Kiwisaver Changes Make Kiwisaver Profitable for the Government
What many media commentators have failed to point out is that Kiwisaver now produces income for the government, not expense.
Prior to the changes, employees contributed 2% after tax, employers contributed 2% gross, with no tax deducted, and the government contributed 2% gross. Essentially about half the government contribution was a redirection of the employees PAYE on that 2% they contributed. (assuming that for every 2% of net income, equals 3% gross income, at a 33% tax rate, although it could be argued that money was once destined for the public purse.
However, since changes to Kiwisaver announced in the budget 2011, the outlook for 2012 and 2013 is quite different.
From April/June 2012, the employer contribution will be taxed, and the member tax credit halved. Assuming that we earn an average wage approximately at the thresholds for maximum subsidy, this means that the amount entering our kiwisaver funds will be reduced by 25%, with no changes to the employer/employee contribution. The real cost of the government contribution will be only 40 cents per $1 they contribute. If you factor in the $1 of tax the employee paid prior to their contribution, then the government is actually profiting from the scheme... eg lets just assume the government had instead proposed a 3%+3% tax free savings scheme, with no government contributions, us kiwisavers would actually be better off.
Lets move on to April 2013, the employer and employee contribution moves up to 3%. Based on the employer contribution alone, the whole government contribution is mostly covered by that new tax deduction. e.g. Employee contributes $3, Employer contributes $3, but the government takes $1 of that, then gives it back to the employee as a goverment contribution. So why even bother? I assume it is because the government contribution is capped to a maxium of $521 a year, which means that it mainly effects the rich. I suspect this recent change may cause some upper income self employed to question if entering the scheme was a good idea.
Don't forget the tax paid by the employee prior to their contribution. A 2% contribution to kiwisaver, actually relates to 3% of gross income, because almost a $1 is paid in tax for every $2 saved.
I do note that the government do lose a little company tax for every increase in employer contribution. However, they also gain a little more tax revenue from income produced by the kiwisaver funds.
But I also note that for no cost to the government, and perhaps a little profit even, they are locking everyone into a fairly robust savings scheme. That is fantastic for the individuals involved, but also fantastic for the government who will be able to access some of this money via bonds sold to kiwisaver funds, and private/public partnerships on new roading projects etc.
Overall, I'm still in favour of Kiwisaver, I just wanted to point out how a subtle change has turned Kiwisaver into a profitable exercise for the government. However, we should fight a hard if it gets any more profitable for the government.
Posted: Sunday 29 May 2011