Michael Littlewood: KiwiSaver scheme getting special treatment

International evidence suggests tax breaks for retirement saving are very expensive. Photo / 123RF

The Tax Working Group's report, Future of Tax - Interim Report, made three recommendations on the tax treatment of retirement savings.

One was to remove the "employer superannuation contribution tax" on the 3 per cent mandatory contributions by employers to KiwiSaver for employees earning up to $48,000 a year.

They also recommended a 5 percentage point reduction for each of the lower PIE tax rates but only for savings in KiwiSaver. And they want to simplify the way PIE rates are applied for KiwiSaver members.

The working group's focus on KiwiSaver suggests New Zealanders, particularly those on lower incomes, aren't saving enough for retirement. The group also seems to think KiwiSaver is the only, or the main way, New Zealanders should be saving for retirement.

In a startling contradictory admission, however, the group also acknowledges New Zealanders might be saving enough for retirement. The truth is no one knows whether that's actually the case.

The Tax Working Group offered no evidence on this but there have been several relatively recent reports to suggest New Zealanders seem to be rational about their financial preparations for retirement. That should not be surprising.

By the end of this financial year, we taxpayers will have spent more than $10 billion since 2007 on taxpayer-funded subsidies for KiwiSaver. In the next financial year, 2019/20, another $840 million will head in the same direction, on current rules. The Tax Working Group thinks its suggested changes will add a further $215m to that, making a total annual spend of more than $1b.

Here's the thing: we don't know whether KiwiSaver is working (raising overall savings); nor do we know whether the billions spent so far on incentives to save through KiwiSaver have changed anything overall. But now the Tax Working Group proposes spending even more of our money, to achieve what?

KiwiSaver was Michael Cullen's baby and he understandably takes a great deal of interest in its "success", however he measures that. But I hope other Tax Working Group members can stand back and ask themselves some key questions:

●Is KiwiSaver really working? The number of members, contributions and assets are only a small part of the answer to this question. What really matters is whether KiwiSaver has lifted overall savings.

●Are New Zealanders saving enough for retirement? Even if they aren't, should that justify direct intervention through public policy initiatives?

●Have the $10b tax subsidies to date and the expected annual $1b tax spend actually changed things?

●Why is it that only KiwiSaver qualifies for this special tax treatment?

Where is the evidence for the working group's proposals on KiwiSaver?

There is none but there should be if we taxpayers are to spend more than $1b a year.

International evidence suggests tax breaks for retirement saving are very expensive, distortionary, inequitable, regressive and demand high, growing regulatory walls around affected assets to ensure the incentives are not "misused". But worst of all, tax incentives seem not to work (raise overall savings).

Public policy settings should not overtly favour one form of saving over another. Instead, the Tax Working Group should be levelling the tax playing field for all savings and savings-related collective investment vehicles so that everyone pays their appropriate amount of tax. That's what a "fair" tax system should look like.

Michael Littlewood is the former co-director of the Retirement Policy and Research Centre at the University of Auckland.