Budget 2010

STRUCTURING THE TAX SYSTEM TO MAKE SAVING MORE ATTRACTIVE

The unifying theme of this year’s Budget is the idea that the tax system should be structured to make saving more attractive. The suite of tax changes made over the last three years has substantially eased the challenge ahead for New Zealanders looking to build a retirement nest-egg through financial investments.

For investors utilizing PIE investments (like KiwiSaver funds), the marginal tax rates on their savings returns have been slashed. Over the past three years an investor on the average wage ($50,000), that rate has fallen from 33% to 17.5%. For an investor on a high income ($100,000), that rate has still fallen substantially from 39% to 28%. 

How does this affect retirement income? Assuming a 20-year savings horizon, constant savings, and a taxable return of 5%pa, an investor on the average wage will have an extra 8.3% of savings in retirement (than they would have under the pre-PIE tax regime). A high-income investor will have an extra 5.8%. As well, retirees will continue to benefit from higher (post-tax) rates of return on their investments, increasing their income. 

Encouraging savings offers two more benefits in theory.  Firstly, a higher domestic savings rate will make New Zealand less reliant on foreign borrowing and less vulnerable to global shocks. Secondly, a higher savings rate will result in higher rates of productive investment and (hopefully) faster productivity growth and higher wages. 

The government also signaled its willingness this week to impose its views on what productive investment actually is and what it isn’t – namely housing. Imposing restrictions on depreciation make property investments less lucrative. 

But there is plenty of work still to do to create a savings industry in which New Zealanders can have faith that investing their savings in is wise and will promise a secure and decent return. It is the efficiency of this industry that ultimately determines whether Kiwi’s extra savings become productive capital or are siphoned off into the back pockets of industry fat cats. The Government is trying to clean up the mess, but there is a long way to go to restore investor confidence.