Opinion: A tax-free Super Fund sounds appealing, but retirees won't magically benefit without budget trade-offs.
The NZ Super Fund (NZSF) was set up in 2001, a time when the government had spare money from budget surpluses. The intent was to tax smooth the future costs of the universal NZ Super by paying a bit more today, to pay a bit less tomorrow. Certainly, the NZSF has performed well enough, but it's no magic bullet.
Internationally, the NZSF is unusual - sovereign wealth funds in other countries are generally based on revenue from real resources like North Sea Oil in Norway and invested for the overall good of the country.
In contrast, original contributions to the NZ Super Fund were made from budget surpluses, or excess tax revenue.
Today, there are no budget surpluses therefore contributions must be borrowed.
Either way, there is no free lunch.
Putting excess tax revenue into the fund is at the expense of other things we need such as more doctors and nurses, educational needs and less poverty.
Alternatively, the increase in public debt constrains other useful capital spending that, for example, could help us prepare for the explosion in demand for healthcare as the older population ages.
The NZ Super Fund is often misinterpreted to mean we will be able to afford higher pension costs as the population over 65 grows. But it does not reduce the cost of NZ Super at all. If the parameters like the age of entitlement, level of pension, and universality do not change, the pressure of the ageing population on scarce resources will be unaffected even when there are withdrawals from the fund.
A complex formula for the amount taxpayers provide each year is explained in a highly technical paper - the Golden Years by Treasury's Matthew Bell.
The latest projections from Budget 2024 show that contributions will be made to the fund for the next ten years and after that, payments will dribble out of the fund until about 2060 when they become more significant.
Even at the peak in the 2080s, withdrawals are about only 15 percent of the total cost of net NZ Super. The fund never runs down and will be a massive size by the end of the century.
There is a nice consistency at the moment whereby the NZ Super Fund and KiwiSaver funds are treated much the same for tax purposes. The urgent need to align the tax treatment of housing to match investments in these funds is more worthy of government attention.
There are some fundamental unanswered questions about the fund, its purpose, what it is invested in, and its opportunity costs. In the current climate it is easier to be distracted into minor issues such as whether the fund should pay tax.
Currently the Govt is considering not taxing NZSF. No tax sounds appealing and certainly may simplify life for the Superfund Guardians as the tax calculations on different investments can be onerous. But retirees and savers will not be magically better off with no consequences elsewhere for the government's budget. The loss of this tax revenue for example would enlarge the budget deficit.
The issue of whether the NZSF should pay tax is largely one of smoke and mirrors. Under the formula, if NZSF retains tax in the fund, government would simply be required to contributes less when the fund is building up. Thus, the lower contribution offsets the government's loss of tax revenue. Likewise, when the fund is drawn down, those payments back to the state are larger, and act to offset the tax loss.
As Matthew Bell says in Golden Years: " …the overall outcomes for the NZSF, in terms of receiving funds from, and returning funds to, the government, is not markedly different over the long term, whether the Fund pays tax or is tax exempt".
Therefore it is hard to know why Minister Simon Watts said a possible tax exemption for the Fund "could free up more funds for retirement savings".
There have been suggestions that if the tax is removed from the NZSF then KiwiSaver should also be tax exempt and that would be good thing by encouraging people to save more for their own retirement.
It is one thing to make the NZSF tax exempt as a fund owned by us all collectively and another to bring back the old traditional tax treatment of private saving for retirement. The reason we got rid of those tax incentives in the late 1980s was sound: the benefits of tax concessions went largely to high income savers and high wealth people. The same would be true today; it would be a backward and very costly step. The current modest state subsidies for KiwiSaver are well designed, don't favour the rich, and could be expanded at far lower cost.
There is a nice consistency at the moment whereby the NZ Super Fund and KiwiSaver funds are treated much the same for tax purposes. The urgent need to align the tax treatment of housing to match investments in these funds is more worthy of government attention.
By honorary associate professor Susan St John, Business School, University of Auckland.
This article reflects the opinion of the author and not necessarily the views of Waipapa Taumata Rau University of Auckland.
It was first published on Interest
