Savings and financial markets
You have outlined some priority areas for New Zealand's response to the short-term financial crisis, which we would like to discuss with you. There are a number of medium-term considerations around savings and financial markets:
- New Zealand has a history of high current account deficits and low personal savings, and an under-developed financial system in certain respects. This is likely to be having a negative impact on investment and economic growth, and makes us more vulnerable to financial shocks.
- Individual and Government savings policies also form part of long-term fiscal options and should be considered as part of the longer-term fiscal debate.
- The New Zealand Super Fund (NZSF) is a key element to the long-term fiscal strategy as it is used to pre-fund part of the future cost of Crown pension costs. This relies on the performance of the fund and international experience indicates that politically independent funds exhibit higher financial performance. A diverse portfolio also reduces the Crown's risk of over-reliance on the strength of the New Zealand economy.
- You have recognised that savings are important and we agree that KiwiSaver should be retained. KiwiSaver has been designed to help lift the level of household saving and investment in financial assets, but the incentives come at a substantial fiscal cost. Scheduled evaluations will over time progressively answer questions about whether it represents good value for money. The cost of the scheme could be reduced but changes need to be designed to minimise the impact on savings objectives.
- KiwiSaver costings and provisions are complex and the assumptions matter. We would be happy to discuss these with you and alternatives that could achieve the same or similar ends.
|Key policy proposal||Treasury comment||Alternatives/implementation advice|
|Super Fund - Target of 40% to be invested in New Zealand. This policy may be intended to grow New Zealand's capital markets or fund infrastructure spending or ease finance constraints in the current credit squeeze.||
Directing the NZSF to increase its home bias is not the best way to grow New Zealand capital markets since:
If the policy is to fund infrastructure spending via the NZSF then:
If the policy is to ease finance constraints for firms other options can be considered with fewer risks.
Treasury can provide alternative options to develop New Zealand capital markets with respect to equity listings, venture capital and bonds.
If the objective is to provide capital for infrastructure spending then there are a number of options available including issuing new debt and suspending contributions to the NZSF. However, Treasury would want to talk to you further about how this could be achieved, and articulated within the context of the Government's fiscal strategy.
To ease finance constraints for firms there are current measures to keep banks and bank lending liquid. If these prove insufficient, there are further alternatives for both equity and debt.
Implementing this policy proposal would require legislative amendment and consideration of how it may be phased in. We can provide fuller briefings on this.
|KiwiSaver - Minimum contribution of 2%||
Reducing employee contributions to 2% may encourage more people to join the scheme. However, there is no clear evidence that the 4% contribution level is acting as a barrier to participation.
A 2% minimum contribution rate could:
Treasury/IRD can provide further advice on the impact that a 2% minimum contribution level may have on household/provider behaviour plus the costs/benefits associated with the following options:
|KiwiSaver - Minimum 2% contribution but increase to 3% when economic conditions permit||Frequent movements in contribution levels may increase uncertainty for business and participants, and increase administrative complexity for employers and IRD.||A key message emerging from the KiwiSaver evaluation data is the need to stabilise the scheme's high-level design in order to increase investor/business confidence over the medium to long-term.|
|Discontinue Employer Tax Credit (ETC)||In the short-term employers would bear the full cost of removing the ETC, as reducing the minimum contribution would only impact over time and it would take time for employers to pass on the increased cost through lower wages. The cost would fall most heavily on firms in labour intensive industries.||
An alternative option is removal of the ESCT exemption.
Signal the future removal of the ETC to give firms time to adjust thereby addressing the short-term negative impact on firms.
|Link Employer Superannuation Contribution Tax (ESCT) exemption to the minimum contribution of 2%||IRD have indicated this would be difficult to administer because some employers are likely to continue contributions at 4% due to previous arrangements with employees and it would be difficult to differentiate between them.||Remove the ESCT exemption.|
|Reduce the Member Tax Credit (MTC) entitlement to 2% of Salary or Wages||
This policy reduces the fiscal cost of the MTC. It also potentially: reduces incentives to save and acquire savings habits; discourages part-time workers from joining (eg, students and seasonal workers); and discourages ad hoc contributions from lower wage earners (most likely to be new savings).
We need to clarify whether non-working members would still be entitled to the full $1,040 and the rules around the self employed, as it would affect part-time members and those people who work a few weeks or months a year.
|Treasury supports retaining the MTC at its current level of $1,040 for all KiwiSaver members. There are a number of implementation issues that would need to be worked through relating to part-time employment.|
If considering the impact on savings behaviour as well as potential fiscal savings an alternative that Treasury would recommend is removal of the ESCT exemption. Removal of the ESCT exemption would:
- not require a change in employee or employer contribution levels
- remove a feature that is most beneficial for high income employees who are less likely to create new saving
- have no effect on the cost to employers since the tax would be paid by reducing their net contributions to employee KiwiSaver accounts
- avoid the administrative complexity of reducing the exemption to 2% of employer contributions while some employers may continue to contribute at 4% due to previous arrangements with employees.
If you are interested in exploring this alternative in combination with your proposals, we will need to work through the implications of those options.
- Note a 70% replacement income rate is used by the superannuation industry as a helpful measure for determining whether people are saving at sufficient levels to deliver an adequate retirement income. However, this figure does not have a theoretical basis and needs to be used with caution.