Fairness of KiwiSaver top-ups in savings group's sights

Tuesday 24th August 2010

KiwiSaver’s tendency to favour higher income earners will form part of the review of national savings policy, Finance Minister Bill English said today, announcing the new Savings Working Group.

Among options for replacement of government subsidies paid to people in the KiwiSaver scheme is tax cuts for savings of any kind instead, with differential rates of tax on savings versus labour.

“KiwiSaver and PIEs (tax-favoured portfolio investment entities) favour high income earners,” said English.

“The government’s paying attention to the overall fairness of the system.”

In particular, English signalled an examination of the fairness and effectiveness of the $1 billion of annual subsidies, which are not available to people choosing to save outside the KiwiSaver scheme.

His comments come after a speech last week by the Treasury Secretary John Whitehead, warning that middle-income earners had done disproportionately well from social policy reforms of the last 20 years, and that “some sectors of society that previously received taxpayer funded services will miss out in future”.

Whether KiwiSaver should be a compulsory scheme is also on the table, English said.

However, the focus of the SWG is savings rather than provision for retirement. The current universal pension scheme, New Zealand Superannuation, is outside the scope of the review, as is the New Zealand Superannuation Fund – the so-called Cullen Fund – to which government contributions have been cut while the national accounts are in deficit.

“Borrowing to invest in the Super Fund does not increase national savings,” said English.

“It simply changes the mix of the Crown’s balance sheet.”

Capital gains and land taxes are also ruled out.

The working group will look at the make-up of the government’s own savings, including long-term saving and debt targets and any offset between private and government savings.

English expected the group to consider inflation-indexed tax on savings and investments, although “in practice, it’s pretty difficult”.

“The Australian review put quite a lot of work in that, and there’s no doubt the group will pick up on that,” English told a briefing in Wellington.

The Henry Review in Australia supported a move to a 40% discount on the tax of income from bank deposits, bonds, rental properties, and capital gains and for certain interest expenses to encourage savings other than superannuation or for housing.

Though the government’s response will be “positive about anything that will improve national savings,” any response has to be fiscally neutral, English said.

English has asked the Kerry McDonald-led Savings Working Group to provide advice on how to improve national savings, with a specific focus on looking at the case for a dual-tax system, where labour is treated differently from savings and investment, though he does not want it to only look at retirement savings.

Though he would like to have a recommendation he can act on in next year’s Budget, English said it was not necessary for that to happen.

Along with McDonald, the group is made up of Capital Markets Research director Craig Ansley, Motu researcher Andrew Coleman, columnist Mary Holm, central bank Assistant Governor John McDermott, PricewaterhouseCoopers partner Paul Mersi and BNZ head of research Stephen Toplis.

The group aims to prepare a draft report by the end of the year and return to the government in January.

Businesswire.co.nz

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