Apart from a lot of discussion about the nuts and bolts of the new KiwiSaver, there has been little analysis of what the new scheme really means for society, and who will really benefit. Labour’s new grand plan actually represents a tax on workers, backdoor privatization of social security, lower wages, and much greater economic inequality in the future. [Read the full post below for details]
Privatisation and a tax on workers
Matt McCarten argues that the new KiwiSaver represents two very regressive shifts: 1) it’s an onerous new tax on workers, and 2) it presents the privatisation of retirement social security.
First, the new 4-8% ‘contribution from workers is effectively a tax increase for something they have previously received as a right’. And rather than being a huge burden on business – as is often made out – McCarten points out, ‘An employer paying their employee, say, $25,000 a year (and most do) and contributing 4 per cent to their KiwiSaver gets a tax-break for all that contribution, effectively paying nothing.’
Second, although the scheme is ‘sold on the basis of securing pensions for retired workers’ in reality it’s the end of ‘the welfare state, as we know it’. Essentially, ‘The principle of superannuation and other societal benefits is now being replaced by individual, user-pay schemes run by private investment corporations.’
Dr Cullen has introduced a de facto compulsory private savings scheme (Sir Roger would be proud of him) and shattered the 14 year consensus on public superannuation. Oh, no MP today will say it is shattered, but as Kiwi Saver grows in size, the pressure to have it replace public superannuation as the main source of retirement income will grow… [McCarten] is right that Cullen has just announced one of the biggest privatisations in our history. And I applaud this.
Susan St John of the Retirement Policy & Research Centre at the University of Auckland, also says the policy will ‘destroy any political consensus on retirement policy and put New Zealand back to the instability we had before the 1993 Accord’ – see Changes to KiwiSaver unfortunate.
Elsewhere, David Farrar correctly says that ‘Michael Cullen's changes to Kiwi Saver may turn out to be one of the bigger transfers of wealth from poor New Zealanders to well off New Zealanders we have seen.’ In his post entitled Helping the rich! Farrar also provides a useful comparison between what the KiwiSaver will mean for the wealthy compared to National's highly-criticised 2005 tax cut policy:
For someone on $100,000 there is not much difference. National's tax cuts would give you $4,770 and Kiwi Saver $5,040. But go to a Marketing Manager on around $130,000. Under National they get $4,770 and Labour gives them $6,240. That is around $1,500 more. A General Manager on around $220,000 gets $4,770 from National and $9,840 from Labour. An extra $5,000.... Dr Cullen has given an unprecedented windfall to those on ultra-high salaries. He will be the toast of highly paid employees everywhere.
Public Address’ Russell Brown also concludes that ‘ultimately, it's about making damn sure that you have less money in your pocket’ and in ‘the medium-term, it's about building up capital’.
Reduced wage rises anticipated
Employers are set to use KiwiSaver as a way to limit wages increases – see Scheme adds to our costs, say businesses. Employers have already made this very clear. The chief executive of the Employers and Manufacturers Association, Alasdair Thompson, is reported in this article as saying ‘there was little doubt there would be a trade-off in future wage rises’. Even National’s Bill English complained about this, saying, ‘When the workers go to the boss and say, 'I want a pay rise', the boss will say, “Sorry but Dr Cullen has already given it to you - it's sitting in your account and you'll get it when you're 65”.’ And, Government official have also confirmed it - according to the Treasury report issued with the budget, ‘As a result it is likely employers will seek to recoup this additional cost through lowering future wage growth or through increasing prices’ – see KiwiSaver surprise adds twist to budget.
Even Finance Minister Michael Cullen has told a business breakfast that he envisaged that employers would be able to reduce wages rises by a half using the KiwiSaver argument, and that therefore KiwiSaver would ultimately only increase their payroll costs by 0.5%.
A blow to those on the breadline
A number of commentators and critics have quickly realized that the KiwiSaver will increase economic inequality in New Zealand. While the scheme favours the wealthy, those most in need of saving and retirement assistance will be unable to afford to participate. Susan St John says the policy ‘will widen the gap between the poor and the rich in old age – gaps measured by pay during the working life will be amplified by contribution related benefits in retirement’.
This has led to the bizarre situation whereby the National Party have been the main voice ‘standing up for the poor’ (just as they were when the Labour Government recently denied the existence of an underclass in New Zealand - see Topsy-turvy underclass politics). National has ‘questioned the ability of some people to afford to save 4 per cent of their income to gain the benefit. People already facing rising costs and interest rates while on modest incomes would struggle to put that much money away’.
In particular, John Key said the Budget was a blow to those on the breadline. "Fifty per cent of New Zealanders will not take this up and I'll tell you who (they) are - they are the people who can't afford to, who don't earn enough," he said. "And ... they're now being told, `Don't ask for a pay rise'. The lower-paid workers of New Zealand have to give up their pay rise so higher-paid workers can get a cut from KiwiSaver."
Likewise, finance author Mary Holm says that the rich would benefit most from it, and ‘depending on how they are structured, tax breaks tend to favour the rich over those on middle incomes’. She asks if Labour is leading NZ down a similar road to Britain, where ‘a study showed that the richest 10% of taxpayers get 50 per cent of the benefit of tax incentives for retirement saving’. She also points out that the Government subsidy is a regressive one, with the higher your income the more the Government subsidises you.
Peter Boyce, tax partner at PriceWaterhouse Coopers, says ‘It's going to bite on the average wage earner…. Can they really afford to have 10% or so less in the hand? They'll have to spend less, but can they afford to?’ – see How to grab the cash and make it work, in which Sunday Star-Times columnist Rob Stock also argues that ‘Rich families would also find it easy to open accounts for their children and non-working spouses, pocketing the $1000 sweeteners in each account, and being able to meet the scheme provider's monthly minimum savings, probably about $50.’
As an indication of how much the wealthy will benefit from KiwiSaver, it’s worth noting how the proponents of the scheme will benefit – and David Farrar has already done the calculations: ‘Helen Clark benefits by $15,480 an annum once fully implemented; Michael Cullen benefits by around $11,500; Cabinet Ministers benefit by $10,020; Backbench MPs by $5,940’
Of course MPs already have an incredibly generous taxpayer-funded scheme, for which Labour and National took a record 7 minutes to pass into legislation in 1987. According to the article, KiwiSaver's creator doing nicely without it, ‘They currently qualify for a subsidy of $2.50 for every $1 they contribute, up to a maximum subsidy of 20 per cent of their salary.’