Network_Politics

Network Politics

Issue 72, 03 May 2002

SUPERANNUATION REVISITED

The perennial problem of coming up with a workable and efficient second tier of retirement is still eluding the Government, but Finance Minister Michael Cullen recently revealed his current thinking on the issue.

Despite coming to power with big promises to 'fix' superannuation, Labour has so far come up with the Cullen Fund which deals with the first tier or public component of retirement income. Speaking at the Superannuation Funds of New Zealand AGM on Tuesday, Dr Cullen outlined his thoughts on the second tier or private retirement income.

"It is no secret that I have not seen eye to eye with my officials line of advice on this topic [tax incentives], much as I value the free and frank exchange of ideas. I do believe we have a problem with the level of private saving in New Zealand... Similarly, I believe that tax incentives can, if properly designed, have some effect on the level of private savings, where officials tend to be convinced sceptics on this point, arguing that incentives only alter the form that saving takes, rather than the total quantum of saving," said Dr Cullen.

In his speech, Michael Cullen outlined five basic criteria that an incentive scheme would have to meet.

1. It must encourage genuine savings, not simply the temporary diversion of spending through vehicles that qualify for the tax break.

2. It must limit the switching of past savings into a tax-advantaged form.

3. It should increase net new savings into the future, and not simply divert what might be saved in the future down new avenues.

4. It must be broadly equitable (although this is difficult to achieve given that a precondition for an equitable incentive regime is that lower income groups have the capacity to save).

5. It should have a kind of 'multiplier effect' in that it changes attitudes and habits, and contributes to a shift in the savings culture. Incentives that rely purely on a 'bribe' effect tend to limit the net longer-term benefits that they produce.

These are pretty big hurdles for any tax incentive scheme to have to scale, but it seems Michael Cullen is determined to have a go. While noting that tax incentives were only part of a wider plan that includes education and looking to ways of encouraging more employer-based schemes (things that the Retirement Commissioner has been saying for years), he did outline his preferences, and indicated that policy work is going on. Those preferences were:

A rebate equal to a percentage of the dollar amount per year placed with a superannuation scheme up to some maximum amount. It is better than a simple exemption in that it is more equitable. However, it does suffer from the disadvantage of being more expensive if it is going to be sufficiently attractive to leverage extra savings.

An incentive package that concentrates on trying to reinvigorate employment based retirement savings schemes.

It will be interesting to see how these proposals go down with the savings industry. Employer-based schemes have been in gradual decline since incentives were removed by Roger Douglas in the mid 80s.

There are a number of issues that will need to be resolved if the emphasis is going to be put on an employer-based option, not least is the issue of portability. People no longer tend to work for the same employer for the long periods they did up until the 1980s and the trend towards total remuneration salary packages is also a factor that weighs against them becoming popular again. One of the biggest attractions of employer-based schemes was contributions made by the employer, but FBT essentially killed those off, so the only real benefit people can get is lower fees and charges.

It is also worth remembering at this point that the Todd Taskforce on Super in its comprehensive 1992 report dismissed tax incentives as the least effective of three options that included the current voluntary regime and compulsory savings.

Whatever Michael Cullen decides to do, one thing is certain. Expect nothing for quite a while yet.

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	Network Politics (produced by Network Communications) Issue 72, 03 May 2002 SUPERANNUATION REVISITED The perennial problem of coming up with a workable and efficient second tier of retirement is still eluding the Government, but Finance Minister Michael Cullen recently revealed his current thinking on the issue. Despite coming to power with big promises to 'fix' superannuation, Labour has so far come up with the Cullen Fund which deals with the first tier or public component of retirement income. Speaking at the Superannuation Funds of New Zealand AGM on Tuesday, Dr Cullen outlined his thoughts on the second tier or private retirement income. "It is no secret that I have not seen eye to eye with my officials line of advice on this topic [tax incentives], much as I value the free and frank exchange of ideas. I do believe we have a problem with the level of private saving in New Zealand... Similarly, I believe that tax incentives can, if properly designed, have some effect on the level of private savings, where officials tend to be convinced sceptics on this point, arguing that incentives only alter the form that saving takes, rather than the total quantum of saving," said Dr Cullen. In his speech, Michael Cullen outlined five basic criteria that an incentive scheme would have to meet. 1. It must encourage genuine savings, not simply the temporary diversion of spending through vehicles that qualify for the tax break. 2. It must limit the switching of past savings into a tax-advantaged form. 3. It should increase net new savings into the future, and not simply divert what might be saved in the future down new avenues. 4. It must be broadly equitable (although this is difficult to achieve given that a precondition for an equitable incentive regime is that lower income groups have the capacity to save). 5. It should have a kind of 'multiplier effect' in that it changes attitudes and habits, and contributes to a shift in the savings culture. Incentives that rely purely on a 'bribe' effect tend to limit the net longer-term benefits that they produce. These are pretty big hurdles for any tax incentive scheme to have to scale, but it seems Michael Cullen is determined to have a go. While noting that tax incentives were only part of a wider plan that includes education and looking to ways of encouraging more employer-based schemes (things that the Retirement Commissioner has been saying for years), he did outline his preferences, and indicated that policy work is going on. Those preferences were: A rebate equal to a percentage of the dollar amount per year placed with a superannuation scheme up to some maximum amount. It is better than a simple exemption in that it is more equitable. However, it does suffer from the disadvantage of being more expensive if it is going to be sufficiently attractive to leverage extra savings. An incentive package that concentrates on trying to reinvigorate employment based retirement savings schemes. It will be interesting to see how these proposals go down with the savings industry. Employer-based schemes have been in gradual decline since incentives were removed by Roger Douglas in the mid 80s. There are a number of issues that will need to be resolved if the emphasis is going to be put on an employer-based option, not least is the issue of portability. People no longer tend to work for the same employer for the long periods they did up until the 1980s and the trend towards total remuneration salary packages is also a factor that weighs against them becoming popular again. One of the biggest attractions of employer-based schemes was contributions made by the employer, but FBT essentially killed those off, so the only real benefit people can get is lower fees and charges. It is also worth remembering at this point that the Todd Taskforce on Super in its comprehensive 1992 report dismissed tax incentives as the least effective of three options that included the current voluntary regime and compulsory savings. Whatever Michael Cullen decides to do, one thing is certain. Expect nothing for quite a while yet. Home