Proposed changes to KiwiSaver by the Tax Working Group would redistribute wealth by boosting savings for low and middle income earners while reducing that of higher earners.
But it would do so in an overly-complicated way which could have unintended consequences, experts say.
Sir Michael Cullen's Tax Working Group revealed a proposal to apply a capital gains tax to shares which would mean investments in New Zealand and Australian shares by KiwiSaver would be taxed on an accrual basis.
But to balance that out it has recommended that savers be compensated by one or more of four options; a refund of the tax on the employer's KiwiSaver contribution for those earning under $48k and a claw-back for those earning up to $70k, an increase in the member tax credit and a reduction of the investment tax paid by those on the lowest rates.
Taking both into account KiwiSaver provider Simplicity has worked out those earning $40k and investing in a growth fund would stand to gain about $109k extra in their pot at retirement over a life-time of saving while those earning $70k would be down under $1k and those on $100k would be down $13,536.
The same calculations for investment in a balanced fund would mean all three income groups benefitted from the changes.
Sam Stubbs, Simplicity managing director, said the proposals were clearly aimed at redistributing wealth - giving more to the poor and taking away from the rich.
"This is highly advantageous for people earning under $40k and saving in KiwiSaver."
But he said the proposed way of doing it was highly complicated.
"Why not do it with a simple tax rate change?" he questioned.
Susan St John, an economist and co-director of the Retirement Policy and Research Centre at Auckland University, cautioned against tinkering with retirement savings policies to solve problems caused by introducing a capital gains tax.
She said the changes could have unintended consequences and not enough had to been done to analyse the distributional or gender effects of the proposals.
"The Tax Working Group (TWG) has acknowledged that the introduction of a capital gains tax on shares will have a negative effect on the savings of low income people in KiwiSaver.
"This has led the TWG to require complicated policy changes to provide compensation. This is one of the many reasons to doubt the wisdom of a CGT that includes shares," St John said.
She said refunding the employer contribution tax could be unworkable as one employer may not know about other wage income.
"It has been suggested that the IRD provides a refund after the end of the year when gross income is known.
"But what if some income is from self-employment or capital sources? How could an abatement possibly work? "
St John said the tax reduction on the investor rate posed the biggest problem in her view as it would only apply to investments in KiwiSaver portfolio investment entities (PIEs) not PIE funds outside of Kiwisaver.
"One obvious problem is that to constrain the lower PIE rates to KiwiSaver alone would mean that people would potentially have two PIE rates.
"There would be inevitable pressure to extend the favourable treatment to all PIE schemes which would be very expensive and compound the inequity between PIE and non-PIE saving."
St John was also critical of a proposal for the government to pay the member tax credit while a person was on parental leave, despite how much they contributed, saying it would encourage people to put no money in themselves and would only benefit a selective group.
Martin Hawes, a financial adviser who chairs the Summer KiwiSaver investment committee, said a low income couple who saved in KiwiSaver and were expecting a baby potentially had the most to gain from the proposals.
"The overall thrust of what they are proposing is that wealthy people will pay a bit more tax. But what they are doing is going to be quite complicated."
Hawes said as KiwiSaver was opened up to over 65 year olds the proposed changes could also incentivise people to invest in KiwiSaver rather than other managed funds.
"It may mean people put a lot of money into KiwiSaver."
But he doubted the changes would be enough to encourage a low income earner to join KiwiSaver - something the Labour party has been keen on doing.
"We are a low wage economy. It will shift the dial a little bit - those who are in and contributing will be saving more. But I don't see it as enough of an increase to get people to lift contributions from 3 per cent to 8 per cent or sign up."
Hawes said it was the $1000 kick-start which was the big hook to get people in before it was removed and he urged the government to bring it back.
"It think it would pick up quite a lot of extra people if you bring back the $1000."
The government is expected to respond to the proposals in April.
KiwiSaver's proposed changes
• Tax capital gains on New Zealand and Australian shares on an accrual basis
• Refunding the employer's superannuation contribution tax (ESCT) for KiwiSaver members earning up to $48,000 per annum. This would be clawed back for members who earn between $48k and $70k.
• Increasing the member tax credit from $0.50 per $1 of contribution to $0.75 per $1 of contribution up to the cap of $1042 a year meaning a member could get a maximum of $781.5.
• Paying the member tax credit to those on paid parental leave even if they don't contribute.
• Reducing the lower portfolio investment entity (PIE) rates for KiwiSaver funds (current lower rates are 10.5 per cent and 17.5 per cent) by five percentage points each.