Budget constraints rule out tax incentives

The government is continuing to explore realistic incentives for employment based superannuation schemes, including – in our capacity as an employer – a scheme for public sector employees, Finance Minister Michael Cullen says.

"But big structural changes for general retirement savings away from the current TTE system toward a tTE regime will not be proceeded with this term as there is simply no fiscal room in this year’s budget."

Under TTE, pension contributions are taxed at the ordinary rate, earnings in the pension fund are taxed at the 33% corporate rate but payouts to the saver are not taxed.

"I do not believe this is sufficiently savings friendly as it requires a leap of faith from the saver that the tax exempt third stage will be safe from government meddling over the life of the policy.

"Accordingly I asked officials last year to consult with Business New Zealand, the Council of Trade Unions, the Office of the Retirement Commissioner, the Government Actuary and savings industry representatives on alternative options.

"They agreed that the best option was a tTE system under which fund contributions would be taxed at a reduced rate. But Treasury estimates that the costs of introducing this would range from $50 million to $171 million a year depending on the design details.

"The government simply does not have this kind of money available in the 2002 Budget," Dr Cullen said.

He said the government was still looking actively at measures to promote employment based schemes as these were an effective means of encouraging middle and even low income people to save.

Coverage in private employer schemes has shrunk since 1990 from 18.5% to just 12.3% while coverage in the public sector has dropped from 4.1% to 2.6% following the closure to new entrants of the Government Superannuation Fund in 1992.

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