Readers respond on KiwiSaver tax breaks
Three readers were unhappy with my last column, in which I said the KiwiSaver tax breaks expected in the upcoming Budget will benefit only some people, at the expense of New Zealand as a whole.
Broadly, this is because those who can’t afford KiwiSaver, and possibly also non-employee members of KiwiSaver, will miss out. There are other ways the money could be more evenly distributed.
Also, depending on how they are structured, tax breaks tend to favour the rich over those on middle incomes.
Finally, tax incentives distort people’s financial decisions. They make moves that wouldn’t otherwise be best for them and the country.
Here are the main points made by the three readers:
- KiwiSaver tax breaks would “remove a large amount of money from the economy… in a non-destructive way which does not make New Zealand as a whole (or individuals) poorer.
“Money is removed without increasing our deficit to foreign investors. And the money, by virtue of investment funds, would hopefully make its way back into productive businesses.”
My response: Firstly, some KiwiSaver contributions would have gone into other savings anyway.
More importantly, money that goes into any savings scheme doesn’t stop there. Managers use it to buy shares, bonds, property and so on.
And most of the sellers of those investments will be New Zealanders. The money won’t be removed from the economy, just moved around within it.
True, some of the sellers will be overseas. But that cash flow overseas will roughly replace the current cash flow when people buy imported goods or foreign travel.
The effect you hope for just wouldn’t happen.
- “If the intention of a tax incentive is to ensure that a person benefits from the same dollar contribution regardless of their personal tax level, then the tax deduction approach fairly achieves this.”
The reader quotes my example of Joe, in the 21 per cent tax bracket. If his $1,000 KiwiSaver contribution is tax deductible, he saves $210. Meanwhile, Joanne, in the 39 per cent tax bracket, saves $390 on the same contribution.
“Despite the different tax ‘savings’, the after-tax effect is the same,” says the reader. “They both get $1,000 into their retirement savings account. Joanne should not be penalised relative to Joe because she pays more tax!
“So the tax deduction approach is perfectly ‘fair’ to achieve this end, not ‘unfair’ as you determined.”
My response: I didn’t say the approach was unfair. I just said the rich would benefit most from it. That needs to be acknowledged.
- “There is another option besides tax credits and tax deductions and that is tax deferment.”
When this reader and his wife worked in the US, they invested pre-tax money in retirement savings and paid no tax on returns over the years. “The net result is that we were able to save well over $1 million, and now we are paying the tax,” as they take the money out.
“Postponing taxes seems to me a great ‘carrot’.”
My response: I was in a similar US savings scheme. It’s great for us, isn’t it!
The fact is, though, that the tax you and I didn’t pay is money the US government didn’t get — money that might have supported ghetto families in no position to save for retirement.
While you’re paying tax now, it will amount to much less than what you didn’t pay before.
Any tax incentives for saving — whether deductions, credits or deferment — transfer wealth towards the better off.
In the UK, a study showed that the richest 10 per cent of taxpayers get 50 per cent of the benefit of tax incentives for retirement saving.
Are we headed down a similar road? And under a Labour Government?
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.