already special treatment of KiwiSaver? In this context, what does the TWG really mean by ‘fairer’?

International evidence suggests that tax breaks for retirement saving are very expensive, distortionary, inequitable, regressive and demand high, growing regulatory walls around affected assets to ensure the incentives are not ‘misused’. But worst of all, tax incentives seem not to work (raise overall savings). That’s also likely to be the case for KiwiSaver, but we need to find out.

Public policy settings should not overtly favour one form of saving over another.  Instead, the TWG should be levelling the tax playing field for all savings and savings-related collective investment vehicles so that everyone pays their appropriate amount of tax. That’s what a ‘fair’ tax system should look like.


*Michael Littlewood is the former co-director at the University of Auckland's Retirement Policy and Research Centre. 

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41 Comments

What is the TWG's purpose? These conclusions seem to be very political, as opposed to reasoned and objective advice to achieve a particular goal (hence the question - what is their purpose), in which case, why didn't the politicians themselves come up with these conclusions?

First rule of fight club - engage a consultant/potential blame taker.

But, but, but, Michael Knows Best. I mean he does, er, doesn't he?

Glad to hear it's not just me that thinks Kiwisaver is probably (a) bonkers and (b) totally unfair.

Given your political views I can understand why you think its bonkers.. but how on earth is kiwisaver totally unfair?

It appears to be very skewed to those who work in the government or corporate sector and skewed against the self employed. It favours those who need less help. Typical looks good policy that doesn't actually do what it says. It rewards those who take no risks. Is that enough?

Look, I freely admit I may be completely wrong, it might be really good. These schemes look like employment taxes in disguise and it is not clear what the cost is and who pays. My suspicion is that the cost is born by those who can least afford it.

It would not be skewed if it was universal.

How is it skewed against the self employed? Since they are their own employer they have to make both sides of the contribution, but they still get the $521/year MTC if they pay in. Not sure where that is unfair?

As for govt workers, don't they usually have better govt super schemes than kiwisaver anyway? (which is an entirely separate problem, and applies to workplaces other than govt ones too.)

One of the most cynical comments, out of oh so many, Dr Cullen made why wielding the power of office was that there should be no tax rebates for those with health insurance because if you could afford health insurance, you did not need a tax break. So Roger is this a sort of a parallel in reverse? ie Kiwi Saver services best those that least need it? Or are we now getting into Catch 22 territory.

I think subsidising Kiwisaver, especially the $500 a year credit, is an amazing way to help people save for retirement. I would rather see this boosted then giving a tax credit. Would help smaller balances or people on a lower wage.

Also, take away the ability to use Kiwisaver as a house deposit, it only distorts the market. For a real world example, in 2 years time my partner and I will have around $80k in our Kiwisavers to put towards our first house. After we purchase, we will have $0 retirement savings and will have to start from scratch both in early 30's. The size of the house i 'could' buy because of a over-inflated deposit means i have the option to be financially irresponsible and live outside my means because apparently 'we are good savers, aka 6% kiwisaver over 10 years'.

Interesting points. Oddly, I feel more comfortable with the $500 subsidy than with the rest of it. Helping people save for a house deposit seems good. Distorting the market by effectively adding $50,000 or more to the price of every house in the country does not. There must be an answer to this riddle.

Why not encourage retirement savings given amount currently being spent on retirement pensions? Seems like a small price to pay to encourage less dependence on the state and more ability to actually stand on one's own two feet.

I'd like to see a slight tax break added to kiwisaver accounts with low balances to help get low earners in a place where we don't end up paying extra support to them in retirement anyway.

Something like capping the PIR rate applied to the kiwisaver acct for the year at the lower of your normal PIR rate, or the 10.5% rate if your kiwisaver acct balance on the first day of the tax year is less than some amount, maybe $80k? Fairly simple to administer, hard to game, and helps those that are lower income earners have a better life in retirement, makes not much difference to someone who was going to save heaps anyway.

"What really matters is whether KiwiSaver has lifted overall savings"
Well obviously it has for a lot of people who would otherwise have no savings at all. I can't quantify it but I'm sure it is very significant.

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Savings is a function of income. Most Kiwis haven't got enough income to save substantially. That is the crux of the matter.

While that is indeed a problem, the aspect where it really does is help is those that are too lazy/ignorant to make a habit of putting money aside for retirement. By taking it out of their pay packet before they can spend it you force them to save for retirement

Looks like we've really stuffed up a bit in letting housing costs get so high, given it reduces how much people are able to save, thus how much they're able to store up for retirement. Maybe those governments that focused on making home ownership attainable for average hard-working Kiwis on average wages were a bit wiser and more constituted of long-term thinkers than ones that let the housing crisis get away on them.

It’s a nice problem to have though. More than 50% of the population are homeowners, that’s a majority of potentional voters right there.

True, good for some, though it's unfortunately really just a wealth transfer from preceding and succeeding generations.

This article is good:
https://www.boeckler.de/pdf/v_2008_10_31_moore_2.pdf

It explores the S=I identity and shows how in a monetary economy savings is the accounting record of investment not the "cause" of investment.

An increase in volitional saving on the part of households will - it is argued - most likely cause a fall in aggregate demand that plays out in lower investment.

The standard mainstream call to increase savings to allow for more investment applies only to a Robinson Crusoe economy based on barter.

Worth a read.

Savings is actually a function of income minus living expenses. You could argue Kiwisaver is helping to keep a lid on inflation. The 'opolies here using arbitrary price gouging to capture every cent of poor peoples disposable income. Just go to any supermarket, fuel pump or building supply merchant.

If we were at full capacity and full employment with spiralling wages and prices we would need to "keep a lid on inflation" and reducing spending would be useful. Kiwisaver might be one way to do it I suppose. Like raising taxation. But right now I think a cut back in household consumer spending would be a bad thing. There's no point having financial savings for retirement if there is nothing to buy in the real economy. If there's only one person left working with our aging population in 20 years time - she's going to be busy. The main thing is to increase productivity so that one person can provide for us all. Savings won't solve the real productivity problem. Demand, stimulating investment, would.

Let's say we all suddenly saved 10% more - by choice. Would that suddenly mean a vast investment binge due to the lower interest rates due to the savings binge (if you subscribe to loanable funds theory). Or would the fall in demand and unemployment cause businesses to hold back even further on investment?

Yes, some savings are better than no savings. But with our expectations so far in front of our reality, is it any wonder we do not save much. Saving is a sacrifice - of the spend now to the spend later. It requires self-control, patience & understanding among other things. Everyone can save, except most of us chose not to, because we've worked really hard this year and we really need that 10 days in Fiji with the family - at about $1,000 a day minimum. These are the choices we make. That's what make our society a lot better than many others. But my point is, that we should save, and Kiwisaver has been great for everyone to think about that, even do it, as we've done, albeit on a minimum contribution. That's our choice.
And we are self-employed Roger, but your comments are valid as always.

If you are poor then you can't afford not to save.

Unless you're really poor, then you're back to not being able to afford to save.

Kiwisaver does not need government incentives. Why do we do that ?
On the other hand why do we tax any of it ? Should be tax free.

The Australians have had a compulsory superannuation scheme for decades. After the Muldoon act of sabotage relating to the NZ version in the 1970s, finally we got a modest savings scheme in the 2000s.
The Australian share market is worth about 30 times the Kiwi one, with only five times the population - ie, six times bigger per capita.
Kiwis have poured all their $$$ into unproductive property, rather than productive investments. More the fool us, it makes us a much poorer country.
Littlewood has always been opposed to savings scheme, I hope they don't listen to him.

The Aussies have something called Mining. You may have read about in NZ history books, as it used to be a really big earner. Mining is capital intensive, meaning it takes a lot of money to build a mine. It is also extremely profitable for a while and new mines are expected to pay the capital back in a few short years. Building a mine also includes building the roads, housing, railways and ports to service it, again big expensive capital items that are expected to pay for themselves in 3 to five years.

NZ chooses poverty as mining is dirty. To pay for our cars and gas and medicines we therefore sell residency and assets. It is not clear if the cost of provision of infrastructure to service the new residents can be paid for without selling more residency and more assets.

The point is mining gives a high return on capital and provides a good investment for pension schemes. What can you invest in New Zealand? My personal answer is Australia. Yes, mining is dirty and yes it is cyclical, but mining and capitalism go well together. The successful Nordics, Norway, Sweden and Finland are very pro mining. Given our rich mining history, why aren't we?

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obj...
A study suggesting poor bang for the massive taxpayer buck.
If you have a taxpayer subsidy you are essentially taxing yourself to give yourself a subsidy.
Regressive as higher earners are more involved, therefore get more subsidies, whereas poorer people get little or no subsidy as they can't afford to save.
Another poorly thought out Labour sacred cow; how can Cullen be entrusted to assess his baby in an unbiased way??; the updated info on savings must be there; just waiting for the right spin doctor....or for the market to bounce back

Regressive as higher earners are more involved, therefore get more subsidies, whereas poorer people get little or no subsidy as they can't afford to save.

You can lead a horse to water..

As for regressive.. since everybody gets the same $521 credit (if they meet the low qualifying criteria of $20/week contribution), proportionally that helps those that put less in more.

Its far better than what the National Govt had in place... precisely nothing.

Also, referencing an article from 2014, about a study that used data from 2008-2010 when Kiwisaver was just getting off the ground. Probably not that relevant.
But it suits the needs of somebody looking to bash Labour for anything and everything.

You can lead a horse to water & Dorothy Parker’s adaptation of that ended in “but you can’t make her think.” What nobody here is commenting on is what is the likely fate of a Kiwi Saver account at maturity at 65? I do believe that a poll revealed that most upcoming retirees intended to spend it on a holiday. So that would be the end of that. That makes the younger generations coming through and sinking into a house look pretty good. And speaking of retirees, me included, we are the lot that voted for Muldoon and thereby sunk the Kirk Labour government compulsory super scheme. Maybe we still think life is all about holidays.

What happens at 65 is probably going to depend on their situation and it'll change over time. For most of the boomers retiring now they already have a mortgage free house, and can live off the pension alone, and what they have in kiwisaver won't be a huge amount after 8-10 years of contributions. In ten years when its 20years of contributions they will probably split off $30k for a holiday and still be left with a significant chunk of cash to do something useful with.

Yes fair enough, good comment.

If by some miracle there's still pensions around by the time I retire in 40 years, I will bequeath my kiwisaver to my children, as I am not a self-indulgent greedy 'me-generation' baby boomer. Even if I'm that lucky, they won't be.

Thats the point about the data, it's the only stuff I could find; but I can't believe there is nothing; if there isn't, it is incompetence, if there is it's a cover-up. By Cullen??
It is actually quite important to know; as the article in discussion points out.

http://archive.stats.govt.nz/browse_for_stats/people_and_communities/Net...

http://archive.stats.govt.nz/browse_for_stats/people_and_communities/Hou...

Wasn't hard to find those, you'll have to do your own analysis.

cover up by Cullen? Loosen the wire holding the tin-foil hat on.. its impairing circulation.

The links are old and the data are nothing to do with the topic, mr Pragmatic

I think the quest to prove the counter factual is foley. I know a lot of people who are saving in KiwiSaver who would never have that type of savings otherwise. I know annecdote isn’t the plural of data but I’m talking about a lot of annecdotes here.

I prefer to see KiwiSaver as the vehicle that allows us to raise the retirement age.
•make it compulsory
•increase the benefits
•increase employer contributions

Then raise the age. People who want to retire at 65 can use their KiwiSaver to do so and the age can rise slowly to 68. I’m sure then the economic payback would be there to support higher contribution subsidies and paybacks.

Yes, raise the Super age but also decrease the Kiwisaver age to 55. This incentivises people to save harder in the knowledge they can retire earlier if they do so.

And thus quoth the King of Id to his peasants. “I have good news and bad news. First the bad news. I am going to nationalise all the provident funds. And the good news. You will all be allowed to work until you are eighty.”