Waiting for superman

By MARK FRYER

Anyone who believes the Government should encourage New Zealanders to save more could be excused for feeling a little empty-handed after Michael Cullen's latest Budget.

Although the Minister of Finance has said he believes the country does have a savings problem, and that governments can encourage private savings, his proposed solutions are developing at a pace that makes evolution look snappy.

A year ago, in the 2001-02 Budget, Cullen said it was time to consider action on lifting private saving.

And in a speech in April, he reiterated his view that, even if the officials in Treasury might disagree, New Zealanders are not saving enough and that tax changes could encourage us to salt away more of our money.

But while Cullen's latest Budget speech described the taxation regime for superannuation as being of "great interest" to the Government, the measures it outlined were neither definite nor immediate.

Cullen said he was considering two options for changing the way superannuation contributions are taxed. Whichever one it is, the change won't happen until April 1, 2004.

Both of Cullen's options would reduce the tax that the Government extracts from the money which employers contribute to super schemes, on behalf of their staff.

The argument for reducing that tax goes like this: at the moment, 33c in every dollar that an employer puts into a super scheme goes into the Government's coffers.

That's not fair on anyone earning less than $38,000, because if they received the money directly, as pay, it would be taxed at a marginal rate of only 19.5 per cent. On that basis, the tax rate on super contributions is "fair" on taxpayers in the $38,001-$60,000 bracket, who pay 33 per cent, and is a concession for those on over $60,000, whose income is taxed at 39 per cent.

In his Budget speech, Cullen outlined two options for changing that situation.

The most modest approach would be to reduce the tax rate on contributions which employers make on behalf of workers earning under $38,000, to the 19.5 per cent marginal rate that applies to the rest of their income.

Option two would take things further, and offer everyone the same 6 per cent concession that taxpayers in the top bracket now enjoy. While Cullen did not spell out the details, that approach would see the tax rate on super contributions fall to 27 per cent for those earning $38,001-$60,000, and to 13.5 per cent for workers on $38,000 or less.

Cullen has previously said the first option would involve the Government passing up about $29 million a year in tax, while offering everyone a 6 per cent concession would cost about $80 million a year.

So far, the superannuation industry isn't exactly bursting with enthusiasm.

Cullen's Budget speech was "a disappointment", said the Investment Savings & Insurance Association, which represents companies involved with investment and life insurance.

Taxing super contributions at the employee's marginal tax rate would reduce the over-taxation of workers earning under $38,000, but relatively few people would benefit, especially given the decline in work-based super schemes, says the association's chief executive, Vance Arkinstall.

According to latest figures from the Government Actuary, only 244,000 of us belong to such schemes, down from 310,000 in 1990.

Even Cullen's more generous option, offering the 6 per cent discount, "won't be sufficiently attractive to encourage a sudden explosion in the number of superannuation schemes being offered", says Arkinstall.

"It is a small step in the right direction but it's got to be linked to reducing the compliance, making it easier for employers to have these schemes in place."

Linda McCulloch, head of superannuation strategy for AMP, says aligning the tax rates is the least the Government could do, and it should do it immediately, not in 2004.

"That's $58 million of over-taxation that perhaps could have been in people's savings accounts," she says. "I'd just like that to happen and I don't know why it hasn't happened immediately.

"Given that he has an operating surplus, I'd have thought, out of $2.3 billion, $29 million [a year] was small bikkies.

"I think the industry and certainly AMP would be pretty happy that people aren't over-taxed any more - probably almost as happy as the people themselves - but at the same time if the 6 cents is the up-front incentive to get people to save long term for retirement I don't think it's the answer."

She is pushing for a system which would see tax on super contributions and investment earnings deferred until the money is withdrawn.

At Business NZ, executive director Anne Knowles supports the idea of taxing super contributions at the individual taxpayer's marginal rate, but says barriers that discourage employers from offering super schemes also need to be looked at. Those include the cost of producing prospectuses and the fear that an employer will be legally liable for the advice they give staff on the subject of superannuation.

"All of those issues need to be addressed at the same time if there is going to be an increase, let alone a significant increase, in employer-based superannuation schemes."

While the organisation hasn't analysed Cullen's idea of a 6 per cent tax discount, Knowles says it appears to be relatively complicated and that could discourage some employers.

And, if either of Cullen's options does make it into the tax rules by 2004, there is plenty of reason to doubt whether it will have any impact on the amount we save.

Over the years, a series of reports on savings have come to the conclusion that, if the goal is increased saving, then tax incentives are not likely to achieve it, or at least not without creating major problems.

Most recently, the final report of the McLeod tax review, released last year, said that: a) there was little to suggest that New Zealanders save too little and b) even if we do, there was little evidence that changing the tax system would make us save more.

Given that this country has universal taxpayer-funded superannuation, the report concluded, "most New Zealanders would not be well served by being induced or compelled to make additional retirement provision at the expense of living standards during their working lives".

And a report by Treasury late last year found fishhooks in all the possible incentive schemes it analysed. The report pointed out that most of the benefit of such incentives would go to higher earners, incentives have to be paid for by taxes, and that low to middle-income households just may not have enough income to save much more.

Michael Littlewood, who runs a financial planning company offering superannuation schemes, and was a member of the Todd Task Force on retirement savings, also wonders what the point is.

I N the United States, where savings schemes enjoy generous tax advantages, he says the evidence is that they increase savings only slightly at best, and may have even reduced saving.

"You have to say, if that's the case, then what are we actually trying to achieve here? What's the problem?

"There is a general feeling that we're not saving enough - well that could simply be a reflection of the fact that we don't have enough income.

"Although I am a great believer in saving and although I would be hugely advantaged, in the business that I'm in, by an incentive for employer superannuation, I think it's a crappy idea."

He also challenges the logic of aligning the tax rate on super contributions with an employee's own marginal tax rate.

A tax rate of 33 per cent on super contributions may look high for a person on the 19.5 per cent rate, but in some cases that can still be less than the effective rate which would apply if they received the money directly. That's because money in the hand, as well as being taxed, may also reduce entitlements such as Family Support, or income-tested benefits. For people in those situations, the 33 per cent rate on super contributions is effectively less than they would pay if they received the money directly.

The real answer, says Littlewood, is lifting the growth rate to help pay for the ageing population, not worrying about how we slice the economic cake.

"In my view, spending $80 million on identifying who were our talented teachers and paying them more to stay teaching is more likely to contribute to New Zealand's growth in the future than subsidising tax planners to produce tax-effective compensation packages for their customers."

* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. Email: mark_fryer@nzherald.co.nz. Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423.