KEY POINTS:
What has happened to the policy-making process in New Zealand? The facade of consultation hides the arbitrary decision-making power of the executive. Either major decisions are made without consultation, such as the student loans and Working for Families announcements pre-election, or consultation is sought, but not on the
options finally adopted.
The latest shock is the KiwiSaver legislation, which makes a mockery of the consultation process.
The Select Committee heard countless submissions on this major initiative and the accompanying tax bill which addresses the taxation of superannuation schemes.
But when the KiwiSaver legislation was reported back into the House it contained a major shift of principle that had not been previously signalled, and some other changes that either had not been discussed or that the Select Committee specifically rejected.
The most critical change made matching employer contributions to KiwiSaver tax-free. It was obvious that this would be the thin end of the wedge. Exactly as would be predicted, we learn that similar tax privileges are now to be extended to all employer superannuation schemes.
While these schemes must also lock in saving until 65, there is no tax recoverable on the final payout, whether as a pension or a lump sum. There is little time for analysis of this move as the start date is July 2007.
So, right before Christmas when it is less likely to be noticed, one of the defining features of the New Zealand system of saving for retirement has been unilaterally abandoned.
We had a great story to tell the rest of the world about how to take a rational approach to saving for retirement. Provide a good basic floor with a universal state pension and let people supplement that as they see fit without bias to any particular products.
Oh yes, housing is tax-advantaged and that has been a problem, but the way to deal with that is not by making everything else tax-advantaged too.
The slippery slope we have embarked on will markedly erode the tax base. The hard-won reforms that earned New Zealand international recognition have been tossed aside as if they were a careless trifle.
It was in another cynical move just before Christmas 1987 that Roger Douglas announced major tax changes including the removal of all tax incentives for retirement savings. Shock waves reverberated throughout the financial community yet, once over the shock, the policy made perfect sense.
The critical contrast to this week's announcement was that the tax reforms for the treatment of saving were based on a proper analysis. Treasury had found tax incentives hugely favoured the better off, not only because the better off are on higher tax rates but also because they save the most anyway.
Tax incentives made little sense because they encouraged shifts from non-tax favoured saving into tax-favoured saving with scant evidence that saving actually improved overall. They noted the large hidden cost to the Government in tax forgone, that either reduced public saving or forced average taxes to be higher.
Treasury was also adamant that tax-favoured savings vehicles diverted scarce capital into inappropriate investments at the cost of reducing economic growth.
Does Treasury now feel that its analysis in the 1980s was wrong? Where is the distributional analysis of the tax incentives just announced? How is remuneration policy going to be affected if there is a tax advantage for employer contributions but not for those made by employees?
How are other expenditures going to be affected, such as Family Support payments for those who "salary sacrifice" by diverting part of their remuneration to the employer contribution? Did anyone think of that?
Are managed funds really the best way for New Zealand to utilise their scarce savings? Is the tax-free nature of the final payout from superannuation schemes now under threat?
Until we see some evidence that this policy is supported by the appropriate rigorous analysis to prove its worth, we can but surmise that political compromises are now more important than principle. As the old song goes, you don't know what you got 'til it's gone.
* Dr Susan St John is co-director of the Retirement Policy and Research Centre, Business School, University of Auckland.
