Academic journal article Social Policy Journal of New Zealand

The Distributional Impact of KiwiSaver Incentives

Academic journal article Social Policy Journal of New Zealand

The Distributional Impact of KiwiSaver Incentives

Article excerpt

Abstract

New Zealand's approach to retirement incomes profoundly changed with the recent introduction of KiwiSaver and its associated tax incentives. Previous policy reduced lifetime inequality, but KiwiSaver and its tax incentives will increase future inequality and lead to diverging living standards for the elderly. In this paper we evaluate the distributional effects of these tax incentives along with other impacts of KiwiSaver. Using data from a nationwide survey carried out by the authors, we estimate the value of the equivalent income transfer provided to individuals by the tax incentives for KiwiSaver participation. Concentration curves and inequality decompositions are used to compare the distributive impact of these tax incentives with those for New Zealand Superannuation. Estimates are reported for both initial and lifetime impacts, with the greatest effect on inequality apparent in the lifetime impacts.

INTRODUCTION

New Zealand's distinctive approach to retirement saving profoundly changed on 1 July 2007 with the introduction of KiwiSaver and its associated tax incentives. The previous approach, in place since 1990, provided a non-contributory flat pension to anyone who qualified by virtue of age and residency and then let people supplement that as they saw fit without favouring one particular savings vehicle over another (St John and Willmore 2001). In contrast, many countries also promote a contributory (and often mandatory) savings scheme to supplement the basic pension and voluntary provision. Because the flat pension, NZ Superannuation, is paid to everyone at a standard amount unrelated to previous earnings, it helps to equalise lifetime incomes. (2) Scobie et al. (2005) show that NZ Superannuation places a floor under the income of retirees, so that even when some fall below a relative poverty line (60% of the median) the poverty gap is negligible. Also, Ginn et al. (2001) describe it as a "women-friendly" pension because there are no earnings-related contributions, so women receive the same payments as men even though their average incomes are lower and they participate in the labour force for fewer years.

These same features are not present in KiwiSaver, which will lead to diverging living standards for the elderly. Since KiwiSaver is a workplace saving scheme, it will amplify gender, ethnic, educational and other inequalities reflected in earnings and employment variations. Not only will wealth (and retirement income) gaps emerge between members and non-members, the differing levels of member and employer contributions and variation in the performance of KiwiSaver funds will also introduce inequality. While such inequalities might be considered an inherent feature of any saving scheme, they are likely to be compounded by the generous taxpayer incentives provided to KiwiSaver members (Crossan 2007).

The main incentives for KiwiSaver participation are the $1,000 tax-free contribution on first joining (the "kick-start"), the matching contribution of up to $20 per week ($1,043 per year) from the government for members aged over 18, (3) and the exemption from Employer Superannuation Contribution Tax (ESCT) for employer contributions up to a maximum of 4% of the employee's gross pay. (4) In addition, there is a subsidy for the purchase of a first home of up to $5,000 (subject to income and house price limits), and a fee subsidy of $40 per year. From 1 April 2008 employers received a tax credit of up to $20 per week to (partially) offset the cost of compulsory employer contributions into the accounts of employed KiwiSaver members. These compulsory employer contributions are set to rise one percentage point per year, from 1% of gross pay in 2008 to 4% by 2011. Existing superannuation schemes that become KiwiSaver-compliant can access many of these benefits, including the exemption from ESCT for employer contributions and the matching government contribution of up to $1,043 per year. …

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