Monday, May 21, 2007

Helping the rich?

DPF has a typically disingenuous exercise in which he compares the effects of Kiwi Saver to National's proposed 2005 tax cuts, and concludes that Kiwi Saver helps the rich:

For someone on $100,000 there is not much difference. National's tax cuts would give you $4,770 and Kiwi Saver $5,040.

But go to a Marketing Manager on around $130,000. Under National they get $4,770 and Labour gives them $6,240. That is around $1,500 more.

Of course, this glosses over a very important point: most of the benefit in Kiwi Saver comes not from the taxpayer, but from matching employer contributions which naturally rise with income. Rather than being a tax cut, it is instead a redistributive policy, aimed at channeling money from employers to workers. As for the government's contribution, the $20 / week cap on matching contributions makes it clear that they are firmly aiming their assistance at the 50% of New Zealanders who earn less than $25,000 a year.

DPF does raise an interesting question though - how do the benefits compare? Here's a quick graph, whipped up from the spreadsheet Anita did on National's tax cuts back in 2005. Unlike DPF, who consistently shows no interest in the 80% of New Zealanders who earn less than $50,000 a year, and instead focuses his "who benefits" exercises on the 3.5% who earn more than $100,000 a year (otherwise known as "ACT's base"), I've shown the range of incomes from $15,000 to $150,000:

Kiwi Saver consistently delivers more to people than National's programme of tax cuts would have, and (thanks to government contributions) substantially more to those on lower incomes. And it does all of this without causing inflation, or compromising the government's ability to fund public services such as health, education, and social welfare.


Assuming lower paid workers can afford to join Kiwisaver of course.

Kiwisaver takeup rates are likely to be higher among the mid to higher income groups.

Posted by Joe Hendren : 5/21/2007 05:00:00 PM

As Joe henderson pointed out the point about not joining. The graph could be done differently to show the effects on peoples incomes now, not in the future, in which everyone will go down by 4%. As for tax cuts and inflation it is an excuse, and should only be made by people who want to cut government spending for the same reason. The point Kiwisaver doesn't threaten govt services like tax cuts is also invalid. The government spending $1 on Kiwisaver has the same effect as $1 on tax cuts on the governments ability to fund health and education.

Posted by Anonymous : 5/21/2007 05:17:00 PM

Joe: Uptake is the big sticking point - to join you have to be able to sacrifice 4% of your income for some period of time. And I'm aware that not everyone can afford to do that.

The answer of course is to continue the push to raise wages. Unfortunately, if National gets in, progress on that front will stop dead.

Nicholas: Because most of the benefits of Kiwi Saver flow from employer contributions, it has far less of an effect on the government's ability to fund public services than an equivalent programme of tax cuts.

Posted by Idiot/Savant : 5/21/2007 05:41:00 PM

Because most of the benefits of Kiwi Saver flow from employer contributions

I/S, you're usually one to criticise people using euphemisms ... why keep calling them 'contributions' when they're compulsory?

Posted by Anonymous : 5/21/2007 05:52:00 PM

An EU ecomomist acquaintance of mine had this to say:

Basically it looks like ANY non-working person can open up an account and the Govt. will seed it with $1,000. There are roughly 1m kids in NZ so that's $1bn going to the savings industry/off the fiscal accounts right there. Plus, I am not 100% certain on this, but looks like the Govt. will also match each $ put into non-working persons accounts up to $20 per week. E.g. say you open an account for your new born child and put in $20 per week to get the maximum Govt. subsidy. After 20 years compounding $2080 contributed each year conservatively at 7.5% p.a, this account would be worth around $80k, the govt's contribution being slighly over 1/2 of this.
Two things parents fret about are the ability of the kids to buy a home and fund their education. Kiwisaver already has an explicit provision to allow funds to be withdrawn for 1st home buyers. A big vote grab there. In the next election I would not be surprised to see a similar break to fund tertiary time we could say good bye to student loans... with further checking it looks like the subsidy for non-workers above is correct....this is BIG deal and has not been picked up in the press yet. I suspect it soon will be.

Posted by Anonymous : 5/21/2007 05:52:00 PM

.....(thanks to government contributions)

Isnt that our money to start with?

Another case WFF!

We take from you in taxation and give back a little in Kiwi Saver.

To make a real savings initiative just remove the taxation on interest received from savings or company dividends. Very simple, very effective.

No need to increase taxation, no need to employ unproductive state workers, no need for the Sate to hoard our money because we might "spent it".

Posted by Anonymous : 5/22/2007 04:56:00 AM

"Isnt that our money to start with?"

Er, no. No it isn't - it's your society's money. If you feel your society costs too much, feel free to vote for politicians who promise to make it cheaper. But don't whinge if they don't get to be the govt.

Posted by Psycho Milt : 5/22/2007 07:34:00 AM

Ruth's comment is very interesting.

I hadn't picked up that I can open an account for the kids, though I thought I could open one for my wife, who doesn't work. Has there been any confirmation or analysis of this in the press?

Heh. In the press. Like our media reports this sort of thing!

Posted by Anonymous : 5/22/2007 09:23:00 AM

weak I/S - very weak. I wondered which side of this you would fall on. You should be a politician. This post is almost as bad as the worst of Jordan & Tony's. Even your graph at either end of the scale proves dpf's point. There is a bigger difference between the gap at the top and the gap at the bottom. so those on top get more. It also shows quite nicely how National planned not to give extra to those on the highers marginal rate. wealth transfers from the poor unable to save to the high earning with disposable income. sweet.... or not.

Compulsory savings is a good policy for the situation NZ is in.

Posted by Anonymous : 5/22/2007 09:25:00 AM

IS - what about another line on the graph - one showing the government contribution to kiwisaver at each income level.

Posted by Anonymous : 5/22/2007 10:58:00 AM

As well as adding other lines, you might like to integrate over the proportion of the population at each band. Perhaps that would be too hard, but it would put a different spin on sagenz's point that more is being paid out (individually) to high-end earners.

Posted by the Scarlet Manuka : 5/22/2007 12:50:00 PM

I remember Muldoon ripping off my super that was a compulsory scheme setup ny Norm Kirk's Labour government. Just think how much capital there would have been in NZ if this had been allowed to grow and where we probably be in the OECD stakes. My worry is that National will get in next election and tinker with it and remove the compulsory component for employers. So, for the sake of the nation have all parties agree to this at let it grow!

Posted by Anonymous : 5/22/2007 01:51:00 PM

I would not worry so much about Kiwisaver which will be still quite young at election time. More worrying is the so called Cullen Superannuation which National would love to stop and make a one off payout. That would effectively stop any hope of building a fund to offset the cost of National Superannuation. Then with the Brash idea of rolling Nat Super out to 75 years of age they would solve the whole problem with one stroke.

Posted by Anonymous : 5/22/2007 02:05:00 PM


You've let DPF con you. The whole comparison between the employer contributions to KiwiSaver and the size of the Nat's tax cuts is like comparing the size of apples with the size of text files.

In the long term requiring the employer to pay an extra 4% of your salary into a retirement scheme is exactly the same as requiring them to take 4/104ths our of your pay packet and put it into a retirement scheme. Because THE EMPLOYMENT MARKET IS A MARKET and at the margin the employer will only hire if labour costs are at a certain level.

A more honest comparison is between National's tax cuts to Labour's tax credits for Kiwisaver.

Posted by Mr Wiggles : 5/22/2007 02:06:00 PM

I think your graph admirably establishes the duplicity of National's "tax cuts for the rich", the only real policy and it has and one it cannot afford to discard because of the money they have been paid by the fat cats. As long as Labour doesn't foul things up as a result of a combination of: arrogance, fatigue, bureaucratic capture and moral weakness, the next election is very winnable for it.

Posted by Anonymous : 5/22/2007 02:31:00 PM

I love it when you prove my point. The graph shows that the super rich get the most of this policy. And I am delighted you endorse it. Kiwi Saver is a wonderful privatisation of public funds to private funds.

If National did this I am sure you would scream bloody murder against it. As for me, I actually support it (but not how it was done) - I just love pointing out how it goes against left wing canons.

Also you distort the truth when you say I gnore those on under 50K. In fact I blogged from the budget lockup what it does for someone on $40K and a day or so later what it does for someone on $26K. But hey ignore those facts.

And as for employers contributing some (not all) of the money, that is true. But they will generally recover it through either higher prices or over time lower wages. And who will be most hurt by that? The poor. Well done Dr Cullen - no wonder McCarten wants him Head of the Roundtable.

Also congrats on the logic that a tax cut would imperil the government's ability to fund public services such as health, education, and social welfare, yet Kiwisaver subsidies will not. What universe is this logic from?

Anon 1 - Kiwi Saver will have the Cullen Fund transferred into it at some stage - but not in the next decade.

Sean - The Govt puts in more than the tax credit. The employer contribution is tax deductible yet is not taxable income for the employee.

Anon 2 - In case you have not noticed it, the fat cats do far better with Labour's policy.

Posted by David Farrar : 5/22/2007 02:49:00 PM

Ruth and Pablo - children joining Kiwisaver. You are not correct here. You can open an account for a child with those 'providers' who offer it, but the government 'subsidy' of $20 per week does not apply to children ie. anyone aged under 18.
Since the Kiwisaver account is an obvious candidate for a means to save for the monies to pay student fees, we might expect Labour to offer that (ie. offer the new option to cash in Kiwisaver accounts to pay for student fees)as an election bribe next year, possibly sweetened with a government subsidy of $1-20 per week. If they did do that it would be a winner for those parents like myself who fret over these wretched student loans and the burden they are on our children.

Posted by Anonymous : 5/22/2007 03:18:00 PM

You cannot discount the inherent value in having the money now as tax cuts would have delivered. A dollar now put into debt repayment (at say 15%) is worth a hell of a lot more to me than putting away $1 of mine and getting a extra dollar that I can access in 30 years.

As DPF points out (and your graph shows) these changes help the rich and if National had proposed them they would not get such a glowing commentary.

Posted by Anonymous : 5/22/2007 05:04:00 PM

yeah... i/s is right, you're a bit disingenuous dpf. $2k to someone on <$25k is worth a hell of a lot more than $7k to someone on $145. it's the same percentage in the pocket, but...

the former will use it for food or healthcare, while the latter will put it into investments.

plus, what everyone seems to overlook is that this budget has strong undertones of productivity.

the 4% employer 'contribution' acts as a disincentive for additional hiring. logically, a business will (or should) invest in plant or other such productivity improvements, because these are fixed costs.

and, as we all know, increased productivity is what nzl needs right now. not meaningless spending on imported goods.

Posted by Anonymous : 5/22/2007 05:14:00 PM

"As DPF points out (and your graph shows) these changes help the rich and if National had proposed them they would not get such a glowing commentary."

Yes, as an outlier case. However, when compared with National's tax cut policy this helps the poorer section of society a lot more. DPF is trying to make out this represents hypocrisy on Labour's part but that is pure spin on his part. As I/S points out "80% of New Zealanders earn less than $50,000 a year" and it is they who are clearly better off under this scheme than anything National have proposed.

Posted by Anonymous : 5/22/2007 05:18:00 PM

Che says: "yeah... i/s is right, you're a bit disingenuous dpf. $2k to someone on <$25k is worth a hell of a lot more than $7k to someone on $145. it's the same percentage in the pocket, but...

the former will use it for food or healthcare, while the latter will put it into investments."

Che, the person on $25k can't use it for food or healthcare and the person on $145k can't put it into investments of their own choosing - they both have to put their $2k and $7k into investment funds like Westpac Managed Funds that will largely be invested offshore. So what on earth are you talking about????

Also, I can't wait for the left to support National Party tax cut proposals for $7k for the rich and $2k for the poor on the same grounds you have outlined here - because with tax cuts one could buy food and healthcare and the other use it to invest in a New Zealand business.

Actually, on think I might be the turkey here. Were you trying to be ironic or something, and I've missed it???

Posted by Anonymous : 5/22/2007 05:20:00 PM

Anon1 above says:

"As I/S points out "80% of New Zealanders earn less than $50,000 a year" and it is they who are clearly better off under this scheme than anything National have proposed."

No one is better off at all till they want to buy a house (or, of they already own a house) till they earn 65. The money gets tied up in an offshore managed fund for god's sake!

So any comparison between tax cuts and this is silly. A tax cut you get immediately and can invest or spend on food and shoes for the kid, or on lotto and fags. With KiwiSaver you don't see it for potentially many decades. Comparing the two is ridiculous, particularly in the context of trying to help the struggling poor.

And, let's be real, no family earning under, say, $50,000 is realistically going to take a 4% cut in their after-tax pay, so they won't get anything at all from their employer or the govt ... and so the graph is just silly. It doesn't mean anything below a certain point along the X axis.

Posted by Anonymous : 5/22/2007 05:25:00 PM

richgraham - children can get the $1,000 initial hand out though.

Posted by Anonymous : 5/22/2007 05:28:00 PM

And I/S, in your initial post you say: "Rather than being a tax cut, it is instead a redistributive policy, aimed at channeling money from employers to workers."

That is a remarkable definition of "redistributive" - under that definition any payment (like wages!) from an employer to an employee could be called redistribution.

It used to be that Labour governments believed in taxing high earners (whether employers, employees, or passive earners from investments) and then redistributing this money, through the consolidated fund, to low earners (whether employees or small business owners etc).

Now you want to set up a system which demands employers pay more money to the already well paid, less extra money to the already low paid - and for both rich and poor to have to invest that money in foreign stock and bond markets.

Redistributive. You have to kidding. Pure spin and sophistry on your part.

Posted by Anonymous : 5/22/2007 05:35:00 PM

Not having read the fine print, I would be cautious that it doesn't end up like the Australian compulsory taxation system where your account will almost certainly lose money every year unless you have enough to cover the fees. Which is over $10k here, so all those students and poor suckers who don't earn much find that their tax is just going into windfall profits to fund managers. Even rich people get caught at times - I had ~$1500 in a fund chosen by one contracting company I did some work for that was going to cost me $300 in "exit fees" to withdraw, or wait two years and only pay $100. Then I realsied they wanted $100pa in management fees anyway, so I took the money immediately (merged it into my main account).

Posted by Moz : 5/22/2007 05:45:00 PM

The scheme encourages people on low incomes to save for their first home, by giving the $1000 kickstart and the $3-5k one off grant to buy to their house. Once they buy this first house, the will be able to divert half of the %4 of their income into their mortgage but nonetheless and thus only be contributing %2 of their income to be getting %12 going into their kiwisaver accound every year. The beauty is in the detail. Its not some free handout, its a socially democratic scheme which is targeted towards low income earners (the government componenent at least). By giving young low wage earners an achievable goal to work towards (ie buying their first home) this scheme encourages a savings ethos while at the same time broadly benefiting all workers.

Posted by Anonymous : 5/22/2007 10:55:00 PM

Actually, I/S, Sean's right. The compulsory employer contribution is an illusion, as those contributions are going to be offset by wage freezes or lower-than-expected increases over the coming years.

Essentially, your employer will be docking your pay to put into your savings.

And true, at lower incomes, they'll get a decent return, but that comes nearly exclusively from government subsidies. The employer will fork out very little. This is a good thing, as it'll mean it'll have a small impact on the lower end of the labour market - it just means that it's not particularly redistributive vis-a-vis employers.

The tax issue is pretty complex, and I try to explain it in this post, but the fundamental point is that employers don't end up paying a cent.

Posted by Anonymous : 5/23/2007 03:13:00 AM

anon - "Were you trying to be ironic or something, and I've missed it???"

a little. one can't be seen to agree with dpf. saving is just deferred spending. that $2k for the <$25k is likely to be worth a hell of a lot more to a poor retiree than a rich one.

otoh. the poor are highly likely to opt out of the scheme, rich highly likely to opt in. the government already extends a programme called SSRSS that sees lower-paid government employees occasionally opting out because they can't afford to put 3% per pay aside. but, people on $50k+ usually opt in.

dpf is disingenuous because on one hand he's calling this a 'taliban government', and on the other praising it for putting money in the retirements schemes of the rich.

Posted by Anonymous : 5/23/2007 07:07:00 AM

Che - apologies then for missing your point. I'm not interested in what DPF has to say, I was more interested in what I/S and you had to say, and I can't really see how this scheme can be justified or defended on EQUITY grounds. It is obviously regressive. Maybe it can be defended on other grounds, but not equity grounds .... and it is a bit of a concern seeing so-called social democrats trying to. It gives the rich lots of money but not the poor, and it privatises superannuation.

Posted by Anonymous : 5/23/2007 10:17:00 AM

Keith Ng - your post on public address is excellent, but you may have missed another dirty little secret. The scheme will put downward pressure on wages, as even Cullen says, but this might be worth accepting in exchange for the schemes other benefits. However, if you are a low-paid worker who feels you cannot afford the cut in after-tax income that joining the scheme involves, then you experience the downward pressure on wages (ie. miss out on your next payrise) but get none of those extra benefits from your employer and/or the government - not even the $20 a week payment. This means low paid people will miss out on wage rises, gain no benefit from the scheme and be further excluded from the gains of economic growth over the last seven years. Brilliant, Dr Cullen. And shame on those on the Left who support this scheme.

Posted by Anonymous : 5/23/2007 10:33:00 AM


I'm very aware that the employer contribution also gets a tax credit: my partners and I are both owners and employees of our little company so we having been doing the number crunching pretty carefully.

But your comparison is still disingenious: it's the amount of non-taxed income being moved into Kiwisaver that you should be counting. That's a much smaller amount than what you graph.

Where we do agree is that this will help the rich: 4% taxfree is nice.

Posted by Mr Wiggles : 5/23/2007 11:04:00 AM


Read the fineprint on the fees VERY CAREFULLY. Also check out Gareth Morgan at as he's on a crusade regards this (he's even set up his own fund - though we aware the he'll charge a flat 1% on the principal.

Any kind benefactor killing to crunch the numbers on fees for the various provider's schemes and post it somewhere would be doing New Zealand a big favour.

Posted by Mr Wiggles : 5/23/2007 11:05:00 AM

I am sure Gareth Morgan has a fine kiwisaver programme. However, he is a brilliant publicist. He gets huge amounts of free airtime providing "independent" analysis on kiwisaver.

National Radio and co. should be charging him $100ks for the publicity they are giving him and his scheme.

His trenchant criticism is extremely convenient to his cause.

Posted by Anonymous : 5/23/2007 11:18:00 AM

The relative gains are marginally better for low income brackets, but the relative costs are also higher. The higher your income the more you are able to afford the 4.7%+ cut in take home pay, the lower the less able. The graph needs to be adjusted to account for the uptake of KS.

Posted by unaha-closp : 5/23/2007 11:36:00 AM

Anon @ 10:33am. Someone on very low wages shouldn't miss out on their next pay raise:

1. There should be no downward pressure on their wages from Kiwisaver employer contributions because the employer tax credit will cover it.

2. Labour is committed to raising the minimum wage to $12 next year.

Posted by Graeme Edgeler : 5/23/2007 11:38:00 AM

Sorry Graeme, I was just taking seriously the comments from the Finance Minister that there would be downward pressure on wage claims and it is not just people on the minimum wage that I was thinking of but people on well above that but who still cannot afford to save (like a teacher on $30k). Their next pay rise will not be as high as it would have been, but they will not get the benefits of KiwiSaver, because they cannot afford the after-tax pay cut. I don't think that can be seriously disputed. Why do you think people like McCarten and Lila Harre are opposing this so strongly?

Posted by Anonymous : 5/23/2007 04:02:00 PM


If you are wanting somewhere to deposit money for your children's education check out Australian Scholarships Group.

This has been around long before NZ implemented student loans.

Basically it can work like this, they take a small amount of money off you each month for x years. When your child starts Uni they give you all your contributions back (no interest) then they pay for the fees and/or allowances for your child. Put simply, the interest on your money today is paying for current students and the interest of future investors are paying for yours.

Posted by Anonymous : 5/23/2007 09:41:00 PM

Putting education funding into Kiwisaver would be a grave mistake. Consider the implications of a child from a poor family stumping up to do Law with $0.00 and a kid from a wealthy family with $20-30K. Which one would have a figure closer to the course costs? Which one is taking a loan for the full amount and which one is half subsidised already?

This would further lower the tertiary uptake from lower socio economic groups. Just as Kiwisaver in it current form will create a bigger divide between the socio economic groups in retirement.

Student loans were implemented to make education more accessible to lower socio economic groups. Why mock the people who need them by subsidising people who don't?

Posted by Anonymous : 5/23/2007 09:56:00 PM