Inside Money

Business writer David Chaplin blogs on personal finance

Inside Money: Is National about to kill KiwiSaver?

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Photo / Thinkstock
Photo / Thinkstock

I could live with the removal of the $1,000 KiwiSaver Kickstart payment - I've already got mine - but if, as widely suspected, the government dumps the annual member tax credit (MTC) I'm off for an indefinite holiday.

In fact, as a self-employed person I don't even need to take a holiday, I can simply stop contributing to KiwiSaver and spend more of my miserable income on frivolous consumer items or save instead via flexible investment vehicles that don't require me to lock my money away until I'm 65.

But even those PAYE workers, who will retain the benefit of the 2 per cent tax-free employer KiwiSaver contribution, might be re-reading the holiday clause in the event the MTC gets dumped.

The MTC incentive, which tops out at just under $1,043 per member each year, was an important factor in growing KiwiSaver to its current 1.7 million members, who will have a right to feel betrayed if it is removed.

Effectively, the MTC added another 2 per cent to the savings of a worker on the average wage. It's a remarkably efficient method of incentivising long-term savings that doesn't unduly favour high-income earners (as, say, a tax break on individual contributions would).

And if the government is going to require us to quarantine a proportion of our incomes with private financial institutions until we turn 65, then some kind of incentive is due.

In Australia those incentives take the form of generous tax breaks on both contributions and investment earnings within superannuation schemes. The Australian super incentive system is complex and expensive to administer but has the advantage of not showing up on the government balance sheet as a discrete number - unlike the MTC.

The government budgeted $880 million to cover MTC payments in the 2010/11 financial year, which makes it an easy target for surplus-seekers. As a bonus, by removing the MTC, the government will be able to gain the fiscal high ground without even calling the action what it is - a tax increase.

KiwiSaver, meanwhile, will undoubtedly suffer and could, as one industry player told me, "just become another dead super scheme".

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