Kiwisaver and Income Equality: Must not have checked my mailbox…..
David Farrar links to a Herald article on a report that came out of Waikato University’s management school saying that Kiwisaver is going to increase income inequality.
Their policy analysis that rich people will restructure their activities to get tax benefits in a way that poor people cannot seams relatively sensible. I don’t claim to know anything about the the tax implications of Kiwisaver so I’m willing to trust them on that. This isn’t the only way that rich people can take advantage of the tax system in NZ. Last time I checked to top personal tax rate in NZ was much higher than the company tax rate, and businesses get gst back which gives people the incentive to structure as much under their company as they can. Incentives are king, this kind of behavior is nothing new.
What does bother me about this article is that they conclude that Kiwisaver has not “inspired new saving but rather a “reshuffling” of existing savings” based upon 598 completed mail surveys they sent out. I don’t know how they do things in Waikato, but I doubt that would hold up in any economics school (or even one of the economics slanted govt departments MED, RBNZ or Treasury) in the world. Seriously a mail survey? I’d like to see aggregate data on savings (while acknowledging that aggregate data has it’s own problems) before I draw any type of conclusion like that.
While I agree that it’s likely that rich people are likely to restructure their savings, kiwisaver does seam to provide some good incentives to people who aren’t rich to start saving. Maybe these people missed the mail??
(as a disclaimer I haven’t been able to track down the original article, if anyone has and my opinions are grossly misinformed please let me know!)
<<UPDATE>>
The paper has been tracked down and apparently the necessary data ( The Survey of Family, Income and Employment (SoFIE)) won’t contain sufficient information about kiwisaver to accurately analyze the policy until 2012 so this postal survey is just really a stopgap until then. That said, it’s not unreasonable to think that Kiwisaver as a policy is best evaluated after being around for a few years, especially with the hasty manner the policy was implemented by the government
“While I agree that it’s likely that rich people are likely to restructure their savings, kiwisaver does seam to provide some good incentives to people who aren’t rich to start saving”
I wouldn’t say that its only the rich that have limited incentives to increase savings from Kiwisaver, after all according to income smoothing we should all save during the high earning period of our life-cycle.
The main thing is that Kiwisaver offers a much higher rate of return than other investments (given that the government throws money at you), as a result there are income and substitution effects on your savings level when you take money from the bank and put it in Kiwisaver. Assuming that the substitution effect dominates, a person should save more.
However, the effect on national savings is more likely to be negative, as the government is reducing public savings to fund Kiwisavers returns.
Yeah I was referring to private savings, not national savings, sorry for any confusion. I don’t find national accounts very exciting so I can be sloppy with my definitions sometimes.
Not that I really have a problem with government savings decreasing, I’m not sure it’s the most efficient allocation of resources for the government to hoard a bunch of money. But maybe that’s just the right wing economist inside of me trying to steal the limelight!
I agree with your analysis, although when we talk about rich and poor we aren’t generally referring to people at different stages of their life cycle are we? I always assumed we were talking about the difference between a CEO and a factory worker and their incentives to save, not where they are in their life cycle.
That said, life cycle issues clearly impact individual savings behavior in the way you described.