Michael Littlewood responds on KiwiSaver

Michael Littlewood has kindly e-mailed me a response to my comments on KiwiSaver. Michael is an expert on superannuation policy and is co-director of the retirement policy and research centre at Auckland University. He has been on almost every expert taskforce there has been on superannuation.

DF:And this law change will make it illegal to pay them more money if they do not go into KiwiSaver.

ML:I think the argument is rather to give KiwiSaver members smaller future pay increases to allow for the cost to the employer of KiwiSaver. The outcome may be the same but there is a different emphasis.

DF: So this is the head of the Unite union agreeing the the EMA Northern that the scheme dsicriminates agaianst the poor, young and old!

ML: McCarten is not completely accurate. The young do get the kick start and also the favourable tax treatment afforded by the PIE tax status of most schemes. However, they don’t get the member tax credit and the employer isn’t obliged to contribute. For the old, yes the employer doesn’t have to pay but the member tax credit continues for some (those who haven’t completed five years). However, all of this wouldn’t matter if the employer could pay members and non-members for the job they are doing, not based on whether employees joined KiwiSaver or not.

DF: Exactly. The overall costs to the employer should be the same.

ML: Non-members (who as McCarten and Thompson acknowledge will tend to be the young and the poor) will miss out in three potential ways – first, there is the direct difference in total remuneration that is the subject of this blog. Secondly, employers that are forced to pay more to members will compensate with lower future pay rises to all. That means both members and non-members will all get less but members will have the compensation of the employer’s contributions and the tax breaks that non-members won’t get. Thirdly, the non-members will, along with everyone else, be paying higher taxes to pay for the cost of KiwiSaver but won’t be getting their share of the taxpayers’ handouts.

DF: It is becoming close to de facto compulsory and I suspect it will become compulsory at some stage.

ML: But compulsion doesn’t magically make things “fair”. If young, poor employees can’t afford the 48 cents an hour now, how does forcing them to pay the 48 cents an hour suddenly make it affordable? It may remove some of the current inequity only because there will be no difference between different groups of employees. And then what about the other unfairnesses of a compulsory KiwiSaver? Will non-employees be forced to pay as well? (Not many countries with compulsion do that for good reasons). If not, their taxes will be higher to pay for the employees’ KiwiSaver. Then there will be the inequity between the old (whose taxes will be higher to pay for KiwiSaver) and younger taxpayers. And what about children who can join KiwiSaver now? (Why that should be so is probably best explained as a legislative accident).

DF: I support KiwiSaver partly because it is an effective privatisation.

ML: But only if you accept that KiwiSaver leads inevitably to an Australian style income/asset test on New Zealand Superannuation. If you really want to know why that’s a bad idea, you need to understand how the Australian system works and why it is that the incomes of most Australian financial planners are dependent, in part, on developing ways to avoid both tests.]

DF: And McCarten is right that it will inevitably lead to a move away from the current universal publicly funded superannuation scheme. A 25 year old today will earn more money in retirement from KiwiSaver and NZ Super than they will during their working life. That is nuts, and inevitably public superannuation will be made less generous as more and more people have KiwiSaver.

ML: think the more likely outcome will be a scaling back of the KiwiSaver incentives. We don’t yet know what National really thinks of KiwiSaver II. If the long term policy drift is back down towards a KiwiSaver I, the alarm about the impact on the future New Zealand Superannuation benefit might be lessened. However, I agree that future governments cannot really sustain both in their present shape.]

DF: Indeed. Employers should be able to offer a total remuneraton package where if an employees chooses not to go into KiwiSaver, the employer can pay them extra cash.

ML: The shame of it all is that, before KiwiSaver I or II, the best evidence we have is that most New Zealanders were saving enough for retirement – see here, here, here and here for examples. My fondest hope is that a new government might wish to adopt the radical notion of evidence-based policy making. Regrettably, there hasn’t been too much of that from either Labour or National in the last 11 years (since the second Todd Task Force in 1997

Thanks to Michael for his comments.