August 15, 2010

NEW ZEALAND: Government eyes forced savings for old age

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Kiwis could soon be made to save for their old age,
with compulsory savings back on the political agenda.


By VERNON SMALL and MARTIN KAY - Sunday Star Times

AUCKLAND, New Zealand / The Sunday Star Times / August 15, 2010: The government will put compulsory retirement savings on the table as part of a review to boost Kiwis' retirement nest-eggs and reduce New Zealand's dependence on overseas borrowing.  The fate of the Cullen superannuation fund, KiwiSaver and tax breaks for savings – which could halve the tax paid on some bank deposits and other investments – will also be in the mix.

A working group, based on last year's Tax Working Group, is close to being finalised, and ministers plan to use its findings as a centrepiece of next year's Budget, and for the election campaign.  Government sources said PricewaterhouseCoopers tax expert John Shewan would be part of the group, possibly as its chair.

The sources said Victoria University's Bob Buckle, who fronted the tax group, had been approached, but he declined because of pressure of work. Buckle declined to comment, but said there were important issues to be addressed in the area of savings and investment.

John Shewan, Chairman of PricewaterhouseCoopers New Zealand is specialist tax consulting partner.

Shewan said it would be inappropriate to comment on whether he had been asked to participate, although he indicated he was aware the group was being planned.  But he said the issue of whether KiwiSaver should be compulsory would be considered. Nearly half the working age population has already signed up to the scheme.

Government insiders said compulsion was increasingly being raised with ministers, although a 1997 referendum rejected a compulsory savings scheme proposed by NZ First leader Winston Peters.

Other areas for study would include incentives to boost savings, such as tax deductions for contributions, a lower tax rate, or taking inflation into account.

"The argument is if you are earning 6% interest and inflation is running at 2% then you should only be taxed on 4%. That's the argument and it has been around since Adam was a schoolboy," Shewan said. But that was just one of the many issues to be examined. Some funds were already taxed at 28%, so there was already an element of reduced tax for savings.

Finance Minister Bill English declined to comment, but flagged that the government wanted to cut back on the number of policy advisers and make more use of experts such as the Tax Working Group to prepare policy options. That group had helped the government prepare its Budget tax package, including the GST rise to 15% and increased property tax "without causing a public backlash".

If the government does opt to make membership of KiwiSaver compulsory, it is likely to sell it as a boost to the pool of capital available for investment as a way of lowering New Zealand's dependence on overseas lenders.

Strategists are aware such a move could be painted as a backdoor way to replace the state pension with private savings. But they believe Prime Minister John Key's pledge not to change entitlements or the retirement age will prevent fears about the future of superannuation from overshadowing the savings debate.

ATTEMPTS TO BOOST RETIREMENT FUNDING

1975: Labour introduces compulsory retirement savings based on employer and employee contributions with eventual aim of replacing public pensions. National abolishes the scheme in 1977, introducing universal pensions tied to the average wage.

1997: The public rejects a proposal from NZ First leader Winston Peters for a compulsory retirement savings scheme in a referendum, with more than 90% voting no.

2003: The New Zealand Superannuation Fund – dubbed "the Cullen Fund" after Labour Finance Minister Michael Cullen – is set up to help pay a proportion of future pension costs from about 2030. It is today worth more than $15.6 billion, though National has suspended contributions while it runs deficits.

2005: Cullen unveils KiwiSaver, a scheme to encourage retirement savings that requires workers to put in 4% of their salary in return for a $1000 government kickstart.

2008: National winds back the KiwiSaver scheme when it comes to power, cutting minimum contributions to 2%, but it is growing at about 35,000 people a month.

© 2010 Fairfax New Zealand Limited