Source: Radio New Zealand
RNZ / REECE BAKER
A 25-year-old earning an average income could end up about $90,000 better off over the course of their working life if reforms suggested by the OECD for the retirement savings system were implemented.
But not everyone is convinced it’s the right way forward.
The OECD’s latest economic survey for New Zealand said New Zealand’s tax treatment of financial savings was unusual.
When New Zealanders save for retirement, their contributions are made from taxed income and their investment returns are taxed, but the eventual withdrawal is not. This is referred to as a tax-tax-exempt, or TTE system.
Australia and Turkey are the only other OECD countries that operate this way, and Australia has tax incentives to encourage saving.
The OECD said almost all other countries use a system where returns are exempt, and sometimes tax the withdrawal.
This can mean better outcomes because untaxed returns are able to compound.
“New Zealand’s TTE taxation of retirement savings significantly suppressed long-term wealth accumulation relative to expenditure tax benchmarks such as EET,” the OECD report said.
The report said, as part of overall reform of New Zealand’s capital and savings income taxation regime, the government should shift the burden of taxation of pension savings from contributions and returns towards withdrawals.
The Retirement Commission said higher-income earners would be the most significantly affected by tax concessions under the EET system. “The value of exempting contributions and fund earnings rises sharply with income and investment returns.”
That was something the OECD noted – it said higher-income people hold 50 percent of all the assets in KiwiSaver.
“A quid pro quo would be to means test their access to public pensions based on the extra revenue they accrue from higher KiwiSaver balances due to the pensions savings returns tax reform. Confining means testing to the top income decile would also help minimise the private pension savings disincentive effects, although these appear to be tiny when tax changes are made inside an autoenrolment scheme like KiwiSaver.”
The commission said there was little evidence that the concessions would increase overall saving and instead were likely to incentivises saving that would have happened anyway.
“Many people have saved under a TTE regime with the expectation that withdrawals will be tax free. Taxing those withdrawals would amount to excessive taxation, while exempting them would require complex grandfathering and parallel systems.”
Shamubeel Eaqub, chief economist at KiwiSaver provider Simplicity, calculated the changes could mean about $90,000 extra in today’s dollars at retirement for a 25-year-old earning an average income.
“The political fight is about who that $90,000 of efficiency gain accrues to, versus who pays for it now.”
Kirk Hope, chief executive of the Financial Services Council, which represents KiwiSaver providers, said the report was a useful contribution.
“Anything that helps Kiwis save more for retirement is worth looking at. Reducing the tax people pay while their savings are growing could help build stronger balances over time.
“But the detail matters. Changes could affect savers, employers, future retirees and the Government’s books, so they need to be carefully thought through.
“Retirement is a long-term plan, so people need confidence that the rules are clear and stable.”
Koura founder Rupert Carlyon said the suggestions made perfect sense.
“I think what they’re actually recommending is a move to the UK-based model which is you tax on the way out versus the way in. In the UK how it works is that you let people contribute pre-tax income and then tax withdrawals. Generally people like it because they withdraw less, they’ve got a lower income in retirement so they end up saving and moving to a lower tax bracket at that point in time.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand