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.