To tackle the superannuation affordability problem, it needs to be de-politicised. All main political parties will at some point need to agree on a shared path forward and either tackle age eligibility or introduce means testing. The key to successfully pulling off either is to do it with plenty of warning, so future generations can plan accordingly. Coming at the problem with a longer-term lens is what’s going to lift New Zealand out of the policy impasse in which we find ourselves.
KiwiSaver and superannuation are part of the solution, too. Kiwis are currently saving way less than our Australian cousins. Australia has an 11.5% contribution rate, compared to our average of 6%, when the employee and employer contributions are combined. So how do we boost savings as an additional buffer? We need a review of all superannuation schemes (KiwiSaver, the Super Fund, NZ Superannuation) to determine what our overall savings landscape should look like.
KiwiSaver is old enough now and people are familiar enough with the scheme for it to start maturing. There needs to be greater flexibility, with options for Kiwis to be more active with their accounts and contribution levels — beyond the five options available to employees. To supercharge our savings future, financial literacy should be taught in all schools so young people are clued up about the benefits of things such as compound interest and the benefit of starting to save early.
On the population side of the equation, immigration will continue to play its part in replenishing our country with a youthful, productive taxpaying population. Being an isolated nation, there are few avenues in which to enter New Zealand illegally. This allows us, through our immigration system, to attract the skills and age profiles of the people who will contribute most to the country in the future. Contrary to what others might say, we are not a small country. We’re roughly similar in land mass to the United Kingdom, but with a population the size of the city of Melbourne. We have plenty of room to grow, and we could easily accommodate three cities such as Melbourne, 50 years down the track.
So, if we know that immigration will continue to be a major part of New Zealand’s story, why shouldn’t we collaborate on the agreed best outcome for our country? That looks like ensuring we have the right immigration settings to get the skills and talent we need and the right investment in infrastructure to support a growing population (schools, roads, houses, jobs etc.).
Political flip-flops and U-turns on immigration and infrastructure investment are simply setting us up for failure in the future.
In terms of getting tax settings right, we need to look at the whole tax system and ensure it is competitive with other countries — or we risk driving existing Kiwis and potential skilled migrants away. A simple (and therefore hard to avoid) system, works best to achieve what we want it to achieve — for example, raising enough revenue or changing behaviour (e.g. pollution taxes).
So, what about a capital gains tax?
Some take the view that we need a capital gains tax, arguing it would raise much-needed additional revenue and change behaviours — encouraging people to invest in capital other than housing. BusinessNZ remains sceptical when it comes to a CGT – because to be effective it would need to be comprehensive.
Given that most proponents of a CGT want an exemption for the family home, the reality means little additional revenue would end up being raised. In the UK, capital gains tax accounts for about 1.3% of tax (home excluded) and in Australia it accounts for about 3% (home excluded).
Behaviour-wise, people would still be encouraged to invest in housing, rather than investing in a business, due to the house having a tax advantage.
In New Zealand, our tax as a percentage of GDP is 33%, which is very close to the OECD average of 34%. The shares of the three main types of tax in New Zealand (individual, company and GST) are all higher than the averages for the OECD, mainly because we don’t have social security taxes as other countries do (e.g. National Insurance in the UK, superannuation and health in Australia). New Zealand has the fourth-highest company income tax rate in the OECD as a percentage of GDP, despite having only the tenth-highest company tax rate in the OECD, which is because other countries have various offsets.
Our tax system needs to be looked at in its totality. If new taxes are added, what are we taking away? Based on the challenges outlined above, an alternative to higher taxes is strong incentives for people to save for their retirement and healthcare and sustained spectacular economic growth of 5% or more every year. Some thinking on how to grow the pie rather than just how to tax the pie more, is warranted.
