Sleight of hand in taxing retirement savings

Friday 23rd May 2025

So, the government is halving its contribution to KiwiSaver from $10 to $5 a week but, not to worry, it is ratcheting up the default minimum contribution from employees and employers to 3.5% and then 4%.

It is important to recognise that the government contribution is not just a pump-priming subsidy from the taxpayer.

It was introduced to offset, at least partially, the lamentable effects of a change to the tax treatment of retirement savings vehicles by Sir Roger Douglas in the late 1980s. That change was later described by Sir Michael Cullen, if memory serves, as the worst example of intergenerational theft he had seen.

Douglas replaced the previous, and internationally normal, exempt-exempt-taxed (EET) treatment to taxed-taxed-exempt (TTE).

Under EET if you set aside some portion of your income into long-tern retirement savings which will be out of your reach for years, even decades, that sum is not treated as part of your taxable income. And, importantly, the income your savings earn is not treated as part of your income as it accrues, though it may attract tax in other ways. Only when the money is released to you and you are free to spend it is it taxed.

TTE, by contrast, means retirement savings are made out of after-tax income and grow more slowly.

Making the minister’s life easier

But it makes life easier for a Minister of Finance.

Enter Cullen and KiwiSaver. At the maximum rate of $520 a year the government contribution, for someone on the average wage (which the Treasury reckons is $1,600 a week) making the minimum 3% KiwiSaver contribution, would just about compensate for the loss of the tax exemption on their contribution.

Not any more.

Nicola Willis’s Budget halves the rate of the government contrition to 25c per dollar contributed by the employee to a maximum of $260 a year.

It is increasing the default employee and employer contribution rate from 3% to 3.5% from April 1, 2026, and then to 4% from April 1, 2028. It will allow KiwiSaver members to apply to Inland Revenue for a reduction, described as temporary, of their contribution rate to 3 per cent and it will be removing the government contribution for all KiwiSaver members with taxable income over $180,000 per annum.

It expects these measures to save the government $2.5 billion over the next four years.

Encouraging people to save an additional 2% of their wage is per se desirable. But a chance would be a fine thing. The Budget forecasts real wages to grow by an average of just 0.7% a year over the next four years.

Shrinking real wages

And even that paltry increase is greater than the forecast in the Treasury’s fiscal strategy model which assumes that average ordinary-time weekly earnings, net of tax and ACC levy, will grow by 1.9% a year in nominal terms over the next four years – in other words marginally shrink in real terms.

So, KiwiSaver providers should perhaps not rub their hands in gleeful anticipation just yet.

Douglas’s fateful adoption of TTE has meant that for a generation now the tax system has told 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 bid up the price of houses. Then watch leverage amplify the growth in your housing equity and enjoy your tax-free imputed rent if you are an owner occupier, or your various deductions if you are a landlord, until you sell and pocket your tax-free capital gain.

So, we have a capital-shallow business sector, hobbling productivity and incomes, while we enthusiastically import the savings of foreigners in order to pay each other ridiculous prices for housing.

And we watch Generation Rent turn into Generation Resent and head for the airport.

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