By Brian Fallow*
Less tax, not more, would be a better way of lifting private provision for retirement income.
The National Party proposes to make KiwiSaver compulsory for all workers and to ratchet up minimum contribution rates for employees and employers alike from 3.5 per cent now to 6 per cent by April 2032.
The argument is that change is necessary to render New Zealand Superannuation fiscally sustainable would be a lot easier if there was more private provision. And if, in the process, the productivity-hobbling capital shallowness of the business sector was alleviated, that would be good too.
So how much money are we talking about? Where would it come from? And where is it likely to go?
But first, why go compulsory?
I remember a press conference 20 years ago when Michael Cullen was laying out how KiwiSaver would work. I asked him if it was a Trojan horse for compulsory contributions down the track.
“Do I look like Brad Pitt?” he replied, referring to the movie Troy. So, no.
A compulsory impost on wages would feel a lot like a new tax, even if the money was not going to the Government. And for people in lower-paid and more marginal jobs, that would be a very unwelcome change.
That is, if anything, even more true today, when food banks are reporting they are seeing more and more people who have a job but are still struggling to put food on the table.
To say to those people, as National essentially is; "You wouldn’t miss 4, then 5, the 6 per cent coming out of your gross wage, would you? And your boss would be happy to match that, eh?” is cruel nonsense.
National’s response is that; “Individuals who wish to suspend their contributions would be required to meet the hardship test, currently applied for individuals who wish to make an early withdrawal from their KiwiSaver.”
Inland Revenue reports that as of May this year just 1138 people were in that category, which indicates that the criteria for financial hardship are pretty stringent.
The Financial Markets Authority, which is KiwiSaver's regulator, in its most recent annual report, for the year to March 2025, says $12.2 billion was paid into KiwiSaver accounts, $7.4 billion by employees, $3.8 billion by employers and $1 billion in government contributions.
Since then the Government contribution has been halved and the minimum default contribution rate, which two-thirds of contributors make, has been raised from 3 per cent to 3.5 per cent.
By 2032 that inflow of cash to KiwiSaver schemes will have risen a lot, driven by the higher contribution rate and base-broadening measures like compulsion, including the self-employed, and a requirement to pay employer’s contribution for people still working over the age of 65.
It will also benefit from nominal wage growth and, hopefully, some increase in the numbers employed, given that the unemployment rate is only fractionally off a 10-year high.
So who will be paying all those extra billions of dollars?
Some of it would come from the workers’ take-home pay. For what it is worth the Treasury’s fiscal strategy model – its big model of the economy which underpinned the forecasts in May’s Budget – generates forecasts for the average wage after tax over the next four years.
It reckons average weekly ordinary-time earnings, net of tax and ACC, in four years time will be 10 per cent higher than it is now. The trouble is even if consumer prices rise over those four years as much as they have over the past three years, namely 10 per cent, the average real wage will still be exactly the same as it is now – before any additional deductions for KiwiSaver.
That is only a forecast, of course. It is bound to be wrong, but given the frequency of international shocks lately, not least from a capricious cretin who is due to still be in power for another two and a-half years, the forecast may err on the optimistic side.
National’s KiwiSaver plan would also increase employers’ contributions, putting downward pressure on their profit margins. As lower household disposable incomes and compressed business profits would both be undesirable outcomes for wage- and price-setters, the chances are that the cost of National’s proposed reform would mainly be borne by consumers paying higher prices.
This would be particularly unwelcome at the Reserve Bank, which has plenty of reason already to be nervous about keeping inflation expectations anchored.
In the six years after Covid-19 reached our shores, the consumers price index (CPI) grew at a compound average annual rate of 4.1 per cent. And that was before the impact of conflict in the Persian Gulf which has yet to be resolved.
For only one of the past five years has annual CPI inflation been within the central bank’s 1 per cent to 3 per cent target band. So for politicians to risk setting up a wage/price spiral pretty much invites the Reserve Bank to carpet bomb the economy with higher interest rates, in order to protect the vital credibility of the monetary policy regime.
As for where those extra billions would go, the Reserve Bank publishes data on where KiwiSaver funds are invested. As of last May it says 60 per cent of the $142 billion entrusted to KiwiSaver schemes is invested offshore.
That may be desirable in terms of diversifying risk, maximising returns and improving New Zealand’s net international investment position.
But it does suggest that the reason our business sector is so capital shallow cannot just be blamed on inadequate domestic savings. Maybe the company tax rate is too high. We do tend to tax too few things and tax them too hard.
The OECD in its recent review of New Zealand attributes at least part of our sharemarket’s puny size to the fateful decision of the fourth Labour Government nearly 40 years ago to change the taxation of retirement savings from the internationally normal exempt-exempt-taxed (EET) model to taxed-taxed-exempt (TTE). New Zealand is one of only three OECD countries to have gone that way.
Most of our international peers think it is reasonable to treat the portion of someone's current income that they set aside in a given year into a retirement saving scheme as exempt from income tax that year. And they do not treat the earnings generated by those savings, while they are out of the saver’s control, as part of their taxable income as they accrue. Only when the savings are released to the saver and he or she is free to spend them do they become taxable income.
By contrast in New Zealand savings are made out of after-tax income and accordingly lower than they might be. They then grow more slowly as the tax man takes his cut every year. When at last the savings are paid out, that transaction is not taxed but as soon as the saver spends the money GST applies.
So for more than a generation we have had a tax system which says to New Zealanders: If you want to provide for your old age, don't save money, borrow money. If you save they will tax you every step of the way. Better to borrow as much as you can and use it to bid up the price of housing.
Then you can sit back and enjoy your imputed rents if you are an owner-occupier, or your various deductions if you are a landlord. Watch leverage amplify the growth in your housing equity until you are ready to pocket your tax-free capital gain.
So we end up with absurd house prices, a capital shallow business sector and young people heading for the airport with one-way tickets.
Reversing that policy error would come at a fiscal cost, of course. But incentivising more retirement savings through a less punitive tax regime, rather than compelling it as National proposes, looks like the better way to go.
*Brian Fallow is a former long serving economics editor at The NZ Herald.
6 Comments
NZ needs all its tax and then some. Like the idea but it needs to be offset on something that generates tax that cannot be avoided. Land tax....?
Well said, Brian.
You should shout this to the rooftops.
As a long term proponent of this idea you could mention that under reasonable conditions EET would improve asset allocation in the economy, raise returns to KiwiSaver savings by approximately 75% and raise government revenues in the long run. It would significantly reduce the adverse effects of inflation on lenders. An EET system tax system is significantly less distortionary than our current TTE tax regime where savings are taxed when they are earned, taxed as the investment earnings acccumulate, and then exempt from further direct taxation.
There is one “catch”, however. An EET tax schedule is not only less distortionary than a standard TTE tax system, but it has lower effective tax rates. This means assets held inside a retirement saving scheme such as KiwiSaver are taxed at a lower rate than other retirement savings. The Inland Revenue Department hates this, as it means there is a new distortion. People will be able to pay less tax than if they hold assets in a retirement saving account rather than holding them directly. The IRD argues it is better if all investments are taxed in the same way even if this is the most distortionary method, rather than have some assets taxed in a less distortionary way. If hurts in one place, it should hurt everywhere! Some people find this crazy – for example, the economists who work in the tax departments in most countries in the world – but it has become an article of faith for the New Zealand Inland Revenue Department. For nearly forty years they have been saying the same thing, even though they never seem to have produced formal models defending the idea.
The strange thing is that New Zealand’s income tax system does not tax all assets in the same way. There is no capital gains tax for example. Nominal interest earnings are taxed rather than real interest earnings. Owner-occupied housing is taxed at different rates than other assets. There is a very complicated tax regime for directly held overseas shares.
Perhaps it is too much to expect intellectual consistency from the Inland Revenue Department. Nonetheless, an EET system has been opposed by the Inland Revenue Department because it offers people – that is you and me – a way of having a less-distortionary and lower-rate tax system, and they don’t like this and that is just the way it is.
Andrew Coleman
And here's Andrew's related article from 2024;
Ahh the old days of plentiful comments, and the elusive wingman from Riverhead. Good times good times
The elephant in the room, for all governments, is what to do about the poor, especially the so called 'working-poor'?
These people aren't lazy and still contribute to our economy, but cannot afford to save for their retirements. However, it is fair to say that the working poor also pay less tax so the problem is difficult to tackle in an equitable way. Until someone addresses this problem once and for all we will be debating this subject forever.
All governments seem to be able to do is tinker around the margins. I.e. use taxation as an incentive or disincentive may help, but it can also have unintended consequences. Perhaps ChatGPT or Gemini has a solution. The experts say that AI will solve all of the world's problems...right?
Excellent analysis and independent thinking Brian Fallow.
For me 'As of last May it says 60 per cent of the $142 billion entrusted to KiwiSaver schemes is invested offshore.' and the current historically oversized sharemarket bubble is likely to in the next few years if not this year wipe out up to 70% of the value of the savings of the working poor in NZ is good reason to oppose the National Party plan to to increase contribution %.
To me this policy is an example of simplistic intellectual failure on Nationals part. Simple, quick, easy do nothing else, raising productivity is too hard, import more low paid immigrants... on and on it goes, round and round with Labour, National, NZF and ACT.
Comparing NZ economic performance with South Korea and Taiwan points to NZ Governments and private business failures to adapt, plan, organize and invest in a changing world over decades.
See NO PROGRESS 1, 11, AND 111 in https://www.interest.co.nz/economy/139231/review-things-you-need-know-y…
NZ Super returns AI Overview (Gemini)
Over the 10 years to early 2026, KiwiSaver returns averaged roughly 4.5% to 7.5% per year, depending on the fund type. After subtracting taxes (using a 28% PIR) and average annual fees, and adjusting for historical inflation (averaging roughly 2% annually), the real inflation-adjusted return
is about 2.5% to 5.5% per year
Fund Type Breakdown (10-Year Annualized Estimates)
Long-term performance varies significantly depending on how much risk (growth assets like shares) your fund takes. [1, 2]
- Conservative:
- Balanced:
- Growth / Aggressive:
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