Matisyahu's Blog

There has been plenty of discussion regarding National introducing compulsory KiwiSaver as part of the larger discourse around the future of government funded superannuation – changes to the retirement age, whether there should be an element of means testing or any other ways to get the cost of superannuation under control. What has entered the narrative is the argument that compulsory KiwiSaver is going to lead to government funded superannuation will be phased out in favour of KIwiSaver.

What do I think of the claim? I don’t think it’ll happen because it would result in them becoming unelectable the moment any change like that takes place not to mention if there are going to be changes then it’ll require a general consensus by most if not all the major parties to ensure that you don’t have wild swings in policy. What do I think will happen? if Working For Families (WFF) and the Independent Earners Tax Credit (IETC) are anything to go by then what you could see is a change in the way the superannuation payment is calculated based on such as a percentage of the minimum wage working full time or some other method.

The change in how they calculate it could include maybe basing it on the minimum wage or change the inflation adjusting calculation such as in the United States there is the idea of ‘chained CPI’ which is an inflation measure produced by the U.S. Bureau of Labor Statistics that accounts for consumer substitution. The end consequence of moving to such a system would still result in the superannuation going up but it would be below the traditional CPI amount so that, for example, if you had someone being paid $400 a week and based on a standard CPI then in 5 years the amount the they would be getting paid is $500 but using chained CPI the amount maybe only $450 so if there are a million people receiving superannuation then that would translate to $2.5billion being saved by the fifth year.

Why is that my prediction? because that is how governments have traditional raised taxes without actually raising taxes or decrease spending without making it appear as though they’re cutting spending. You raise taxes without actually raising tax rates by not changing the tax brackets so as nominal income goes up the brackets don’t charge so your effective tax rate is higher even though in real terms (inflated adjusted) you’re pretty earning the same amount you were earning before the pay rise. The other way is decreasing spending by not carrying out spending cuts but by making sure that your spending still goes up so that the nominal spending receives the media headlines (the usual ‘record spending on healthcare’) but the reality is that the spending increase is below inflation so in real terms there has actually been a cut up in spending.

Could there potentially be a future where it is means tested? if they do bring it in then it’ll have to be high enough not to capture large numbers of New Zealanders who ‘did the right thing’ only to get punished. This is the problem with means testing policies because it creates a system where you have those in the middle who are ‘too rich to be poor, too poor to be rich’ so they’re stuck in this half way house. The same sort of situation we have in New Zealand when it comes to the student allowance – reminds me of a friend from high school where both parents worked, he had a brother and a sister, middle class but apparently the family was too rich to receive the student allowance so the daughter missed out on qualifying for it (keeping in mind back then the student loans accrued interest while studying as well as after studying).

I think the big mistake is failing to address the economic performance of New Zealand because the focus on the spending is like trying to cut your way to prosperity. The problem is that successive governments have avoided trying to make the necessary changes in taxes and capital expenditure to rebalance the economy away from unproductive property speculation and the false economy of convincing people that inflated house prices equal wealth. The problem is that any sort of transition from a property centric economy is going to result in some winners and some losers but I guess we’ll be a bit like the Americans – will do everything then eventually as a last resort doing what should have been done right from the outset.