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Monday, May 9, 2011

The Next New KiwiSaver*

*(like the next new Whole Earth Catalogue)

In New Zealand we have a pension plan called KiwiSaver. It was set up as a long term saving plan.  With a couple of notable exceptions, it can only be accessed by the contributor at retirement.  You would think that since it is meant to be from when you start work, to the age of 65, there would be great reluctance to change it by successive governments.  Of course, no one would object to a change for the better.  But No, the present National Government (on the right) has already made a couple of changes, neither of them beneficial to the participant.

National has now announce that at the coming budget they will make some further changes to KiwiSaver.  The first part of this blog is being written before these announcements.  The second part will be after they come out.

Part 1
I have long argued that KiwiSaver, in its present form is a scam.  I define a scam as a system that makes the mark think he is getting something for nothing and hence make him willing to part with his money.  My objections to Kiwi Saver in its present form are the following

Firstly, the government contributes a matching amount up to a little over a thousand dollars a year.  Sounds good doesn't it.  But whose money is this they are giving you.  You guessed it.  It is your money, previously collected through taxes with the act of collection siphoning part of it off*.   If the government incurs this added expense  it has three options.  It can a) raise taxes, it can b) reduce services or it can c) borrow more money resulting in us and future generations of Kiwis going further into debt. Note that in this connection, we are at present borrowing huge amounts of money sometimes quoted at about $300m per week and our GST has just gone up from 12.5% to 15%.

*People are needed to administrate the collection and distribution of taxes.  The more different taxes you collect and the more different ways you distribute it, the more people you need.  Lets say, for the sake of argument, tax collection is 90% efficient.  That means for every $1000 you collect you only have $900 in the government coffers for doing the government work.

My second objection is the employee contribution.  Any CEO worth his inflated salary will simply calculate how much the great privilege of having you work for him is worth and deduct the KiwiSaver contribution from your salary.  Again making you think you are getting something for nothing.

My third objection and the way KiwiSaver could be made worthwhile without the bribes is as follows.

At present KiwiSaver contributions are after taxes.  If you are in the 33% tax bracket, you have to earn $150 in order to have $100 to contribute.  This means you already start well behind the starting line.  The interest on your KiwiSaver investment has to get you back up to $150 before you even start to get ahead*.

*I can just hear the critics say, but you are getting capital gains.  I don't know what you think but I am a little jaded with the promise of long term capital gains after that events of the last few years.

You are also taxed on dividends and interest and to add insult to injury, you are taxed on the whole amount you earn, not the part that is above inflation.  Who controls inflation.  There are many outside influences but in so far as it can, the government does.  We have about 3% inflation in New Zealand so at the end of the first year with your investment of $100, you have to have $103 in the bank just to have the same buying power.  Your dividends are also taxed at your marginal rate so if you get an investment that earns 6%, you have $106 at the end of the year.  Since you have earned $6, you are taxed $2.  You are left with $104.  This is a real earning of only $1 on an investment of $100.  It turns out that at this 1% true interest*, it will take you about 40 years to get back to the buying power of the original $150 that you earned.

*It is actually 0.97% interest but let's not quibble

Clearly the solution is   a) to let you invest before taxes and  b) to be allowed tokeep your earnings or at the very least, pay tax on your true earnings.

End of part 1.  We wait in great anticipation for the announcement.

Part 2 
We now have the new version.  The government contribution is halved and the minimum contribution from the worker and his boss is 3% rather than 2%.  The government contribution is still a fiction.  They are taking money from us in taxes so that they can give it back in KiwiSaver.  The Employer contribution is still a fiction.  Your boss will still reduce your salary (or not let it rise as fast as it otherwise would) so he can pay this contribution and for the individual, the scheme is less worthwhile an investment.  No reduction in taxation on the portion you contribute has been made and your dividends and interest are still taxed at your marginal rate with no allowance made for inflation.  Not a pretty picture.

1 comment:

Anonymous said...

My thoughts exactly and no, it's not a pretty picture at all. As soon as I heard about the 'free' $1000 I was very wary of this whole thing.

Besides... didn't we have a super scheme already? What was wrong with that? But even then, the whole idea of giving somebody your money now so that they can (maybe) give it back to you in a few decades is pretty silly.