Wednesday, February 21, 2007



Tax cuts and KiwiSaver

Peter Dunne is hinting that rather than offering personal tax cuts, the government will instead provide further sweeteners to people using KiwiSaver. It's a good idea, and one which neatly gets the government out of its self-imposed fiscal discipline hole.

The problem with tax cuts is that they are inflationary - people go out and spend the money, driving up prices, and eventually interest rates. KiwiSaver offers a way out of this problem, in that the money is not immediately available for spending, and so its inflationary effect will be negligible (the same thinking applies to the Cullen Fund, BTW). It also allows the government to get a double payoff - they are trying to promote saving and get people signed up for KiwiSaver, and providing extra incentives (higher bonuses, government contributions, automatic diversions of taxes into KiwiSaver accounts) will encourage this. And it allows them to avoid the whole issue of compulsory savings - why bother with compulsion if the offer is so good that almost everyone will take it?

My only worry is that increased private retirement saving may create space for a future right-wing government to undercut universal provision of superannuation - the absolute bedrock of the welfare state. OTOH with an aging population, the power of the grey voting bloc is only going to grow, and this should act as a check on such radical moves.

18 comments:

"My only worry is that increased private retirement saving may create space for a future right-wing government to undercut universal provision of superannuation - the absolute bedrock of the welfare state. "

AND the biggest intergenerational theft ever. Taxpayers since 1976 funding an unsustainable welfare scheme that penalises anyone unfortunate enough to die before or early into retirement age.

For example, the average Maori man gets nothing from national superannuation, nor does his family inherit his "contributions". If it was a personal account his contributions could at least be inherited. I didn't support Roger Douglas's scheme but at least it would have helped build up intergenerational equity where little to none exists today.

Posted by libertyscott : 2/21/2007 12:45:00 PM

not sure why you view this as inflationary. the "3 cent" decreae in marginal rate would be transferred to the savings account, plus a possible employer contribution.

sure, this amount *could* be drawn down along wth the $1k kicker for a first home, but people aren't actually spending it on consumables.

Posted by che tibby : 2/21/2007 01:24:00 PM

doh.. pays to read entire post before sending comment...

Posted by che tibby : 2/21/2007 01:25:00 PM

Why do those using kiwisaver deserve the benifits while others don't?

For instance I'm looking at buying my first house, so won't be using kiwisaver, as the mortgage rates are above the interest rates on the house so it will cost me money to use kiwisaver when I could instead put that 4% towards a mortgage.

It would be great to get a tax cut so I could also put that towards paying off my mortgage faster and saving for the future, but instead - if these proposals go ahead, only those who go on kiwisaver will be eligiable.

How is that equitable or fair? I earn the money, and they benifit from it.

Ahh the wonders of socialism. ]

(NB: I have no problem with personal super accounts, providing others aren't forced to subsidise them - taking responsibility for ones future is a good thing. But there are other options other than super - ie investing in small business, your house, reducing debt if its high interest etc. there is no magic bullet).

Posted by MikeE : 2/21/2007 01:27:00 PM

LibertyScott: Sure, some people miss out. But its still far better than letting the elderly die in penury.

The vast majority of people can not save enough over their working lives to support themselves in old age. The Libertarian solution is for these people to starve, or subsist on charity. I far prefer the current system of effectively insuring one another against this risk through taxation.

MikeE: Why do those using kiwisaver deserve the benifits while others don't?

Bluntly, because the government wants to do it that way, and thinks it will serve its policy aims. Much of politics is distributional - people arguing over who gets what - and if you want to see a different distribution, you can vote for a different government.

Posted by Idiot/Savant : 2/21/2007 01:40:00 PM

Mike E -

You can withdraw your KiwiSaver contributions to buy a house.

Posted by KiwiSaver is the coolest thing ever : 2/21/2007 01:47:00 PM

> if you want to see a different
> distribution, you can vote for a
> different government.

H. L. Mencken observed that "Every election is a sort of advance auction sale of stolen goods."

Good to see you've the guts to admit it, I/S :-)

Posted by Duncan Bayne : 2/21/2007 03:56:00 PM

I/S the trouble with tax cuts - any tax cuts - is that an aging population and increased medical technology are, 10 years or so from now, going to start putting a massive strain on our health care system. Which we're going to have to pay for somehow. On top of that I'd be interested to see the distributional impacts of the cuts.

Nevertheless, as you say, tax to savings does seem like a way out of the fiscal/interest rate bind.

Posted by terence : 2/21/2007 06:21:00 PM

mikeE, i'm not sure you've actually read what kiwisaver is about.

as i understand it, you just chip 4 or 8% of your weekly earnings into the account. if you do that all year, the government gives *you* a grand.

at the end of five years you have the *free* $5k, and your own money to withdraw and use for a deposit.

it isn't socialism, it's a savings plan with a one grand incentive attached. the only downside is ther question of whether your savings will attract market interest rates. you'd have to guess the policy people would make sure it does.

Posted by Che Tibby : 2/21/2007 06:53:00 PM

Mr Tibby,

"at the end of five years you have the *free* $5k, and your own money"

I thought the govt only stumped up with a grand in the first year.

Posted by Aj : 2/21/2007 11:43:00 PM

its was $1k p/a, for 5 years.

http://www.hnzc.co.nz/hnzc/web/rent-buy-or-own/home-loans/kiwi-saver-and-the-deposit-subsidy.htm

http://www.kiwisaver.govt.nz/

basically the $5k is an incentive to keep your money in the acount for at least the 5 years.

the policy intent is to build a savings culture in nzl from the ground up. dunno if it will work. might. i've not had any close involvement in desiging or building it, so can't rightly say.

Posted by Che Tibby : 2/22/2007 07:07:00 AM

Do you pay tax on your contributions (of course you will)? What will the interest rate earned be? I'm guessing a house will still provide a better return.
If the contribution wasn't taxed and the interest rate gained was set at market, could be interesting. Otherwise it is kind of encouraging "dumb" saving instead of smart investing.
Presumably all the money collected will need to be invested, but, what will it be invested in, and by whom?

Posted by MERC : 2/22/2007 08:03:00 AM

MERC - you're right on the money there. Another factor to conisder is whether your employer will match your contribution (up to a certain point at least).

But no tax break + no employer contribution = not much of a deal for many. The government's $5k contribution helps, but I suspect many would be better off paying off existing debt.

Posted by dc_red : 2/22/2007 09:42:00 AM

" I'm guessing a house will still provide a better return"

Hardly, over the long term. I can't recall the figures but over the long term housing barely keeps up with inflation in real terms. Investing in stock and bonds provides a better return.
Having said that, retiring existing debt is the best option for most people. And after that, STAYING out of debt. If that's possible.
Kiwisaver providers may allow for mortgage repayments
From the kiwisaver site
"Some scheme providers could offer a mortgage diversion option. After you've been with a scheme for 12 months you can choose to have up to half of your regular contribution go towards the mortgage on your home. The rest would go to your KiwiSaver account. Mortgage diversion may be available for new and existing mortgages, but can only be used towards the mortgage on your main home (not an investment property or holiday home).
Once your mortgage is paid off, all contributions would go to your KiwiSaver account. Employer contributions cannot be diverted to your mortgage.

Che,
I think $1000 is only for the first year, but if you choose to use the contributions to a first home deposit you get extra $1000 payments. For all others there is only a one-off $1000 'kickstart'

From the kiwisaver site
"KiwiSaver offers a first home deposit subsidy of $1,000 each year of membership in a scheme, up to a maximum of $5,000. To be eligible you must have been saving through a KiwiSaver scheme for at least three years and meet criteria. Income and house price caps will apply.
The first home deposit subsidy is administered by Housing New Zealand and will be available from 2010. To find out more visit the Housing New Zealand website.

Posted by Aj : 2/22/2007 10:38:00 AM

Mike,

> For instance I'm looking at buying my first house

that would best be adressed a seperate scheme - like an australian first home buying scheme. (having said that that would also be house price inflationary)

> It would be great to get a tax cut

the problem is that there will be side effects - over simplifying here but - for example your tax cut will be shared about equally by all the other people in your house buying bracket. So (in theory) house price might just increase by the amount of your tax cut.

And then interest rates will go up and if you do anything to do with exports the dollar will rise and you won't make as much.

Sure you will have a larger amount written on your pay slip after tax but you might not be any better off at the expense of having to pay more tax later. (I don't oppose tax cuts, I just oppose tax cuts NOW)

I/S

> The vast majority of people can not save enough

Still... older people are much more wealthy than younger people last time I looked at the stats. To a degree there are ten agers on an average assets of close to 0 subsidizing (via tax) old people with average assests possibly in the hundreds of thousands.

GNZ

Posted by Anonymous : 2/22/2007 10:47:00 AM

"the interest rate gained was set at market"

It is.

Kiwisaver isn't an investment fund. It vets investment funds and lets you pick which ones you want from the approved list.

Nor are there tax advantages to buying a house over investing in Kiwisave: you can pick a fund that makes its money by investing in shares for long-term capital gain, in which won't get taxed just increase in value of your house won't get taxed.

Posted by Icehawk : 2/22/2007 02:48:00 PM

"funding an unsustainable welfare scheme"

It's not unsustainable. Do the maths.

The govt does need to save up to make that true: ie run a govt surplus now to pay retirees later. Whether that's "really" a surplus or whether it's balanced by future debts is a matter of how you choose to do the accounting: hence great debate over govt accounting and whether or not we're running a surplus. If people like DPF and the National Party keep harping on about "the huge govt surplus" whenever the Cullen Fund's investments do well then the govt will stop saving and it *will* become unsustainable.

" If it was a personal account... "

The aim of national super is to provide a safety net for all. "All" includes those too unlucky or incapable to save anything for retirement. The problem with personal accounts is that they fail to reach the aim.

That's why a mix of a minimal superannuation safety-net and strong encouragement of the use of personal accounts is best. Hence KiwiSaver.

Posted by Icehawk : 2/22/2007 03:52:00 PM

Saving money for an aging population is pointless. Money is an abstraction, worthless unless it can be converted in to tangible work or goods. The problem with an aging population isn't a falling proportion of money earners, it's a falling proportion of workers, and throwing a big pile of saved money at the workers twenty years from now won't help them produce more, it will just send inflation through the roof and the exchange rate through the floor. Rather than saving, we should be investing in infrastructure to ensure that we can maintain our standard of living with less work.

Posted by Commie Mutant Traitor : 2/23/2007 11:56:00 AM