Click here for an alternative view: KiwiSaver election policies
In ancient Greek democracy citizens gathered in the public square to debate proposals. Any citizen could contribute an idea.
In that spirit, retired lawyer David Schnauer has written a remarkable book, Uncomfortable Economics: Decisions New Zealand Politicians Can No Longer Avoid.
It should be compulsory reading for election candidates.
Schnauer examines why New Zealand has slipped down the international wealth rankings. He identifies the cancellation of Norman Kirk’s superannuation scheme as an important reason.
He makes proposals for improving KiwiSaver that we should be debating.
New Zealand is one of only three OECD countries taxing both retirement savings contributions and investment earnings, and the only one offering no tax relief.
Other countries give savers substantial tax advantages.
KiwiSaver is designed so that the biggest beneficiary is the Government.
Consider the taxation.
Employees contribute from after-tax wages. Employer contributions are also taxed.
Then investment earnings are taxed every year.
Only the final withdrawal is tax-free.
Compare Singapore.
In Singapore, compulsory contributions receive tax relief. Investment earnings and withdrawals are tax-free.
Singapore’s Central Provident Fund had S$689 billion as of June 30, equivalent to more than $900b ($937b). KiwiSaver had around $147.7b as of June 30, according to the latest Morningstar survey.
Singapore’s scheme is older, and contributions are much higher.
Nevertheless, Schnauer demonstrates how taxing contributions and investment earnings substantially reduces the wealth accumulated.
He estimates the Government’s annual tax take associated with compulsory KiwiSaver at around $4b.
That is money that could instead be building the country’s investment capital and New Zealanders’ retirement savings.
I have an example in my family.
Poor health forced a member of my family out of the workforce 10 years ago. He recently told me that, despite leaving his KiwiSaver untouched, the capital had hardly increased.
The investment fund he chose is part of the explanation. But every year the Government has also taxed his investment earnings.
Compound interest is supposed to be the miracle of retirement savings. Taxing the returns year after year diminishes that miracle.
I believe David Seymour is right to have Act campaigning to make KiwiSaver investment earnings tax-free.
Over a working lifetime the difference would be substantial.
The proposal would also benefit retirees.
People over 65 can put savings into KiwiSaver and withdraw them when needed. Making the earnings tax-free would increase the return on their savings.
It might end the sorry spectacle of successive generations of retirees losing billions chasing higher returns.
Critics complain that tax-free KiwiSaver means the higher your income the wealthier KiwiSaver would make you.
What is wrong with making Kiwis wealthy?
Lower-income savers would benefit too.
But Act should go further. Contributions should also be tax-deductible.
This would make saving more affordable, especially for those on modest incomes.
A sufficiently attractive voluntary scheme would make compulsion unnecessary.
I have known people with hereditary illnesses who knew they would not live to retirement.
Compelling them to save for a retirement they will never enjoy is barbaric.
There is, of course, a problem.
The Government is already running a deficit. Giving up billions in tax revenue would make it worse.
Schnauer does not duck the issue.
He turns to Parkinson’s Law.
Cyril Northcote Parkinson famously observed that work expands to fill the time available for its completion. He also found that bureaucracies expand regardless of the amount of work.
As Britain’s navy shrank, its administration grew. As Britain gave its colonies independence, the Colonial Office expanded.
Schnauer provides New Zealand examples.
In 2017, Corrections employed 9000 staff looking after 10,479 prisoners.
By 2023, it employed 10,000 staff looking after just 8610 prisoners.
Under Labour, the Ministry for Business, Innovation and Employment’s workforce increased from 3366 to 5879, a rise of 74%.
Schnauer calculates that returning public service staffing to around its 2017 level would save $8 billion annually just in salaries.
That is more than enough, on his figures, to finance substantial reform of KiwiSaver taxation.
Parkinson calculated that bureaucracies tend to grow by around 5.75% annually, regardless of workload.
If Nicola Willis had read Parkinson, she might have realised that demanding a 6% reduction was little more than cancelling one year’s bureaucratic growth.
We have an election in which politicians propose compelling citizens to save more while continuing to tax their savings.
Yet the question of whether we could create a better retirement scheme by taxing less and spending less is scarcely being discussed.
In a functioning democracy, Schnauer’s book is what we should be debating.
Stay ahead with the latest market moves, corporate updates, and economic insights by subscribing to our Business newsletter – your essential weekly round-up of all the business news you need.