The theoretical background used for the analysis is detailed below, outlining some of the fundamental justifications used for the provision of tax incentives. First, some of the main arguments in support of tax incentives are outlined, followed by the arguments against tax incentives. When these prejudices are removed, the positive effect of the incentives to save disappears.
In summary, the theories discussed above are inconclusive about the magnitude of the impact that tax incentives may have on increasing savings for retirement. The next three sections examine three periods of different policy practices related to the provision of tax incentives for pensions and the different roles of the state in each period.
1898 – 1938: The Liberal State
The relative generosity and welfare intentions of the National Provident Fund are indicated by the fact that membership was initially limited to those with an income of less than £200 a year. Under section 25(1) of the National Provident Fund Act 1910, the benefits provided by the government to contributors are guaranteed. Furthermore, legislation allowed the fund to be topped up by the government up to the amount of one-fourth of the total contributions paid into the fund during the preceding year, with further amounts (if any) deemed appropriate by the Board of Governors (Act on National Provident Fund 1910, s25(2)).
The discussion that follows considers the primary arguments put forward in support of the implementation of the National Provident Fund. This is further proof that this country with a clearer vision recognizes that it is the state's duty to do everything in its power to help those who really need help." New Zealand recognized years ago that it was the state's duty to provide for people in the form of an old age pension.
Mr E Newman (House of Representatives) believed that it was “undoubtedly the duty of the State to encourage thrift and thrift as much as possible” (NZPD, 1910a). These were related to the cost of the scheme and the potential for inequality (or unfairness) resulting from its presence. Those who are poor will not be able to join the fund or insure their children, so 25 percent of the contributions paid by the state will benefit the wealthy and not the poor.
With the exception of the discussions related to behavior change, the discussions did not have a strong link to the theories proposed above, although this is not surprising as the theories have largely evolved since the implementation of the National Provident Fund.
1938 – 1984: The Welfare State
While there was support for and arguments against the National Trust Fund Act in its early stages, the majority seemed to be in favor of the initiative. The greater emphasis at the time was on providing incentives – and means – to enable individuals to save for their own retirement. Around the mid-1950s, National Trust Fund annual reports noted that about half of these eligible employees had joined the National Trust Fund.
Despite the tax cuts, only about a third of the workforce in the 1970s were members of pension funds (Holmes, 1975). This may partly reflect the relative generosity of the government, which reduced incentives for individuals to make their own retirement savings. However, the scheme was very unpopular and played no small part in the success of the national government at the next election.
Superannuation was now funded from ordinary government revenue, whereas the social welfare benefits of the Social Security Act (1938) had previously been funded by a compulsory contribution (social security tax) to the Social Security Fund (King, 2003). National Superannuation was a generous pension scheme, providing 80 per cent of the average wage by 1978. Rates in other countries were markedly lower, for example the US was 49 per cent, Australia 40 per cent, Britain 38 per cent and Sweden 32 per cent of the average wage (McClure, 1998).
Given that membership of pension funds such as the National Provident Fund or the Government Survival Fund has been declining since the mid-1970s, 16 the situation in New Zealand during this period would tend to indicate that the provision of tax incentives to encourage individual retirement savings is ineffective in the presence of the state's generous provision of retirement income savings.
1984 – 2000: The NeoLiberal State
As part of the deregulation process, the Labor government passed the Taxation Reform Act (No. 5) 1988, which amended the Income Tax Act 1976. The majority of the arguments for removing the existing incentives had a neoclassical economic basis. In general, higher-income earners saved more than lower-income earners and were therefore better able to take advantage of the tax cuts.
Mr JR Sutton, MP, agreed that the new regime would remove the redistributive effects of the old regime. There was evidence that much of the savings invested through retirement plans were withdrawn and spent before retirement. The Treasury Department claimed that the effect of the existing stimulus measures was more likely to affect the shape of the savings than the whole.
In support of the reforms, Mr CD Matthewson (MP for Dunedin West) claimed that savings in New Zealand were not low – in fact they were above the average level of all OECD countries (NZPD 1989). Since that change, expired pension plans represent 0.6% of pension funds. Ms. Richardson claimed that since the announcement of the reforms on December 17, 1987, of the 4,400 pension plans, approximately 900 had closed with a loss of approximately $87.
Defending the reforms, the Honorable Peter Neilson (MP for Miramar) argued that because of the aging population, national retirement as currently funded would not be sustainable by 2031. It discourages savings and is one of the fundamental flaws in the Bill” (NZPD, 1988). During the second reading of the Bill, the Honorable J B Bolger (Leader of the Opposition) argued "every other OECD nation has the wisdom to encourage its people to save.
2000 – 2005: an emerging NeoWelfare State
Only recently has the state re-incentivized private pension savings in New Zealand. The first introduced change occurred in July 2004 with the introduction of the State Pension Savings Scheme (SSRSS), Govt. 21 Another change with a significantly wider potential impact came with the announcement of the KiwiSaver initiative in 2005.
The Tax Review 2001, 22 in its Final Report, made recommendations to the government on principles and structures to build a sustainable long-term revenue base, from the perspective of whether the tax system was sufficient to meet current needs. The final report concluded that it was not clear that New Zealanders were saving too little, and further that there was little evidence that changes to the tax system were likely to lead to higher saving. The Final Report also identified that the tax system will affect the absolute level of saving to the extent that it affects the level of national income, and accordingly it was considered important to avoid introducing tax distortions that could lead to savings and investment choices of lower quality.
The changes that followed this report, such as the implementation of the SSRSS and the proposed introduction of the KiwiSaver account, indicate that the government has been prepared to introduce austerity measures that are likely to distort decision-making. A further recent development that may have a significant impact on future initiatives, or the implementation of the proposed KiwiSaver account scheme, may develop from the results of the most recently elected New Zealand government in September 2005. The realignment of political influence has resulted in that the government is now signaling a change in direction in New Zealand, with a move away from.
Therefore, the pre-election indication that the government was no longer opposed to providing 'incentives' and mechanisms to promote retirement savings – both at individual and government level – may now lose momentum.
Conclusion
In general, the implementation of the National Provident Fund had broad support from both sides of the House, whereas the reforms of the late 1980s provoked significantly opposing views. There was also a strong focus on improving equality, as evidence indicated that those who benefited most from the presence of the incentives were those who needed the least help. As employer contributions and fund earnings are taxed at 33%, but the highest marginal tax rate in New Zealand is 39% (for earnings over NZ$60,000), someone paying the 39% marginal tax would potentially benefit from a 6% saving.
10 For example, Sinfield (2002) writes that tax relief in the United Kingdom saw the top 10% of taxpayers receive more than 50% of the benefit, with a quarter going to the top 2.5%. 13 Other benefits existed, such as payments at the birth of a child, for incapacity to work, and weekly payments to surviving family members at the death of the contributor. This is the system in place in New Zealand today for all salvage vehicles.
18 At the time, various figures were quoted about the financial costs of the tax incentives. Engen, E.M., Gale, W.G., and Scholz, J.K., (1996), The Effects of Tax Based Saving Incentives on Saving and Wealth, Cambridge: National Bureau of Economic Research Working Paper 5759. Holmes, K., (2001), The concept of income: a multidisciplinary analysis, Amsterdam: International Bureau of Fiscal Documentation Doctoral Series.
Hooper, K Tracing the origins of tax”, in Hooper K, Somerfield, J., Greenheld J., en Ritchie, K., eds, Tax Policy and Principles: A New Zealand Perspective, Wellington: Brookers.
