Post-budget the Government looks set to continue tinkering with KiwiSaver. In addition to the recent removal of the $1,000 kick-start, Bill English said last Friday morning on Radio NZ that the government is keen to make KiwiSaver compulsory for all workers. Stating, “We’re … keen on this, what we call mass auto-enrolment, and that is auto-enrolling everyone who’s not in the scheme, so that they then have the opportunity to opt out. With the kick-start payment no longer in place, that’s much cheaper than it used to be.” He continued on to say they will look at this over the next “six to twelve months.”
Is this compulsion by stealth?
The latest proposed move opens up the debate of incentives vs. compulsion and which is a better way to encourage savings.
However this may just be an academic debate with respect to KiwiSaver because the only Government or tax incentive left now is the Member Tax Credit (MTC) of up to $521 p.a., which was cut in half from $1,042 in 2012.
This tax incentive from the Government may not be as generous as it seems for people earning more than the median wage.
For example, if you earn $50,000 gross p.a. and are contributing 3% the tax taken from your employer’s contributions ($1,500 x 17.5% = $263) and the marginal income tax you pay on your contributions ($1,500 x 31.45% = $472) will outweigh the Member Tax Credits ($521 p.a.) that you receive back.
While KiwiSaver remains sensible for the individual for many reasons, in particular the employer contributions, there seems to be the potential for the Government to collect more revenue in aggregate than it is paying out via the MTC’s.
A much stronger incentive to encourage saving would be for the Government to allow people to deduct their KiwiSaver contributions (up to a maximum) from their annual income for tax purposes. This is how retirement savings plans operate in Australia, US, UK and Canada and, if used here, would certainly serve as a stronger incentive to encourage long-term savings because people would then have a tax incentive to save more than just 3% of their earnings.
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