KiwiSaver
The options that are preferred in relation to the modification of the KiwiSaver scheme, and the reasons these are preferred, are set out below.
Proposal 1: Reducing minimum employee contribution rates to 2%
The new minimum contribution rate for employees proposed is 2% of gross wages. Existing members would retain their current contribution rate unless they elect to reduce their contribution to the lower rate (2%). The default rate for new members would be 2%, although they could choose to contribute at a higher rate. The new minimum matching contribution rate for employers will also be reduced from 4% to 2%.
This option is preferred as it partly mitigates the disadvantages associated with a lower member contribution rate of 2% at a reduced fiscal cost. The design of KiwiSaver is heavily based on behavioural literature, which suggests that due to inertia many existing members are likely to remain on the 4% contribution rate and not elect to contribute at the lower rate. This option addresses the affordability issue for those on lower incomes (who may struggle to save at a 4% rate) while maintaining overall savings at a higher level than the 2% minimum. Apart from providing greater support in retirement for savers, a higher level of saving has wider benefits in terms of supporting financial system development.
Proposal 2: Repealing the employer tax credit (ETC)
In the short-term employers would bear the full cost of removing the ETC, as reducing the employer minimum contribution rate to 2% would only impact over time. It should be noted that this cost will also impact on the Crown as an employer. In any event, although employers would bear the full cost initially, it is likely to be passed onto employees in the longer-term through lower wage increases. If employers impose the cost differentially on KiwiSaver members, it will reduce the incentive to save. However, some employers are likely to eschew this approach (i.e. keeping take-home wages the same for members and non-members). To the extent this happens there will be only a small reduction in the incentive to save.
Given the economic climate and the need to fund tax reductions that have greater growth-enhancing potential, this option is preferred to the alternatives of either retaining the credit, or reducing the amount or application of the credit, despite the costs to firms of removing the ETC. These costs would fall heavily on firms in labour intensive industries, where there are large numbers of KiwiSaver members. While the cost could potentially be offset through lowering tax rates and harmonising tax rates for different forms of investment, there could be some transitional issues, particularly for firms that are just breaking even. Such firms would be unlikely to fully benefit in the short term from a reduction in tax rates because their taxable income would already be low - having to incur the full cost of theETC could result in some hardship for these businesses. However, the personal tax cuts will also help fund fiscal stimulus from which these employers should benefit.
Proposal 3: Reducing the employer superannuation contribution tax exemption (ESCT) to 2%
Reducing the employer superannuation contribution tax exemption (ESCT) to 2% for KiwiSaver and other qualifying schemes is preferred as it contributes toward higher-value tax cuts. Given other saving incentives in KiwiSaver and the complementary PIE regime, the higher tax exemption creates unnecessary fiscal cost. Therefore, the preferred option is to reduce the tax exemption and divert the savings into the higher-value tax cuts.
Although reducing the ESCT exemption to 2% for KiwiSaver and other qualifying schemes is likely to have a small effect on saving incentives and consequently on financial system development, this impact will be smaller than complete removal of the tax exemption, while recognising the fiscal objectives outlined above.
Proposal 4: Reducing member tax credits (MTCs)
Minimum contribution rate of 2% but MTC continues to match member's contributions up to maximum of $1,040
Under this proposal from the Council of Trade Unions, the amount of the member tax credit can continue to be calculated on the basis of the level of contribution by the member, up to a maximum of $1,040 per year. If salary or wages are less than $52,000, the member may still choose to contribute at the minimum 2% rate, and, as a consequence, not receive the full MTC on their contribution level. Alternatively, they could contribute more than the minimum 2% in order to receive the maximum credit of $1,040 per year. Non-employees will receive the amount of the credit based on their contribution level up to a maximum of $1,040 per year.
While the fiscal impact of this option is greater than capping the MTC at 2% of a member's wages regardless of their contributions (i.e. an additional $791 million over 5 years), it is preferred as it provides better savings incentives and is more equitable than the alternative options. Further, it does not create additional administrative or compliance costs than those currently being incurred in relation to member tax credits.
Proposal 5: Discontinuing the fee subsidy of $40 per annum
Removal of the fee subsidy is unlikely to discourage non-members from joining the scheme. The impact will be felt most by members who are on contribution holidays and who are not receiving the MTC.
This option is preferred as overall, the risks and negative impacts from discontinuing this benefit are considered relatively minor, and the growth benefits from recycling the revenue are considered to be greater than the benefits of retaining the fee subsidy.
