Budget too tight for tax breaks

By BRIAN FALLOW

Finance Minister Michael has ruled out the introduction of any tax breaks for private superannuation schemes this year.

This decision is despite Dr Cullen's long-held view that private retirement savings rates are too low and that a more liberal tax treatment is needed.

But Treasury officials are sceptical of this view, saying that tax incentives are a solution that won't work, to a problem that doesn't exist.

Officials have advised the minister that the scheme under most active consideration, which would involved a rebate for contributions to superannuation schemes up to a cap, would cost anything from $50 million to $171 million a year, depending on the details of its design.

"The Government simply does not have this kind of money available in the 2002 budget," Dr Cullen said.

Under the present regime, introduced by Roger Douglas, savings come out of after-tax income.

The money they earn is taxed at 33c in the dollar (even if the saver's personal tax rate is lower than that) and the final payout is tax-free.

The richest 20 per cent of households do 70 per cent of the saving and tax breaks would disproportionately benefit them.

"Under even the most optimist credible assessments, 75 per cent of the spending on a savings incentive would subsidise saving that would have been made without any incentive," Treasury said.

Half of all households spend more than they earn and for them saving for retirement falls into the "chance would be a fine thing" category.

Treasury said that for such groups an incentive would make little or no difference.

"If these households lack the ability to fund current consumption, tax incentives are unlikely to create the ability to save," it said.

Separate research done by Treasury economists last year, which looked at the link between saving, investment and economic growth, found that investment rates in New Zealand were comparable to those achieved by other developed countries.

It concluded that if domestic savings were insufficient to finance that level of investment it did not matter, because New Zealand had been able to draw on foreign savings to make up the shortfall.

"We conclude that investment and hence economic growth do not appear to have been constrained by domestic saving rates that are 'too low'."

It said policies to promote domestic savings would have to be justified on other grounds.

Another study released last year on behalf of the Ministry of Social Policy found that the median level of savings (excluding home ownership) was only $7500 for single pensioners and $37,500 for retired couples.

Dr Cullen said the Government was still looking at ways in which it could promote employment-based schemes, including a scheme for the public sector.

Coverage in private employer schemes has shrunk from 18 per cent of employees in 1990 to 12.3 per cent, and from 4.1 to 2.6 per cent in the public sector, owing to the closure of the Government Superannuation Fund to new members in 1992.

The chief executive of the Investment Savings and Insurance Association, Vance Arkinstall, said the industry continued to believe that some form of tax deferral was the right approach.

He said that even if it was at only a modest level at first, it would at least send the right signal.

Opposition leader Bill English said the backdown on tax breaks left the Government's superannuation policy in tatters.

"When Labour came to power they were promising a flash new super fund financed from operating surpluses, along with widespread tax incentives to boost long-term savings.

"Two years down they track they have delivered a fundamentally flawed [New Zealand] super fund that is going to drive up public debt, and now Dr Cullen has reneged on his promise of tax incentives to encourage people to save for their own retirement."