NZ Herald 16 March 2019

AI totally agree — to the point where I’ve made the same point in this column before.

Anyone who is still feeling hard done by might want to check out www.globalrichlist.com. You fill in your country — so the calculator can take account of your currency — and type in either your approximate income or wealth. The calculator tells you where you rank in the world’s rich list.

For example, if your income is $50,000, you’re in the top 1.04 per cent of people in the world.

ACould you really go on such a spending spree? I suspect you would worry too much about your future.

The world is made up of savers and spenders. While the ideal life plan, according to economists, is to even up your consumption over your lifetime, spenders are likely to have to cut back in retirement.

Savers have a much better chance of spending equally throughout life. So if you envy your neighbours and workmates now, you could well have the last laugh.

Governments tend to encourage saving, because it’s good for the economy — although the economy would also struggle if too many spenders abruptly stopped spending.

Our government’s big plug for saving in recent years was the introduction of KiwiSaver — which, contrary to what you say, does give people incentives to save. And, as discussed in the next Q&A, the Tax Working Group’s proposed changes to KiwiSaver would improve the scheme for most people.

However, beyond KiwiSaver, if a CGT is introduced it will make rental property and some other investments somewhat less lucrative.

So perhaps you’re right. If the wrong mix of recommendations is adopted, that might discourage some forms of saving. The government should keep that in mind.

By the way:

• I wasn’t the one last week who said “a lot of income for the wealthy gets hidden in various ways”. That was a quote from www.inequality.org.nz. But it’s probably true of the richest tenth of New Zealanders — the people the quote was referring to.
• Some readers might not understand what you mean by “on their house ATM”. It refers to people with revolving credit and similar mortgages, who can reborrow mortgage money they have paid off. Some of these mortgages have loan limits that reduce over time, and I hope lenders include that feature for any borrower who is not using their mortgage responsibly.
• You may be comforted a little by the thought that spenders pay more GST than savers do.

Finally, a suggestion. While splashing out on spending probably wouldn’t work for you, perhaps spend a bit more on fun.

AFirstly, a comment about dividing your savings by 25. That assumes you want to spend the money over 25 years.

But if you retire at 65, I would suggest you do a 20-year plan. By 85, many people say NZ Super is enough. And if you retire at 70, a 15-year plan should work.

Also, note that in the first year you divide your balance by, say, 20, but in the next year it’s 19, then 18 and so on. In the twentieth year you spend the lot — if you want to. In most years you will have an increasing amount to spend, because of returns being earned on your money.

If any tax or other changes affected the size of your savings at retirement, that wouldn’t change the rule of thumb. Your one-twentieth — or whatever — would simply be a bigger or smaller amount.

For more on rules of thumb about retirement spending, see my new book, “Rich Enough? A Laid-back Guide for Every Kiwi”.

But your letter raises another issue — how the Tax Working Group’s proposed changes would affect KiwiSaver.

The TWG recommends introducing a CGT on New Zealand and Australian shares. The current different rules for shares beyond Australasia wouldn’t change. That means returns on every KiwiSaver fund that holds some Australasian shares would be lower.

However, the TWG also made four other recommendations about KiwiSaver, as follows:

• Increase the tax credit from 50 cents per dollar to 75 cents per dollar of contributions. This would raise the maximum tax credit from $521 to $781.50 a year.
• Reduce the tax rates on KiwiSaver for those on lower incomes from 10.5 to 5.5 per cent, and from 17.5 to 12.5 per cent.
• Refund taxes on employer contributions for some members — so that the money goes back into their KiwiSaver accounts. The full tax would be refunded for people earning up to $48,000 per year, and part of the tax would be refunded for those earning $48,000 to $70,000.
• Give members on parental leave the maximum tax credit regardless of their level of contributions.

What would be the effect of all these changes?

The bottom three recommendations — excluding the tax credit increase — “would ensure that, as a group, people earning less than $70,000 per year would have improved KiwiSaver outcomes if the Government adopted the Group’s recommendations for extending capital gains taxation,” says Sir Michael Cullen, the TWG’s chair.

He adds that if all four recommendations are adopted, “KiwiSaver members earning over $70,000 would also, as a group, be better off. While some individual KiwiSavers might not be fully compensated by the Group’s measures, for the most part, KiwiSavers would most definitely be better off.”

KiwiSaver provider Simplicity crunched the numbers for its scheme and came up with similar findings.

People earning $40,000 would be considerably better off. People earning $70,000 would see little difference, as would those on $100,000 in a balanced fund. But people on $100,000 in a growth fund would be a bit worse off.

This assumes providers make no changes to their investments. They might, however, invest more in global shares and less in Australasia, which would improve investors’ outcomes.

Over all, then, the TWG package would boost most KiwiSaver members’ retirement savings. The government might not adopt all the recommendations, but I would be really surprised if their final version would make most KiwiSavers worse off.

While we’re on KiwiSaver, Parliament this past week passed the following changes. Unlike the TWG recommendations, these are definitely going to happen:

• From April 1, employees will be able to contribute 6 or 10 per cent of their pay — in addition to the current 3, 4 or 8 per cent.
• Also from April 1, contributions holidays will be renamed “savings suspensions”. And the maximum holiday will change from five years to one year — although you will still be able to renew your holiday each year. Currently, almost 84 per cent of those on a contributions holiday take a five-year break, rather than a shorter one. The hope is that if they have to renew the holiday annually, that will prompt them to start contributing again.
• From July 1, people over 65 will be allowed to join KiwiSaver. Also, people who join after turning 60 will no longer be “locked into” the scheme — unable to withdraw money until five years after they join.

AIt depends on why we want a capital gains tax.

If the aim is to tax people who are really earning an income from their gains — so they pay income tax just like employees and others — a system like that would certainly help. It’s a bit like the bright line test, which taxes people who sell rental properties within five years of buying them.

But if we’re looking at broadening the tax base so that we tax gains quite separately from income, I’m not sure why people who are able to hold an asset for longer should get better treatment than those who hold it for just a few years.

Sure, the gain will usually be bigger over a longer period. But the longer-term holder will pay tax less often.