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Saving in New Zealand - Issues and Options

Options to subsidise or compel saving

This final section sets out policy options where the Government specifically encourages or compels individuals to save.

Subsidies for saving

Many countries provide some form of subsidised savings accounts and these are often linked to retirement savings. In New Zealand, the Government subsidises retirement saving through KiwiSaver, which includes an automatic-enrolment mechanism and a fairly significant subsidy. Some other countries subsidise forms of saving through tax-preferred savings accounts.

KiwiSaver aims to encourage a long-term saving habit

The KiwiSaver scheme aims to encourage a long-term saving habit and an accumulation of financial assets by people who would not otherwise be able to maintain their standard of living in retirement. KiwiSaver may also assist financial literacy and capital market development generally, and has generated public debate on retirement saving. KiwiSaver has had strong uptake as illustrated below.

Figure 13 - KiwiSaver enrolments 2007 - 2010
Figure 13 - KiwiSaver enrolments 2007 - 2010.
Source: Inland Revenue administrative data

KiwiSaver subsidies were introduced at a time when the Government was saving strongly, but households were not. It is timely to review the effectiveness of these now that the Government is no longer saving.

International evidence suggests subsidies have a significant impact on how people saveand a modest impact on how much people save

It is too early to draw definitive conclusions on the impact of KiwiSaver on national saving in New Zealand, with the scheme introduced in 2007. There is no hard evidence of the impact of KiwiSaver on national saving. It seems likely that KiwiSaver has encouraged some household savings that would not otherwise have occurred, but that some proportion of KiwiSaver contributions would have been saved anyway. KiwiSaver also involves the Government saving on behalf of households through subsidies. KiwiSaver incentives currently cost the Government about $1 billion per annum. The international evidence on the impact of subsidies on household saving varies, but tends to suggest that subsidies have a significant impact on how people save and only a modest impact on how much people save.[24]

Figure 14 - KiwiSaver money paid to providers, 2007 - 2010 ($ million)
Figure 14 - KiwiSaver money paid to providers, 2007 - 2010 ($ million).
Source: Inland Revenue administrative data

* Employer contributions include a tax exemption from Employer Superannuation Contribution Tax (ESCT) at a cost to the government of around $230 million p.a. Employers also received the Employer Tax Credit until 31 March 2009.[25]

There are reform options that may improve the impact of KiwiSaver

The SWG may wish to consider a number of options to reform KiwiSaver in order to improve its likely impact on national saving:

  • Boost automatic enrolment - KiwiSaver's automatic enrolment of new employees was designed to overcome behavioural factors (such as procrastination) which mean that individuals save less in practice than they might otherwise choose to. However, automatic enrolment only applies only to new employees. An Inland Revenue Department survey found more than a quarter of non-members said the main reason they had not joined KiwiSaver was because they had not yet got round to it.[26] There is scope to extend KiwiSaver automatic enrolment further, for example: a one-off automatic enrolment of all non-members; an extension of automatic enrolment to people who have been in their jobs for more than five years; or a reduction in contribution holidays.
  • Better targeting of incentives - target KiwiSaver incentives to those on moderate or lower incomes; these individuals are the most likely to increase their level of saving because of the availability of KiwiSaver subsidies. While evidence is not yet clear, incentives are unlikely to be having a significant effect on how much is saved by wealthier individuals, as the benefit of the subsidy can be captured by diverting funds from other forms of saving.
  • Remove ongoing incentives - KiwiSaver was originally designed with a $1,000 kick-start but no ongoing government contributions. This design relies on contributions continuing to be made due to peoples desire to save for retirement and inertia.

KiwiSaver provides one form of subsidy for retirement saving. Other countries use a variety of tax subsidies that could be considered as alternatives.

Many countries offer tax subsidies that move toward exempt-exempt-tax (EET) treatment of retirement savings, which substantially reduces the effective tax rate on savings. Taxation of savings in New Zealand is currently based on a tax-tax-exempt (TTE) approach, under which tax applies to income before it is saved and on income earned; but not on savings when they are withdrawn. An EET approach involves allowing a deduction for (or not taxing) income applied to saving, exempting qualifying interest or other savings income from tax, and taxing distributed savings at marginal income tax rates.

  Pros Cons
Boost automatic enrolment
  • Increase KiwiSaver membership
  • Increased uptake will increase the cost of incentives
Target KiwiSaver incentives
  • Reduced fiscal cost (and extent of government dis-saving)
  • Likely to reduce uptake of KiwiSaver
Remove ongoing KiwiSaver incentives
  • Could increase national saving through significant reduction in fiscal cost
  • Likely to reduce household saving
Targeted tax incentives (eg, EET)
  • Reduced tax rates on some long-term savings
  • Reduces efficiency of the tax system
  • High fiscal cost
  • Likely to make the tax system less progressive
  • May result in “switching” toward tax-preferred savings forms rather than increase in level of savings

Questions

  • Should the Government be subsidising household saving?
  • If so, what would be the most effective way to do this?

Notes

  • [24]Attanasio, O., Banks, J., Wakefield, M. (2007) Encouraging Savings through Tax-Preferred Accounts; Attanasio, O. and Banks, J. and Wakefield, M. (2004) Effectiveness of tax incentives to boost (retirement) saving: Theoretical motivation and empirical evidence.
  • [25]Employers used to be reimbursed for proportion of their compulsory contributions through the Employer Tax Credit at a cost to the Government of $37.5 million in 2007-2008 and $206 million in 2008-2009.
  • [26]Colmar Brunton (2010) KiwiSaver evaluation: Survey of individuals
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