Kiwiblog

Stuff reports:

KiwiSaver has been only “modestly successful” at getting poorer people to save for their retirement, a new Treasury report says, warning that the scheme “may in fact reduce national savings”.

The working paper on the initial impact of the scheme on retirement savings argues that, because of the subsidies going to those who would have adequately saved anyway, the government may be paying out $13,000 a year for every person at whom KiwiSaver is aimed.

That does not surprise me. Those better off and already saving are the ones most likely to take advantage of 2:1 and 3:1 subsidies for saving.

The Treasury report said as many as 93 per cent of those in KiwiSaver were outside the target group, so the vast majority of the public cost of the savings scheme leaked away from those who may be poor in retirement.

A brave Labour Party would perhaps say we do not believe in middle class welfare where huge tax subsidies go to those who don’t need it, and we’ll restrict savings subsidies to low income NZers only.

The other part of Labour’s policy is to make KiwiSaver compulsory and lift the employer contribution from 3% to 7%. This is dumb for two reasons.

First of all it removes all flexibility and choice for employees. They may wish to pay their mortgage off rather than pay into KiwiSaver. National’s policy opts then in, but allows them to opt out. Labour will remove any choice from the employee. They may wish to save to start their own business, but Labour knows best and will force them into a default KiwiSaver fund – one which incidentally has the fund fees chew up close to 50% of the income in the first few years.

The decision to lift the employer contribution to 7% flies in the face of their campaign for higher wages, and helping struggling families. Most Labour MPs have never been in business, but let me explain how things work. Employers factor in the total cost of labour when they make hiring and pricing decisions. For example in my business I don’t just work out my labour cost as someone’s hourly rate. I add on 8% for holiday pay, 2% for ACC levy, 2% for KiwiSaver costs. So if someone is on $25 an hour the cost to the employer is really $28.10. One might factor in public holidays and sick leave also.

Now if you lift the employer contribution to 7%, it will mean that pay rises in future will be smaller, because otherwise the total cost of labour gets inflationary. Anyone who thinks this won’t happen, is not an employer I suggest. So what Labour’s policy will mean is that over the next few years employees will earn up to 4% less than otherwise would be the case. No, not every employee, but on average. So this is in fact a policy to reduce wages.

The other impact of their policy will be on jobs. You put up the cost of labour, and there are less jobs. Well in this dimension anyway.

UPDATE: Labour admit their policy will lower wages:

We recognise that the 0.5 per cent annual increase in the employer contribution could be taken into account as part of wage negotiations.

So Labour are officially campaigning for lower wages.

Bill English has just announced that when the Government returns to surplus (in 2014/15), they will run an automatic KiwiSaver enrolment campaign for employees. This will apply in the same way as when you get a new job – you can opt out within a month.

The estimated cost (based on 55% of those auto-enrolled staying enrolled) is $550 million over four years. They will not do the auto-enrolment before the return to surplus as this would mean the Government is borrowing to pay for the savings subsidy, which mean overall national savings do not increase – you just increase private savings and public debt.

English has said National will not make KiwiSaver compulsory as some peeple prefer to save for retirement in other ways.

Vernon Small reports in Stuff:

MPs’ generous superannuation schemes will not be cut, despite Government plans to slash the subsidies paid to KiwiSaver accounts. …

Since 1992, MPs have been entitled to a subsidy of up to 20 per cent of their salary, receiving $2.50 for every dollar they put in. Those elected before 1992 receive a subsidy equal to 23 per cent of their gross salary.

Asked why taxpayers should subsidise MPs up to 20 per cent when he was winding back KiwiSaver subsidies, Mr English said they were different schemes.

“The MPs’ scheme has been wound down over the last 20 years to something that is pretty similar to what everyone has available to them. In fact, I think a number of MPs are probably members of KiwiSaver.”

There is a vital fact missing from this article. The Remuneration Authority operates on a “total remuneration” basis and the value of that 20% superannuation subsidy is effectively deducted from their salary. If the subsidy increases 5%, then their salary drops around 5%. If the subsidy is decreased, then the salary increases.

Personally I would just pay MPs the full remuneration for their jobs (which would see their pay increase 20%) and leave it up to them to decide whether they put some of it into a savings scheme or not.

The Dom Post editorial:

The $10 billion deficit for the first nine months of this year confirms, if confirmation was needed, that the last government made bad choices. At a time of plenty it chose to buy popularity rather than to save and invest for the future. Worse still, it created an expectation that the bounty would continue to flow in bad times as well as good.

Yep. Labour thought that the economy would never go into recession, ignoring that the tradeable sector had in fact been in recession since 2004/5.

It cannot – a point Prime Minister John Key and his ministers have been trying to get across in advance of next week’s Budget. New Zealand has to get back to living within its means. There are a number of obvious targets for a government looking for what Finance Minister Bill English has quaintly termed the “nice-to-haves”. They include the extension of welfare to families with incomes far in excess of the average wage, interest free student loans and the 65-year age of entitlement for superannuation.

I support increasing the age of eligibility for superannuation. It will happen one day also. But any increase would have to be signalled a good decade or so in advance, so don’t think any change to the age will help get the books back into surplus in this decade. Lifting the future age of retirement is important for the long-term sustainability of superannuation, but again that is a different issue to the shorter-term fiscal challenge.

Instead, Mr Key’s Government is taking aim at the KiwiSaver scheme introduced by its predecessor to tackle New Zealand’s chronically low savings rate.

Under the scheme, people who agree to set aside a percentage of their income for their retirement receive a one-off Government grant of $1000 and tax credits worth up to $1040 a year. The scheme has proved remarkably attractive. It now has almost 1.7 million members. However, Mr Key has classified it among the “nice-to-haves” and is signalling that the annual Government contribution will be reduced, probably halved.

He and his finance minister appear to believe the public will not be deterred by the change. If so, they are graduates of the same University of Spin and Hope as their Labour predecessors, who believed that scrapping interest on student loans would not increase the take-up rate. New Zealanders are not stupid. The year before loans were made interest free, 53 per cent of eligible students borrowed from the Government. By 2009 – the last year for which figures are available – that figure had increased to 71 per cent.

KiwiSaver membership involves sacrifices. Contributing the amount required to secure the maximum Government contribution means many members have to make choices between other “nice-to-haves” and even some essentials. However, they calculate that, together with employer contributions, the Government top-up makes the sacrifice worthwhile. Reduce the top-up and many will review their participation.

For most employees, they will still be getting a massive subsidy. Someone on $28,000 will still get around $2.50 into their KiwiSaver account for every $1 they put in. That’s a 150% return on investment compared to 10% most funds deliver. I doubt too many people will dump KiwiSaver becuase their return on investment is 150% instead of 200%.

Those who get most hard done by the Government’s changes are self-employed like me. As I pay both my employer and employee contribution, then I’ll personally be quite a bit worse off by the Government’s proposed changes. But I had been saving plenty anyway, prior to KiwiSaver, so to some degree the KiwiSaver subsidies were just a way to maximise my return. And the Government should be focusing its scarce tax dollars on those who most need it, not people like me.

The Government has a choice. It can encourage the current generation of workers to save more, or it can pander to the “grey” vote by maintaining the pretence that superannuation for all at age 65 is affordable when it is patently not. It cannot do both.

It has made the easy choice, not the right one.

The reality is the age does need to increase, but not until around 2025 by my calculations.

John key’s speech is here. Key points:

• WFF, interest free loans and KiwiSaver costing $5b a year, and why we now have a structural deficit, and all has to be borrowed from overseas
• All changes will take place after election, so there is a mandate for them
• KiwiSaver will be changed so that over time employees and employers contribute more, and the Government less
• KS changes will lead to an improvement in the rate of national savings and reduce foreign debt by 2% of GDP over the decade
• Will reduce amount spent on WFF, but target a greater proportion at the most vulnerable families
• For every $100 of student loans, taxpayers get only $55 back
• Half of the overdue student debt is students living overseas – will make sure they live up to their responsibilities

The exact details will be in the budget. To me it looks like a good step in the right direction.

I like KiwiSaver, as it provides an incentive for people to save. In fact you have to be very very poor or very very stupid not to go into KiwiSaver as you effectively get a 200% subsidy for the first $30,000 of income you earn. For every dollar you put in, the employer puts in one dollar and the Government one dollar.

The Government is signalling that the Government contribution may be removed or reduced. This is not entirely surprising as when Labour established KiwiSaver there was huge surpluses. KiwiSaver was set up to reduce that surplus.

Today the Government is borrowing $300 million a week. Borrowing money to save money has never been a sustainable strategy, so the changes are not unexpected – especially as there is doubt if KiwiSaver has increased overall savings.

What I would love to see going forward is a co-ordinated approach and policy around retirement savings – looking at public superannuation, workplace superannuation and other private superannuation schemes.

How much of someone’s retirement income should be funded by public super, and how much by KiwiSaver or other private savings?

The Herald reports:

Labour leader Phil Goff said yesterday that KiwiSaver – which workers can opt out of – had been a great success, but had had little impact on overall net savings.

Well then, how can you claim it was a great success? Was that not the entire purpose of KiwiSaver?

This was what many people said at the time – KiwiSaver will not increase overall savings – it will just lead to people moving them into KiwiSaver due to the subsidies.

“We absolutely have to increase our savings as a country. If we want to own our own future we’ve got to have the money to invest,” he told TV3′s The Nation.

“We’re looking to have a universal KiwiSaver programme. Now how we do that, the details of how we do that we’re still working through.”

So because KiwiSaver has failed to increase the overall savings rate of the nation, we will make it compulsory?

Here’s what will over time impact the savings rate – lowering the tax rates on earning and investing, and increasing the tax rate on consumption – the very stuff just done by the Government but opposed by Labour.

The Herald approves of mooted KiwiSaver changes:

Commerce Minister Simon Power deserves praise for his decision to fast-track tougher reporting requirements for all KiwiSaver providers.

Not so David Ireland, the chairman of superannuation industry body Workplace Savings, who described the move as a “knee-jerk reaction”.

Like some other near-sighted individuals in the funds management industry, Mr Ireland seems to be struggling to come to terms with the idea that investors’ interests must come first.

When the subject is the integrity of KiwiSaver, which holds the investments of 1.3 million New Zealanders, there is every reason to move quickly to plug any gaps in regulation.

What scares me is the poll showing around half of KiwiSaver investors think their fund is government guaranteed.

The Dominion Post wants the public service reined in further:

The public service is a dollar-devouring behemoth that has thwarted many attempts to rein it in.

Prime Minister John Key will need to do better than he has so far, if he is going to succeed in slipping on the halter. It is vital that he does. …

Now the Government is treading so carefully it risks making no progress. Mr Key, through a spokeswoman, has denied there is any proposal that might be described as “radical reform”. Instead, all indications are of a process that smacks of the ad hoc, and of being driven by fear of public reaction as much as by any coherent strategy.

That is not good enough. Despite improvements in government finances, the Treasury is still forecasting deficits will continue to 2016. Finance Minister Bill English rightly wants the focus to remain on getting out of deficit as quickly as possible.

Once we are out of deficit, then we get far more palatable choices. We get to decide whether surpluses are spent on reducing debt, cutting taxes or increasing spending. But until we get back into surplus, it is all fairly unpalatable.

The Press looks at the progress in Iraq:

With so much attention focused on the violence in Afghanistan, there is a risk of downplaying significant events in Iraq, notably its recent election.

The result of this election, in terms of the shape of the coalition which will govern the nation, is likely to take weeks or even months of deal-making.

But the manner in which the election was conducted is one of the most positive developments in Iraq since the United States and its “coalition of the willing” allies toppled Saddam Hussein in 2003. US President Barack Obama could ultimately be proved correct when he declared that the election was an important milestone in Iraq’s history.

The most notable feature of the election was the turnout which defied many observers’ expectations by reaching 62 per cent. This figure might not seem high by New Zealand standards, but it is worth reflecting that it is comparable to the most recent US election.

In a decade or so, Iraq may be doing relatively well.

And the ODT commemorates International Women’s Day:

New Zealand has much to be proud of in its gender equality record, and with the marking on Monday this week of International Women’s Day, there is cause for celebration.

In the most recent Global Gender Gap Report of the Geneva-based non-profit World Economic Forum, New Zealand is ranked fifth out of 134 countries in an index that assesses countries on how well they are dividing their resources and opportunities among their male and female populations – regardless of the overall levels of these resources and opportunities. …

But not so good:

In New Zealand, one in five women will be subjected to violence in their lifetime, compared to one in 20 men.”

I had lunch yesterday with three of my staff at Curia. Two of them are at university and one has just graduated.

Over lunch we got onto KiwiSaver, and all three of them started talking about which KiwiSaver Fund they are with, how much they have earned, what the rate of return has been, and how they aim to use it to help get their first house mortgage.

Now one can debate KiwiSaver at the macroeconomic level – about whether there should be employer subsidies and Government subsidies.

But what struck me, was the difference it has made at an individual level. I can’t imagine before KiwiSaver, three young women (who still have massive student debt) would be talking about their investments, who is getting the best rate of return etc. Developing that culture of savings and investment literacy at an early age is possibly KiwiSaver’s greatest claim to fame.

The Herald reports:

The number of New Zealanders saving regularly has dropped in the past four years despite more than a quarter of adults joining KiwiSaver.

A Retirement Commission survey carried out in March and April has found that only 49 per cent of adults aged 18 and over are now saving regularly, down from 53 per cent in the commission’s first survey in 2005.

Although 29 per cent have joined KiwiSaver, this has been partly offset by declines from 23 per cent to 18 per cent in the numbers in personal superannuation schemes, and from 16 per cent to 14 per cent for those in workplace super schemes.

This is what some predicted may happen – KiwiSaver seems to be just changing the way people save, but not increasing the number of people who save.

David Parker manages both with this press release.

The National Government has given its clearest signal yet that superannuation entitlements will be cut in the future, Labour Associate Finance spokesman David Parker says.

Fearmonger No 1

A reminder. John Key has said he will resign his seat in Parliament if he cuts superannuation entitlements. But not even that will stop Labour trying to prey on the insecurity of retired or near retired persons.

“The pensions of tomorrow need to be protected today. National said before and during the election they would continue with payments to the Super Fund, but have now resiled from this.”

And if Parker reads the announcement from Michael Cullen, when the Fund was established, he will see that Cullen explicitly said that contributions are funded out of surpluses and would be suspended temporarily when there is no surplus.

Not even Dr Cullen was foolish enough to advocate borrowing money to save money.

“Mr English argues that he’s not prepared to borrow to fund the investment in the Super Fund, but he’s already done that to pay for his tax cuts – an astounding third of which go to the top three per cent of income earners,” David Parker says.

Then we have the lie – the claimed borrowing for tax cuts. The extra tax cuts by National were fully paid for by reduced expeniture on KiwiSaver. This is a fact. Parker knows this. He just hopes if you repeat a lie enough times, people will believe it.

“Those tax cuts were not just unfair, but they are a substantial cause of the structural deficit New Zealand now faces and are behind the Government’s plan to now cut investment in the Super Fund.

And he lies again. National’s tax cuts are considerably less foregone revenue that the reduction in KiwSaver subsidisies. The structural deficit would be worse, not better, if National tax cuts and KiwiSaver changes had not been made. This is indisputable. The quantum of each is known and the foregone revenue from tax cuts is les than the reduction in KiwiSaver subsidies.

Everytime you hear Labour talk about borrowing for tax cuts – they are lying. They are desperate to have people beleive it, but it is not true, as National reduced expenditure by a greater amount than the tax cuts to pay for it.

If Labour were honest they would campaign on how National reduced KiwiSaver subsidies for tax cuts, and debate the merits of that. Of course they don’t want to, as anyone economically literate now concedes the KiwiSaver subsidies were far too generous.

Superannuation expert Michael Littlewood has five proposals for the Government:

1. Review the need for the New Zealand Superannuation Fund
2. Change the NZSF’s investment strategy
3. Stop pre-funding the ACC’s liabilities
4. Remove the rest of KiwiSaver tax breaks
5. Fix the income tax system

I very much agree on (1). We are now borrowing every dollar we invest in the fund. At a minimum contributions should be suspended.

In (2) Littlewood proposes that there be no minimum proportion to be invested in NZ (as National proposed) but instead it should be directed to “invest in new businesses or in the growth of existing businesses that, for example, have export potential.”

I disagree with both National, and Michael. I want the NZ Super Fund Trustees to focus on just one thing – maximising returns over the long term. This fund is designed to help fund future Superannuation.

If there is a desire to have the Government invest in businesses to help with job growth (I am not convinced), then that should be done from a seperate fund – maybe through NZ T&E.

Also not sure I agree on (3) but open to persuasion. I don’t think we should move to full funding of liabilities too quickly, but it is a desirable end goal. Partly because it would also allow private sector to compete fairly also.

On (4) I agree. The employer contributions provide enough of an incentive to go into KiwiSaver – an effective 1:1 subsidy.

And totally agree on (5) that the tax system needs a total overhaul.

I blogged on Monday my thoughts on the fiscal crisis, and talked about the stupidity of borrowing money now, as a means of saving for the future.

Michael Littlewood has sent me a response to my post, which I’m delighted to publish. Michael is an expert on superannuation policy and is with the Retirement Policy and Research Centre of Auckland University.

My initials comments are shown in italics and quoted below, and Michael’s comments in normal text below them. My thanks to Michael for his contribution:

The Cullen Fund

The Cullen Fund was based on a premise that as we are going to have surpluses for the next 30 years, then we should save some of those surpluses to meet the future cost of superannuation, so we won’t have to borrow money in the future.

The fatal flaw was always the assumption about surpluses

Not the only flaw – there were at least three others: one that New Zealand in 2020 onwards could not afford to pay for NZS from tomorrow’s economy (there is no evidence of that, despite the ageing population); that somehow, partial pre-funding was better for the economy than the previous PAYG approach; finally that having higher taxes now (to create today’s surplus) was cost-free. This all evidences the previous government’s cookie jar approach to financial management. In fact the Cullen Fund does not change the cost of NZS by $1 but, as has now been demonstrated, can add significantly to New Zealand’s financial risks. And, if I wanted to appoint an investment manager to look after part of my future retirement savings, the government would be last on my list of contenders mostly because no Chinese wall can ever insulate the Guardians from the political process.

but as the years went on and they continued unabated, the opposition to the Fund diminished, and even National signed up to it

Only because it was one of those memorable “dead rats” they had to swallow. Bill English said that you have lost the argument on this kind of policy if you have to explain it. Somehow, New Zealand has to grow up so that we can sensibly discuss this kind of thing.

But we are now in a very different situation. We have a structural deficit, and face massive borrowing for at least a decade.

So the Cullen Fund is now based on borrowing heaps of money today, so we do not have to borrow heaps of money in 25 years? Anyone else see the fatal flaw? Borrowing money to save money is the sort of stuff that caused the credit crisis.

Yes, I agree that leveraging the Crown’s balance sheet to invest in financial markets is a silly idea. But increasing taxes to do the same thing (and creating apparently costless ‘surpluses’) is only marginally less silly.

The Government should seriously consider suspending contributions to the Cullen Fund. We can’t save money we do not have.

And we should also seriously discuss consider selling the Cullen Fund’s investments, even in today’s market. If it makes sense to stop contributions then it makes just as much sense to sell. Not selling in the face of increasing debt is similar to borrowing to invest.

KiwiSaver

KiwiSaver has much the same problem as the Cullen Fund. It is all well and good to help subsidise people’s savings

There is no credible international evidence to support the notion that tax subsidies increase saving. Your statement assumes that, in good times, subsidies are a good thing. They aren’t – tax subsidies to saving are complex, regressive, expensive but, worst of all, seemingly don’t work – based on the best evidence available.

but not if the taxpayer is having to borrow money to do so

No, having to borrow to pay for the subsidies is just a worse idea than having the subsidies in the first place – the need to borrow to pay for them should call their wisdom into question more dramatically.

Because who is going to have to pay back and pay the interest on all that borrowing?

The same argument applies to the higher taxes needed to create the ‘surpluses’ that paid for the incentives in the first place. The counterfactual should be no incentives/lower taxes. Apart from anything else, you ignore the deadweight costs of higher taxes to pay for the incentives.

Those same savers

No, all taxpayers, some of whom are savers.

So once again we have the stupidity of borrowing money today, to help people save. That is not sustainable.

So is having everyone, including the poor who can’t afford to save, paying higher taxes to feed richer citizens’ retirement savings.

I like KiwiSaver

see below

If we were going to continue with record surpluses, it would be great to have a scheme which provides massive incentives for people to save

especially if they don’t actually increase saving (as opposed to savings)?].

But we don’t. Does anyone think Labour would in 2009 have announced the KiwiSaver subsidies they did in 2007? Of course not.

National has wisely already cut the cost of taxpayer subsidies to KiwiSaver. Arguably they need to go further and also look at whether the employee subsidy is affordable. If we need to borrow to find it, then it isn’t.

And what about the tax incentives through the PIE tax regime? That should be up for debate as well.

You see the employer matching contribution is a 1:1 subsidy already, which is massive

but not cost-free to employees. All employees, including the poor who can’t afford to join KS, will help pay for that through lower future pay rises.

Hell most people are happy to get a 10% return on investment and the employer contribution gets you an instant 100% return

Actually no because the 100% is spread over the life to age 65 – you can’t get the money until then.

Now the employee subsidy gets you a further 100% return

No, for the same reason.

so those earning up to $52,000 get a 2:1 subsidy or a 200% return on investment.

Unless the fiscal fortune improves, maybe the employee subisdy has to go also. Sure that means only a 100% return instead of a 200% return, but that is a lot better than the standard 10% return and I doubt it would discourage people going into KiwiSaver. Maybe raise the employer contribution rate to a maximum 3% so the total saved isn’t decreased.

A bad idea for the reasons already given.

We need, as a country, to discuss the retirement saving issue. We never had a proper discussion about these sorts of things in the nine years of the last government. What about the evidence that, before KiwiSaver, most New Zealanders were saving ‘enough’ or ‘more than enough’ for retirement? If you want to see some of the evidence, here is a sample from www.PensionReforms.com – you can see more by sorting the abstracts by New Zealand as the country:

New Zealand’s taxpayers will be spending a lot of public money on new retirement income saving initiatives after nearly 20 years of spending none. Was this decision based on sound analysis of data on New Zealanders’ savings behaviour? Is this policy shift likely to meet any of the stated objectives? Probably not.

Changes to the way retirement incomes are financed should be based on good evidence that is subjected to robust investigation over time. New Zealand missed those steps with its new KiwiSaver scheme, justifying its existence on seemingly dubious economic analysis.

For the last 20 years, New Zealand has had a two-pillar retirement income system – an elegant, universal, PAYG state pension plus voluntary saving. There have been no tax incentives or compulsion for the second pillar of private provision. So, how have New Zealanders responded? Apparently, mostly quite rationally. So what’s the problem?

Strongly negative household ‘saving’ might tell us something about the behaviour of New Zealanders but not whether they are saving for retirement, let alone saving enough. A ‘stocks’ measure of wealth is much more useful than the ‘flows’ of income and spending. more

And here is a report that shows how the existing retired are faring – the answer is “quite well thank you very much”:

The living standards of different types of households cannot be adequately measured without asking the people affected how they are managing and how they perceive their living conditions. That must be done in a systematic way. A new measure allows living standards to be compared across groups and over time. more

I do not favour the government rushing to change things (as it has done with KiwiSaver III). I do favour a full-scale, research based debate on all the things that should matter when we talk about financial preparation for retirement. And the objective of this process must be nothing short of consensus – on the evidence, on the things that matter and on the appropriate public policy settings. Anything less than consensus will sow the seeds for future policy uncertainty. We have had far too much of that over the last nine years.

The set of economic forecasts inherited from Labour were bad enough reading last week. But then on Friday, I noticed that Finance Minister Bill English said that the economy is already nearly at Treasury’s worst-case scenario.

So how bad is the now likely worst case scenario:

• Unemployment peaks at 7.5% in mid 2010
• Economy contracts in year to March 2010 as well as March 2009
• OBEGAL deficits of $32 billion from 2009 to 2013 – averaging greater than $8 billion a year
• Gross debt to increase from $35 billion to $82 billion over four years – a $47 billion increase
• Net debt to increase from $6 billion to $54 billion
• Gross debt as % of GDP to go from under 20% to 39% in four years, and to 76% by 2023

This is a worse outlook than Labour left National in 1990. And you can’t even compare to the 1999 PREFU which was:

• Operating Balances growing to almost $2.5 billion
• net debt falling from 22% to 18%
• Economic growth of over 3% a year
• Unemployment to reduce from 7% to 5.7% over two years

Cullen was left with a wonderful set of projections.

So the next few years are going to be a disaster in fiscal terms. So who is at fault? Well of course the main responsibility is the global credit crisis – that goes without saying. But why are our fiscal fortunes so fragile, than a crisis such as this fucks our economy for the next decade or more? Let’s look at some of the possible culprits.

National’s tax cuts

If anyone blames the deficits and debts on National’s tax cuts, then they are incompetent or lying. The tax cuts were 99% funded from changes to KiwiSaver, and other expenditure savings. They have no impact on the deficit or debt.

In fact National’s tax cuts are (in hindsight) an even better idea than when first mooted? Why? Because they contribute towards a total fiscal stimulus package of 5% of GDP – this is one of the largest in the OECD and may help soften the recession.

But even better, the tax cuts are not funded from cutting current spending (which would detract from the stimulus) but by reducing subsidies into KiwiSaver which would lock the money up for decades.

We’ll come back to the issue of KiwiSaver.

Labour’s tax cuts

So how about Labour’s tax cuts? Is all this fiscal doom and gloom because Labour finally gave in and delivered tax cuts? Well it is certainly true that Dr Cullen has indicated he would have not cut taxes to the extent he did, based on PREFU’s numbers. And many people suspect Labour, if re-elected, would have cancelled some or all of their tax cuts.

The cost of Labour’s tax cuts over four years is $10.8 billion. So yes, if Labour did not cut taxes at all in their nine years of office, then the fiscal situation would be slightly better. Of course taxpayers would be worse off, but who cares about them!

But compare that $10.8 billion to OBEGAL deficits of over $30 billion and an increase in debt of almost $50 billion.  If Labour had not delivered tax cuts (and had not spent the money saved – a big if), it would have somewhat improved the fiscal outlook, but left households worse off, and made the recession worse.

Labour’s tax cuts were equivalent to a one off $3.3 reduction in taxation – the only personal tax reduction in nine years, where taxation went from $32 billion to $57 billion.  It is probably the most modest tax reduction program in the western world.

Labour’s Spending

What has really left us with a massive problem, isn’t Labour finally doing a $3.3 billion annual tax cut, but the massive increases in annual expenditure.

Expenditure has increased from $34 billion per year to $57 billion. That is a $23 billion hike – or seven times as great as the belated tax cuts.

Now of course some of this is necessary increases – even Sir Roger advocates you should increase spending in line with inflation and population growth. But off memory that is still $18 billion a year in extra spending.

And this is the problem Labour has left us. They massively increased spending in non-essential areas, on the assumption that we would have record growth and surpluses forever. They didn’t just keep funding and improving existing programmes (schools, hospitals) but they invented new schemes. Now these schemes were arguably good things – but they were funded based on an assumption of growth and surpluses. And together they combine to remove flexibility from future Governments.

Let us look, at just three of them:

The Cullen Fund

The Cullen Fund was based on a premise that as we are going to have surpluses for the next 30 years, then we should save some of those surpluses to meet the future cost of superannuation, so we won’t have to borrow money in the future.

The fatal flaw was always the assumption about surpluses, but as the years went on and they continued unabated, the opposition to the Fund diminished, and even National signed up to it.

But we are now in a very different situation. We have a structural deficit, and face massive borrowing for at least a decade.

So the Cullen Fund is now based on borrowing heaps of money today, so we do not have to borrow heaps of money in 25 years? Anyone else see the fatal flaw? Borrowing money to save money is the sort of stuff that cuased the credit crisis.

The Government should seriously consider suspending contributions to the Cullen Fund. We can’t save money we do not have.

KiwiSaver

KiwiSaver has much the same problem as the Cullen Fund. It is all well and good to help subsidise people’s savings, but not if the taxpayer is having to borrow money to do so.

Because who is going to have to pay back and pay the interest on all that borrowing? Those same savers. So once again we have the stupidity of borrowing money today, to help people save. That is not sustainable.

I like KiwiSaver. If we were going to continue with record surpluses, it would be great to have a scheme which provides massive incentives for people to save. But we don’t. Does anyone think Labour would in 2009 have announced the KiwiSaver subsidies they did in 2007? Of course not.

National has wisely already cut the cost of taxpayer subsidies to KiwiSaver. Arguably they need to go further and also look at whether the employee subsidy is affordable. If we need to borrow to find it, then it isn’t.

You see the employer matching contribution is a 1:1 subsidy already, which is massive. Hell most people are happy to get a 10% return on investment and the employer contribution gets you an instant 100% return. Now the employee subsidy gets you a further 100% return, so those earning up to $52,000 get a 2:1 subsidy or a 200% return on investment.

Unless the fiscal fortune improves, maybe the employee subisdy has to go also. Sure that means only a 100% return instead of a 200% return, but that is a lot better than the standard 10% return and I doubt it would discourage people going into KiwiSaver. Maybe raise the employer contribution rate to a maximum 3% so the total saved isn’t decreased.

Working for Families

This is another major spending commitment that falls into the category of unaffordable with hindsight. Basically whenever Labour had spare cash they hoovered it up into this targeted welfare assistance programme. And now taxpayers are going to have to borrow billions of dollars to fund this programme.

Unlike the other two programmes though, this one can’t be easily reformed. Families have grown used to having the extra cash, and in the midst of a recession, it would be quite wrong to take the money off them.

But what does need to be done, is some medium-term work on a better tax and welfare system that has less tax churn.

In no particular order.

The Herald Editorial compares the parties:

There has been a striking contrast in the response of the two main parties to the disturbing news that after 14 years of budget surpluses the Treasury now calculates the public accounts are set for a decade of deficits. …

Finance Minister Michael Cullen merely congratulated himself again on having saved previous surpluses for a “rainy day” and looked forward to the problems it would cause for National’s intended tax cuts.

There was evidently nothing he thought necessary to change, either in his own programme of reluctant tax cuts that started this month or in the Government’s spending programmes that might have seemed affordable in better times. If Labour’s “rainy day” could last 10 years, as the Treasury forecasts, Dr Cullen and his colleagues seemed strangely relaxed about it.

In other words Labour has no plan at all.

The fiscal crisis is indeed the first real test of the mettle of leader John Key and his team and it is rare that voters get such a measure before an election.

National could have taken the easy option of confirming its previously indicated tax cuts, offering no specific savings in public expenditure and pretending that tax cuts would actually cure the deficit in quick time. Conservative parties are prone to that belief.

Instead, National has faced the need to balance its tax cuts with specified savings, notably the removal of business tax breaks on research and development and employer contributions to KiwiSaver. The wisdom of reducing the incentives to save is questionable but the courage is not.

And National is willing to take the hard decisions, and not pretend that the decade of deficits is acceptable.

Paula Oliver in NZ Herald:

National has risked alienating people who have embraced KiwiSaver, as the party goes into the election with a tax-cut package that would leave more money in the pockets of most earners – but takes away two business tax breaks to pay for it.

Mary Holm says the changes improve KiwiSaver:

The National Party’s proposed changes to KiwiSaver would considerably reduce two of the biggest gripes about the scheme – that some people can’t afford it and that it ties up savings. …

The contributions of anyone earning less than $52,150 would be tripled by employer and government input. And that means three times bigger retirement savings. …

The reduction of the minimum employee contribution from 4 per cent to 2 per cent of pay means it would be easier to afford KiwiSaver, especially after taking tax cuts into account.

John Armstrong says it is a bit of a fizzer:

The door banged shut in Labour’s face following Monday’s mind-numbingly pessimistic economic forecasts. Labour can thank National’s underwhelming tax package for reopening it at least slightly.

Colin Espiner reports on a snap poll:

A snap poll for The Press yesterday showed National may have pitched the package about right.

The poll of 212 people by Futurescape Global found 43% felt the tax cuts matched their expectations, with 34% feeling it fell short. A slim majority of those polled felt the country could afford National’s package, but people were split over whether they were confident in National’s ability to manage the economic crisis, while 55% said the tax package had not altered their vote. The poll has a margin of error of 6.7%.

Brian Fallow sees a shortage of growth:

National claims its tax package will stimulate the economy in the short term and improve incentives and drive growth in the longer term.

The first claim is plausible, the second not so much.

Reducing the top tax rate faster will be better for growth long term, but quite simply the money was no longer there.

James Weir in the Dom Post surveys business opinion:

Business New Zealand also disagreed “pretty seriously” with the decision to drop R&D tax credits but said the planned tax cuts and target to cut personal tax rates to 33 per cent over time rated a “seven out of 10″ score overall.

The Press editorial is positive:

Even if tax cuts were not on the agenda, there is a case to argue that the levels set for KiwiSaver were too ambitious from the start. As it stands, some young people entering the scheme and earning the average wage throughout their working lives could end up earning more in retirement, when their National Super entitlements were added to their KiwiSaver earnings, than they did in their lifetime.

Yep, and that is daft. The 4%/4% KiwiSaver forced people on the average wage to save too much, taking money they need during their working life.

Clark has said this election will be one of trust. If this is so, then the question for voters will be who do you trust in the turbulent world we now face? With these tax cuts, and with some detail of its longer-term economic plans, National has placed its cards on the table. It has produced figures to show that its plans are fiscally responsible. Voters must decide whether Key and his colleagues can be trusted to deliver on them, or whether Labour can be trusted to manage difficult times as well as good ones.

Will Labour produce a plan? Or is Labour saying it will run a decade of deficits and not make any changes to tax rates or spending?

Tracy Watkins blogs:

A year ago, Key might have risked over promising and under delivering on those amounts.

But that was a vastly different world..

The failure to deliver more may peel off some soft support among those who were leaning toward National but, because of Working for Families, will not be a whole lot better off.

But the rest will probably agree with Key that it’s a package that’s right for the times.

So is it enough? You’d have to say yes.

And finally NZPA reports that least surprising news of all – that unions and political rivals don’t like it. Some get their facts wrong:

United Future leader Peter Dunne, who is minister of revenue, said it was complicated and would be difficult to administer.

“Superannuitants and low income earners are the big losers,” he said.

Bzzt. Wrong. By 2011 superannuitant couples will get $15 a fortnight more.

A birdie pointed this out to me. These are all quotes from the CTU’s submission on KiwiSaver

A key issue is the minimum worker contribution rate. We have previously submitted that there should be a 2% entry point in addition to 4% and 8%.

However, 2% is better than no contribution. Also a 2% deduction may be a better point of entry for new savers to establish a savings habit. The major concern is that thousands of workers will either opt out or not opt in to a KiwiSaver scheme because the minimum employee contribution rate is too high.

So what could possibly be the objection to a lower entry rate of 2%? If it is a concern that 2% from a worker (even with tax credits and employer contributions) will not deliver an adequate lump sum (or annuity) for retirement, then surely a lower than desirable balance is better than no balance.

Union officials are reporting that there is quite a lot of resistance among low income workers to join at a minimum of 4% of gross salary (which of course is more than 4% of take-home pay).

The fact is that there are now significant publicly funded benefits to belonging to a KiwiSaver scheme. In addition, the voluntary action of joining triggers employer contributions of up to 4%. It is therefore extremely unfair to set the bar too high at 4% minimum contribution and we urge the Committee to recommend a 2% option.

In this case, I am happy to agree with the CTU! Of course they do go on to say they would rather have a scheme where the employers pays 9% and employees 2% or something, but this will mean that low income workers who were funding KiwiSaver thorugh their taxes will now have a greater ability to go into it, and receive the generous 2:1 subsidies that apply to everyone earning up to $52,000 a year.

I really like the changes to KiwiSaver – it keeps the good parts of the scheme, makes it easier for low income employees to particpate, gets rid of much of the paperwork, reduces the overall cost to taxpayers (making it more sustainable in the long term) yet still has huge incentives to save.

I suggest people read the full policy paper.

• Retain automatic enrolment of new employees, with the right to opt out.
• Retain automatic deductions from a member’s wages or salary
• Retain $1,000 ‘kick-start’ payment when people first join KiwiSaver
• Retain the member tax credit, paid by the government into KiwiSaver accounts, which matches members’ contributions up to a maximum of $1,040
• Retain compulsory matching employer contributions – but only for 2%, not 4%
• Retain employer contributions exempted from employer superannuation contribution tax (ESCT)
• Retain annual fee subsidy and the first home deposit subsidy
• Still spend $800 million a year on KiwiSaver
• Lower the minimum contribution rate from 4% to 2%, recognising how difficult it is for some people to put in 4%. Employees can still choose to put in 4% or 8%.
• Lower the compulsory employer contribution to 2% also, to match. Employers can choose to put in more than that but 2% is the requirement.
• Abolish the employer tax credit. Thank God for that – every employer in the land hates it – the paperwork creates more problems than the value of the credit. It makes it impossible to easily budget for staff costs also. The lower compulsory contribution matched with the abolishment of the tax credit means the overall impact on en employer with an employee on $52,000 is fiscally neutral – and no more paperwork!
• Allow employers to pay staff who do not go into KiwiSaver more, but make it illegal to reduce someone’s pay if they choose to go in.
• An employee on $50,000 will only have to contribute $1,000 a year to KiwiSaver and will get a total of $3,000 into their KiwiSaver account – a 200% subsidy. Previously they would put in $2,000 a year and get a total of $5,000 which is only a 150% subsidy. Either way it still represents a huge subsidy and you’re mad not to go into KiwiSaver.

There are also some bribes goodies on the wider superannuation issue:

• Keep floor for National Super at 66% (under Labour is meant to revert to 65% again next year)
• The tax cuts will see a couple on National Super getting $15 a week more in 2011 due to the link to the average after tax wage.
• Lift the partner’s abatement threshold for Super from $80 a week to $100 a week

The Herald reports:

A National government would introduce tax cuts for average wage earners of around $47 a week by 2011, party leader John Key said today.

Details yet to come. This includes the tax cuts we got last week.

UPDATE:

1. A tax rate of 12.5% on income to $14,000
2. 21% on income from $14,000 to $48,000 (moves to $50,000 in 2010 and rate drops to 20% in 2011)
3. 33% for income from $48,000 to $70,000
4. 38% for income from $70,000 (dropping to 37% in 2010)

Around 80% of taxpayers will pay a top marginal rate of no more than 20%. Hence secondary tax rates will shift to 20% for most.

Also a Independent Earner rebate of $10 to $15 a week for people not getting a benefit, Working for Families, or NZ Super, who earn between $24,000 and $40,000.

The long-term ambition is a top tax rate of 33%, but this will depend on economic conditions improving.

KiwiSaver

National is going to change Kiwi Saver from a 4% employer/4% employee scheme. It is going to make it 2% employer/2% employee and if conditions permit then lift that to 3% employer/3% employee. Note these are just the statutory minimums – employees can still put in more than 2% and employers can agree to higher contributions also.

The current KiwiSaver scheme (which I have often blogged support for) was set too high at 4%/4%. It was soaking up money needed today. As proof it was set too high, consider this. A 25 year old today on the average wage who went into KiwiSaver would have a higher income when they retire (including NZ Super) than they would have had during their working life (on the average wage). Now it is just nuts to have people earning more in retirement than they did while working. The 2%/2% scheme still has the incentive for the employee, but 4%/4% is part of what led to the projection decade of deficits.

Overall Package

The overall package announced by National isn’t just fiscally neutral – it is in fact fiscally positive by $283 million over three years. A small first step towards ending the projected decade of deficits.

But the bigger picture is growing the economy to pull out of deficit. $283 million won’t do it by itself. Putting more money into people’s pockets, rather than forcing it into super schemes that are currently losing money, will help. And moving to a flatter tax rate at the top end will also help economic growth in the long run.

National is also pulling back on its infrastructure package from $4.5 billion over six years to $3.7 billion over six years. That combined with stuff such as cancelling the MFAt expensaion plans will see debt tracking no higher than the status quo.

National have responded to the economic and financial crisis with a credible package that takes account of world events and a plan for economic growth. What is Labour’s response? Are they really saying that they don’t need to change anything from what they announced six months ago? Surely not. Labour need to reveals its policies and plans – if they have one.

Vernon Small in the Dom Post speculates that National is planning some changes to KiwiSaver help fund its tax cuts. That is an interesting possibility, and let us look at the possible changes.

Over time the major benefit to the KiwiSaver saver is the 4% employer contribution. That is a 100% subsidy for your 4% contribution. I believe it is that compulsory contribution plus the opt out nature of it for new employees which is driving the growth in the scheme. Now neither of these cost the taxpayer any money (they cost business) so I don’t expect changes there.

The three major costs for the taxpayer are:

1. The $1,000 initial contribution
2. The $20 a week employee subsidy
3. The $20 a week employer subsidy

With regards to (1) I don’t see much sense in changing that as 750,000 have already claimed it, and it is a one off expense – quite minor as things go. Same goes for the potential contribution to a mortgage.

No (2) is a fair bit of money – up to $1,000 a year per employee. If one took that away, then you could have a fair few people upset as they only decided to go into KiwiSaver due to that subsidy. On the other hand it is arguable that the matching employer contribution still makes KiwiSaver incredibly attractive to anyone who can afford the 4%. If one got rid of it the argument would be you are losing $1,000 a year from your future savings in order to have more money now when times are tight. It is a debate you can win, but not without risk.

What would be most appealing for me, is a change to (3). You see if you got rid of the employer subsidy it wouldn’t affect a single employee. They would still get their 4% from the employer and their $1,000 from the Government.

But it would remove that subsidy from employers? Wouldn’t that be terribly unpopular with employers and unfair to business owners? Well maybe, but maybe not. Consider these reasons for getting rid of it:

1. Compliance costs – the employer subsidy is a bureaucratic nightmare. Accountants and employers hate it, and getting rid of it would save them hassle, and also free up some IRD staff.
2. It is only a part subsidy anyway, and will probably never increase. Once employers are putting in the full 4%, the employer subsidy of $20 a week will on average cover less than half of this and sure as hell will not be inflation adjusted.
3. It actually makes life hard for employers to calculate total cost of an employee. For example I have a formula where I add on to an employee’s salary 8% holiday pay, 4% to cover sick leave, 2% to cover ACC and now also need to cover KiwiSaver. It would be easier for me to have KiwiSaver cost as a flat 4% rather than being 4% less $20 a week if they earn over $500 a week. The total cost of an employee is a vital piece of information for budgeting and costing jobs. The employer subsidy makes this a lot harder.
4. Most employers will use the extra 1% a year subsidy for KiwiSaver (until it reaches 4%) as a factor in pay rates for new employees, and hence may not personally end up paying significantly more.

Now what do the different components cost. Well according to Treasury by 2011/12:

1. The $1,000 kickstart – hard to find but not significant
2. Employee tax credit – $661 million
3. Employer tax credit – $674 million

So if one scrapped the employer tax credit, that would free up in the medium term $700 million a year. And as the takeup has been so much higher than forecast, it might even be that getting rid of the employer tax credit could give an extra $1 billion a year compared to keeping it.

Please note I have no idea what National’s KiwiSaver policy is. This is my speculation on what would seem an intelligent move to me. And personally as an employer I would rather never ever hear about the employer tax credit again!

08wire has a transcript of the audio recording of Bill English. It is copied below:

ENGLISH: The basic point is… We spend a lot of time on this. The basic dynamics of it are… you look at it from the punters point of view – they’re saying they don’t like the government, and Clark, they took all this frickin’ tax off me and they spend billions of it, and it went on What’s Up badges and websites and bullshit

NATIONAL DUDE: Yeah

ENGLISH: They got a bit fat.

NATIONAL DUDE: Yeah.

ENGLISH: And all our work tells us they’re pretty keen to keeping the bit they’ve got. And we call them Labour-plus voters – and they’re sitting there thinking “that nice man Mr Key is pretty smart – he’ll get me a bit more.” They’re not saying “that nice man Mr Key will take something off me” – they’re saying “he’ll give me a bit more”.

And the reality is if we had been the government with the surpluses they had, we would have had something, like working for families, but not the same. We would have given them quite a bit of cash back. And what happens is – you go in there to try and change it, frankly Don and co got a bit carried away, cos they didn’t understand it. If you give people money then, it is very hard, there’s a set of inevitable problems. It’s like physics, right. If you push something up its gonna drop. If you give people cash, you have high marginal tax rates. OK, that’s it. You can’t get round that. Don thought he could but he couldn’t. So did John, actually – but you can’t. So the only – the raw choice is: fix the problems; or take money off them. And there’s no way you can fix the problems without taking money off them. So we’re sitting here saying the punters are keen to keep it. They’re facing a recession. The last thing we want is to spend the whole election campaign with families of four on TV saying “Mr Key’s taking money off us”. You can’t do that.

NATIONAL DUDE: Yeah.

ENGLISH: So later on we’re gonna have to have a bit of a sort out. Yeah, we’re gonna do something, but we can’t do it now.

NATIONAL DUDE: What about selling Kiwibank?

ENGLISH: And actually, we just have one guy with a spreadsheet. And it’s bloody complicated.

NATIONAL DUDE: I’m sure you’ve Lockwood Smith’s spreadsheet…

ENGLISH: Oh yeah yeah, it is.

NATIONAL DUDE: What about getting rid of Kiwibank, I mean…

ENGLISH: Well, eventually, but not now. Well, its working. A lot of our supporters get a bit antsy about it, but its working. It’s like a lot of things…

The Working for Families aspect is very interesting. People forget National actually introduced child tax credits and the like. Labour gave it a slogan, and extended it.  So it is quite unremarkable that Bill says National would have done something like WFF, but not the same. I expect it would have been like the 96 and 98 packages where National both cut taxes and put money into family support/child tax credits. It has been the lack of balance from Labour which has been the problem.

The comment on high marginal tax and abatement rates are the same comments I made last week – it is a very challenging trade off.

The full Kiwibank quote is revealing also, because it has Bill saying Kiwibank is working, that there is no need to change anything despite supporters being antsy. That is pretty obviously saying nothing will happen against the policy – just a desire for the future.

This will of course be messy, as any taped conversation is where an MPs personal opinions differ from a party’s position. A tape recording of what Michael Cullen really thinks of tax cuts would be fun. But does that mean a party will break its election promises? Nope – both Labour and National did that in the 80s and 1990, and have been scarred by the experience since. No one wants to be a one term Government.

I fully expect National in Government will look at Working for Families (in fact I strongly urged them to do so) and also ownership of certain assets. And if they come up with a good case for change, will include them in their manifesto for the 2011 election.

Michael Littlewood has kindly e-mailed me a response to my comments on KiwiSaver. Michael is an expert on superannuation policy and is co-director of the retirement policy and research centre at Auckland University. He has been on almost every expert taskforce there has been on superannuation.

DF:And this law change will make it illegal to pay them more money if they do not go into KiwiSaver.

ML:I think the argument is rather to give KiwiSaver members smaller future pay increases to allow for the cost to the employer of KiwiSaver. The outcome may be the same but there is a different emphasis.

DF: So this is the head of the Unite union agreeing the the EMA Northern that the scheme dsicriminates agaianst the poor, young and old!

ML: McCarten is not completely accurate. The young do get the kick start and also the favourable tax treatment afforded by the PIE tax status of most schemes. However, they don’t get the member tax credit and the employer isn’t obliged to contribute. For the old, yes the employer doesn’t have to pay but the member tax credit continues for some (those who haven’t completed five years). However, all of this wouldn’t matter if the employer could pay members and non-members for the job they are doing, not based on whether employees joined KiwiSaver or not.

DF: Exactly. The overall costs to the employer should be the same.

ML: Non-members (who as McCarten and Thompson acknowledge will tend to be the young and the poor) will miss out in three potential ways – first, there is the direct difference in total remuneration that is the subject of this blog. Secondly, employers that are forced to pay more to members will compensate with lower future pay rises to all. That means both members and non-members will all get less but members will have the compensation of the employer’s contributions and the tax breaks that non-members won’t get. Thirdly, the non-members will, along with everyone else, be paying higher taxes to pay for the cost of KiwiSaver but won’t be getting their share of the taxpayers’ handouts.

DF: It is becoming close to de facto compulsory and I suspect it will become compulsory at some stage.

ML: But compulsion doesn’t magically make things “fair”. If young, poor employees can’t afford the 48 cents an hour now, how does forcing them to pay the 48 cents an hour suddenly make it affordable? It may remove some of the current inequity only because there will be no difference between different groups of employees. And then what about the other unfairnesses of a compulsory KiwiSaver? Will non-employees be forced to pay as well? (Not many countries with compulsion do that for good reasons). If not, their taxes will be higher to pay for the employees’ KiwiSaver. Then there will be the inequity between the old (whose taxes will be higher to pay for KiwiSaver) and younger taxpayers. And what about children who can join KiwiSaver now? (Why that should be so is probably best explained as a legislative accident).

DF: I support KiwiSaver partly because it is an effective privatisation.

ML: But only if you accept that KiwiSaver leads inevitably to an Australian style income/asset test on New Zealand Superannuation. If you really want to know why that’s a bad idea, you need to understand how the Australian system works and why it is that the incomes of most Australian financial planners are dependent, in part, on developing ways to avoid both tests.]

DF: And McCarten is right that it will inevitably lead to a move away from the current universal publicly funded superannuation scheme. A 25 year old today will earn more money in retirement from KiwiSaver and NZ Super than they will during their working life. That is nuts, and inevitably public superannuation will be made less generous as more and more people have KiwiSaver.

ML: think the more likely outcome will be a scaling back of the KiwiSaver incentives. We don’t yet know what National really thinks of KiwiSaver II. If the long term policy drift is back down towards a KiwiSaver I, the alarm about the impact on the future New Zealand Superannuation benefit might be lessened. However, I agree that future governments cannot really sustain both in their present shape.]

DF: Indeed. Employers should be able to offer a total remuneraton package where if an employees chooses not to go into KiwiSaver, the employer can pay them extra cash.

ML: The shame of it all is that, before KiwiSaver I or II, the best evidence we have is that most New Zealanders were saving enough for retirement – see here, here, here and here for examples. My fondest hope is that a new government might wish to adopt the radical notion of evidence-based policy making. Regrettably, there hasn’t been too much of that from either Labour or National in the last 11 years (since the second Todd Task Force in 1997

Thanks to Michael for his comments.

Matt McCarten looks at the fight over the proposed law change to ban total remuneration packages from including the employer contribution to KiwiSaver:

My union, Unite, represents thousands of minimal-waged workers and few have joined despite a $1000 start-up from the Government and up to $20 a week tax credit.

That’s because someone on the minimum wage would have to contribute 48 cents an hour which they can’t afford when food and petrol prices are soaring.

And this law change will make it illegal to pay them more money if they do not go into KiwiSaver.

I think Thompson is genuinely outraged that KiwiSaver discriminates on age. Workers under 18 and over 65 don’t get the scheme’s subsidies. Mallard claims that as youth rates have been abolished and as older workers are entitled to Government superannuation that somehow makes it acceptable. Well it’s not. It’s clearly discriminatory and unfair.

So this is the head of the Unite union agreeing the the EMA Northern that the scheme dsicriminates agaianst the poor, young and old!

It is an outrage that young workers and older workers who pay their taxes are not allowed to join a scheme their colleagues can. Thompson’s view, which has some merit, is that the workers who aren’t entitled or can’t afford to join KiwiSaver don’t get the subsidy and therefore, effectively, an employer is paying some workers a higher benefit than others.

Exactly. The overall costs to the employer should be the same.

The only way the scheme would be fair was if it was compulsory for all employees so any contribution by employers would be paid to everybody.

It is becoming close to de facto compulsory and I suspect it will become compulsory at some stage.

If KiwiSaver became widespread it would inevitably lead to the weakening and abolition of universal superannuation.

KiwiSaver is privatisation of superannuation by stealth. The poor and those unable to take up employment will miss out and will end up with some state-funded pauper’s pension.

I support KiwiSaver partly because it is an effective privatisation. And McCarten is right that it will inevitably lead to a move away from the current universal publicly funded superannuation scheme. A 25 year old today will earn more money in retirement from KiwiSaver and NZ Super than they will during their working life. That is nuts, and inevitably public superannuation will be made less generous as more and more people have KiwiSaver.

I accept that the Government and trade unions don’t trust employers not to use their compulsory contribution as leverage in contract negotiations. But it seems better-off workers can receive a taxpayer subsidy as well as their employer’s subsidy while their poorer colleagues get nothing.

Indeed. Employers should be able to offer a total remuneraton package where if an employees chooses not to go into KiwiSaver, the employer can pay them extra cash.

A fascinating story by NZPA in the Herald:

Inland Revenue canned a KiwiSaver brochure because of fears it would be used for electioneering, despite at the time saying it was pulled for commercial reasons.

This came after Mike Williams endorsed the suggestion of a Labour NZ Council member to use IRD brochures to electioneer.

Mr English said the IRD should come clean and release the scrapped brochure.

Yes they should.

And also of note:

Solicitor-General David Collins, QC, told MPs that advice and legal action concerning the act had created a significant workload for the Crown Law Office.

This was due to departments taking a cautious approach and seeking advice on the law and whether they would be breaching it.

The office was also involved in two court cases, and another was to begin shortly. Dr Collins said he was also aware of a number of other upcoming legal actions.

But Mr Dr Collins, your Minister of Justice said the law of common sense would apply!

Justice Minister Annette King was also quizzed about why the Electoral Commission was taking so long to respond to a request for rulings on whether material breached the legislation.

Ms King said the commission was an independent body and questions should be put to it.

She said there had been a request for more funding but as far as she was aware the commission had adequate resources.

An IRD spokesman said that it was its job to keep people informed about their obligations and their entitlements.

This is crap. It is outraegous the Government has not given the Electoral Commission more funding. Even if it was a sensible law, the EFA gives considerable extra workload to the Electoral Commission (which was basically just a CEO, a Comms person and someone who answers the phone) which would necessitate extra resource for them. Add on the murkiness of the EFA (which the Commission CEO publicly warned about) and it is somewhat scandalous the Government has refused extra funding.

Back to the IRD:

“We had originally planned for a KiwiSaver information leaflet to go to all households but given the high uptake of KiwiSaver we decided earlier that it did not need to go so widely.”

Well yes as every worker is opted in when they change jobs, and as pretty much every employer gives employees info on KiwiSaver, there would be little need for a pamphlet to every household. I wonder who suggested there should be?

The forced release of substance of National’s KiwiSaver policy is a mess. It comes at a time when Labour have got some momentum from the budget, and National needs to be error free.

I said a few weeks ago that I no longer think Labour can win the election, but that National can still lose it. That still holds true in my opinion. Now this episode by itself is not an election loser, but timing is everything in politics. If the TV stations are polling this week (and they probably are based on their normal cycles) then it may not National back a wee bit, and then you get stories about how the race is back on, and that continues to give Labour the momentum they badly need.

One can only feel some sympathy for Kate Wilkinson, even if tempered with some annoyance. Some MPs are known to be prone to speaking before thinking, but Kate isn’t one of them. It was an uncharacteristic mistake, but it really shows the importance of being very very guarded with speculation on policy – especially when Trevor Mallard is in the room! Trevor hasn’t looked this happy since he biffed Tau

The somewhat ironic thing is that it is a no brainer that eventually National would announce it would keep compulsory employer contributions to KiwiSaver. regardless of whether one approves of the policy, you can’t change it once 600,000 people have made investment decisions based on it. If you were going to not keep the contributions, you would have to have said so almost immediately so that people signing up would be aware that a change in Government would lead to no compulsory employer contribution.

National could have come out and said this at an earlier stage. But it presumably is looking at having some minor differences, and wanted to release a full policy on a timetable of its making. There are in fact two related but different issues with regards to the employer contribution. The first is whether it will be compulsory, and at what rate. The second is what subsidy the Government will pay employers as partial compensation.

John Armstrong makes a fair point:

The more obvious it appears that National is heading into Government and the longer it holds out on clarifying its stance on major policy matters, the more not-so-experienced MPs like Wilkinson are going to come under pressure at such meetings to spell out what the party would do differently.

Vernon Small also makes a similiar point:

But in “clarifying” her blunder National has announced what amounted to a $2 billion spending commitment over four years to a policy which is proving very popular – with 600,000 already signed up – and rather than doing it at a time of their choosing they have been forced to scramble out an announcement as a political save.

I guess that’s what happens in a policy vacuum;  there are just too many things you can’t say and too many things you might say.

To be fair, the budget was only a couple of working days ago, and there is a lot of work to be done on having a balanced alternative budget. So I suspect we will see a focus on policies with relatively minor costs (policy rather than spending) in the immediate future, and then some more of the bigger costing items once the sums are done.