Taxation issues and policy implications for the New Zealand KiwiSaver retirement scheme

In an attempt to invigorate private savings for retirement, the New Zealand governmenthad introduced the KiwiSaver effective from July 1, 2007. It is a work-based retirementscheme with the goal to lift the wealth of retiring New Zealanders with investments thatwill supplement the New Zealand Superannuation income.The uniqueness of the KiwiSaver includes voluntary enrolment, coupled with variousfinancial “sweeteners”, contribution holidays and exemptions for early withdrawals.Various tax credits are also given to both employees and employers. In the first year of implementation, the employer contribution matching is not compulsory. However, thiswill change from 2008 onwards whereby employers are required to contribute 1% of the employee’s salaries or wages. The rate will rise by 1% per annum every year to amaximum of 4% by 2011. The employers are expected to have increased complianceand business costs from the KiwiSaver but it will be offset partly by tax credits and the3% reduction in the business income tax in 2008. Other employer incentives includeexemption of the Specified Superannuation Contribution Witholding Tax (SSCWT) of up to 4% of the employees salaries for contributions made by the employers.The KiwiSaver scheme has many implications for key stakeholders such as employers,employees, taxpayers, government and the investment providers. Increased businesscompliance costs and government spending are some of the operating costs of KiwiSaver. Other implications include potential growth in the financial market, theencouragement of habitual savings, and decreasing of pensioners’ reliance on statesupport for retirement. The clear winners for the KiwiSaver scheme are the investment providers and employees. Other stakeholders will gain some benefits and incur somecosts with the scheme. This paper will also examine the policy implications as theKiwiSaver will ultimately be funded from tax revenues.