Fish-hooks in super incentives

By MARK FRYER

Saving is a challenge for the best of us, so wouldn't it be nice if the Government gave us a little encouragement - maybe a tax break or some other incentive to put aside a few dollars.

Then we'd be able to have a more comfortable retirement and maybe there would be a little less pressure on the taxpayer to fund the ever-growing number of retirees.

Many people have been saying things along those lines for many years, to no avail. The National Party joined the chorus yesterday, promising to introduce tax incentives for long-term saving.

But a recent Treasury report signals that savings incentives are more complicated than they seem, and unlikely to be generous if they happen at all.

Finance Minister Michael Cullen cited the report, Savings Incentive Options, Consultation and Analysis, last month, when he ruled out introducing any tax breaks for private super schemes this year.

The report put the cost of one possible type of incentive at anything from $50 million to $171 million a year and, he said, the Government didn't have that sort of money to throw around.

While Dr Cullen has made it clear that he believes the present system for taxing super schemes is not friendly to savers, the report makes it equally clear that the quest for an alternative is full of fishhooks.

Treasury officials would plainly prefer super schemes to be taxed as they are now.

While the present system is not perfect, says the report, it is better than the alternatives.

When it comes to taxing savings schemes, there are three places the taxman can take his cut - when you earn the money, when your savings earn an investment return and, finally, when you get a payout from the investment.

At present, the only tax break - if you can call it that - for superannuation schemes comes at the end. The money you earn in the first place is taxed, and so are any investment returns (at 33 per cent, what's more, even if you're on a lower tax rate), but the final payout is tax free.

The Treasury document is a report on the department's consultations with various people involved with the savings business and follows Dr Cullen's comment in last year's Budget that it is "time to start moving towards action" on savings.

While the officials are not keen on changing the way super schemes are taxed, the alternative they prefer - or dislike least - would give savers a tax rebate for money put into a qualifying saving scheme.

So, for example, if you saved $2000 and the rebate was 15c in the dollar, you would get a $300 rebate, either at the end of the tax year or when you saved the money.

The scheme's earnings would still be taxed, as they are now, and the final payout would still be tax exempt. Unlike now, your investment would be locked in until retirement.

This approach, says the report, would be easy to understand and the reward for saving would be relatively immediate.

The consensus among those consulted, says Treasury, is that an immediate incentive is more likely to encourage saving.

However, there would be a limit to the amount of saving that would qualify for the rebate. That limit would depend on how much tax the Government was prepared to forgo in order to encourage savings, but it could be as low as $1000 or $2000.

If it was $2000 and every dollar you saved earned a 20c rebate, that would amount to only a $400-a-year reward for saving.

National is suggesting much the same scheme, with a rebate of 10c to 20c for each dollar saved. While details are not finalised, National suggests the reward would apply to up to $2500 of savings, meaning a maximum rebate of $500.

One of the big problems facing anyone designing a reward for saving is that not everyone saves.

If you rank households by income, the bottom 50 per cent are busily "dissaving", spending more than they earn.

This is partly because those relatively poor households include many superannuitants, who tend to be spenders rather than savers.

Even so, figures from 1997-98, cited in the Treasury report, show that a lot of people are in no position to benefit from savings incentives.

Only the top 10 per cent of households manage to save more than $2000 a year, and the top 20 per cent of households account for 70 per cent of all saving.

This means that any tax break for saving is largely a gift to those who are already well able to look after themselves, "a tax break for the top 10 to 20 per cent of income earners", as the Treasury report puts it.

In order to limit the cost to the Government, any rebate scheme would have a cap, but that creates another problem.

Since the well-to-do are already likely to be saving more than that amount, there is no incentive for them to save more, so they get rewarded for savings they would have made anyway.

"Even under the most optimistic credible assessments, 75 per cent of the spending on a savings incentive would subsidise savings that would have been made without any incentive," says Treasury.

At the other end of the income scale, if poor households can't save, says the report, tax incentives are unlikely to give them that ability.

"There is reason to believe that no incentive will cause lower and middle-income households to change their savings behaviour in a significant way," says Treasury.

Even in the US, where the incentives are large, the effect on savings is still unclear.

Treasury also worries about distortions from incentives. If you give people a reward for saving in a certain way, says the report, they are less likely to put their money to alternative but equally worthy uses, such as their own business or getting an education.

Incentives are also likely to encourage certain types of savings - super schemes, for example, rather than alternatives such as direct share investment.

Treasury Report: Savings Incentive Options, Consultation and Analysis