This article was published on 1 May 2007. Some information may be out of date.

Think again about those KiwiSaver tax breaks

Many readers were no doubt pleased to hear of Winston Peters’ recent hints that the May 17 Budget will include tax breaks in the KiwiSaver retirement savings scheme. But only some will benefit — and it will be at the expense of others, and the country as a whole.

Firstly, let’s look at whether Peter’s hints are likely to be correct.

Here’s what he said on TVNZ’s Agenda programme: “Some of the good news in the Budget is that there will be a greater savings drive and incentivisation.”

If there’s no substance to that, Peters is going to look pretty silly.

So how can I be sure that the Budget announcements will harm some people, and New Zealand in general?

Not everyone will join KiwiSaver, even with tax incentives. And one large group who won’t join are those who can’t afford it.

Also, Peters said the incentives would benefit the “great bulk of wage and salary earners who opt to be smart about this”. That suggests that the self employed and those who aren’t employed — while eligible to join KiwiSaver — may be excluded from the tax break.

It seems likely, then, that many of our poorest citizens and many who run businesses that contribute to employment and economic growth will be left out.

What’s more, the money that the Government will no longer receive because of the tax breaks has to come from either:

  • tax increases or the cancellation of tax cuts, which would benefit a wider range of people, or
  • government surpluses, which could otherwise have been used on programmes that benefit everyone — such as crime reduction.

A further worry is that, of those eligible for a tax break, the rich may well benefit most.

This depends on how the break is structured. One rumour is that we’ll get an across-the-board tax cut, of say $10 a week, for every worker who puts that money in their KiwiSaver account.

If something like that happens, all eligible people will be treated equally.

If, however, workers deduct from their taxable income all or part of the money they put into KiwiSaver, those on higher incomes will gain more.

Consider Joe, who makes $30,000 and is in the 21 per cent tax bracket. If he contributes $1,000 to KiwiSaver, and deducts that from his taxable income, he saves $210.

Meanwhile, Joanne, who makes $70,000, is in the 38 per cent tax bracket. She also contributes $1,000 and deducts that from her taxable income. She saves $380 — more than 80 per cent more.

If both are in KiwiSaver for decades, that difference will have a huge impact on their total savings.

Indeed, other countries with similar tax deductions have found that higher income people are the big winners.

And we haven’t even started on the distortions that tax incentives can cause — which I wrote about in this column six weeks ago.

To summarise that point: There are all sorts of ways people use excess money to improve their wealth, including repaying debt, getting an education, and starting or running a business.

For many people, these moves are wiser than saving in a managed fund, such as a KiwiSaver scheme. With tax incentives, though, they may opt for KiwiSaver.

Thousands of people, then, will be doing what — in the absence of government interference — is not what’s best for them. That’s not good for an economy.

It’s not too late to change your minds, Government. Winston might be a bit embarrassed, but he’s coped with that before!

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.