Compulsory KiwiSaver 'has its drawbacks'

Photo / The Aucklander

Making KiwiSaver compulsory could boost national savings, the Treasury says, but it raises difficult wellbeing and fairness issues.

In a discussion document intended to set the scene for the deliberations of the newly formed savings working group chaired by Kerry McDonald, the Treasury traverses three areas where policy changes might contribute to the goal of lifting New Zealand's perilously low rate of national savings.

New Zealand's level of international indebtedness puts the country in the same league as the "Pigs" (Portugal, Ireland, Greece and Spain).

"Evidence suggests compulsory schemes generally increase household saving, but not by the full amount of compulsory contributions. Households typically respond by reducing other forms of saving to some extent," it says.

It is not sure how much existing KiwiSaver subsidies, which cost about $1 billion a year, contribute to national saving.

The international evidence tends to suggest such subsidies have a significant effect on how people save, it says, but only a modest effect on how much they save.

Some people might welcome an imposed discipline requiring them to save.

But for some the best saving choice might be repaying a mortgage, investing in a business or farm or acquiring financial assets. Others might be better off by not saving at that point in their lives.

And while compulsory superannuation could be positive for capital markets, it could mean pressure for the Government to provide some form of guarantee.

While many countries, including Australia, have compulsory savings schemes and a means-tested "safety net" pension funded by the state, New Zealand would be unique if it were to introduce compulsory saving atop a state scheme as (nearly) universal and relatively generous as New Zealand Superannuation.

The second broad area traversed is policy changes that would encourage more saving by reducing what people can expect from the state.

"For example New Zealand Superannuation and student loans reduce the need to save in advance for well-known life-cycle events."

Likewise social-welfare benefits and subsidised health services reduce the need for precautionary saving or insurance.

The Government has excluded from the savings working group's purview NZ Superannuation, whose entitlement parameters the Prime Minster has pledged not to touch, and specific welfare and income-support measures, which are the province of another working group, headed by Paula Rebstock.

The savings group is, however, invited to consider the impact of overall fiscal policy.

The Treasury says returning to fiscal surpluses sooner than the projected 2016 would be desirable for several reasons, increased national saving among them.

But it acknowledges that the associated spending cuts might include areas that "add to people's wellbeing or are growth-enhancing".

In the third broad policy area, tax, the Treasury is also sceptical about the impact of tax on how much people save and invest, as opposed to how they do it.

But it suggests areas where tax changes might reduce distortions.

One which it has long advocated, introducing a capital gains tax, has been expressly excluded from the terms of reference.

However it also raises the possibility of inflation indexation, where only real, and not nominal, returns to savings and investment would be taxed.

An alternative suggested by the Henry tax review in Australia would exclude from tax 40 per cent of interest payments, rents and capital gains.

Another is the dual income tax system, which taxes capital income at a low flat rate and labour income at higher progressive rates.

Treasury Secretary John Whitehead stressed that the discussion document is not Government policy, or even Treasury advice. It would be up to the working group to make recommendations and the Government to make decisions.