KiwiSaver and tax cuts

Vernon Small in the Dom Post speculates that National is planning some changes to KiwiSaver help fund its tax cuts. That is an interesting possibility, and let us look at the possible changes.

Over time the major benefit to the KiwiSaver saver is the 4% employer contribution. That is a 100% subsidy for your 4% contribution. I believe it is that compulsory contribution plus the opt out nature of it for new employees which is driving the growth in the scheme. Now neither of these cost the taxpayer any money (they cost business) so I don’t expect changes there.

The three major costs for the taxpayer are:

1. The $1,000 initial contribution
2. The $20 a week employee subsidy
3. The $20 a week employer subsidy

With regards to (1) I don’t see much sense in changing that as 750,000 have already claimed it, and it is a one off expense – quite minor as things go. Same goes for the potential contribution to a mortgage.

No (2) is a fair bit of money – up to $1,000 a year per employee. If one took that away, then you could have a fair few people upset as they only decided to go into KiwiSaver due to that subsidy. On the other hand it is arguable that the matching employer contribution still makes KiwiSaver incredibly attractive to anyone who can afford the 4%. If one got rid of it the argument would be you are losing $1,000 a year from your future savings in order to have more money now when times are tight. It is a debate you can win, but not without risk.

What would be most appealing for me, is a change to (3). You see if you got rid of the employer subsidy it wouldn’t affect a single employee. They would still get their 4% from the employer and their $1,000 from the Government.

But it would remove that subsidy from employers? Wouldn’t that be terribly unpopular with employers and unfair to business owners? Well maybe, but maybe not. Consider these reasons for getting rid of it:

1. Compliance costs – the employer subsidy is a bureaucratic nightmare. Accountants and employers hate it, and getting rid of it would save them hassle, and also free up some IRD staff.
2. It is only a part subsidy anyway, and will probably never increase. Once employers are putting in the full 4%, the employer subsidy of $20 a week will on average cover less than half of this and sure as hell will not be inflation adjusted.
3. It actually makes life hard for employers to calculate total cost of an employee. For example I have a formula where I add on to an employee’s salary 8% holiday pay, 4% to cover sick leave, 2% to cover ACC and now also need to cover KiwiSaver. It would be easier for me to have KiwiSaver cost as a flat 4% rather than being 4% less $20 a week if they earn over $500 a week. The total cost of an employee is a vital piece of information for budgeting and costing jobs. The employer subsidy makes this a lot harder.
4. Most employers will use the extra 1% a year subsidy for KiwiSaver (until it reaches 4%) as a factor in pay rates for new employees, and hence may not personally end up paying significantly more.

Now what do the different components cost. Well according to Treasury by 2011/12:

1. The $1,000 kickstart – hard to find but not significant
2. Employee tax credit – $661 million
3. Employer tax credit – $674 million

So if one scrapped the employer tax credit, that would free up in the medium term $700 million a year. And as the takeup has been so much higher than forecast, it might even be that getting rid of the employer tax credit could give an extra $1 billion a year compared to keeping it.

Please note I have no idea what National’s KiwiSaver policy is. This is my speculation on what would seem an intelligent move to me. And personally as an employer I would rather never ever hear about the employer tax credit again!