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Superannuation and private savings

Superannuation and private savings

There is a maxim which applies to the formulation of public policy. "Encourage something and you will get more of it, discourage something and you will get less of it."

Over the last twenty years or so successive governments seem to have lost track of the simple wisdom expressed in that maxim. Both this week's AMP survey and that conducted by Sovereign a month or so ago clearly demonstrate that when it comes to private savings for superannuation, we now have "less of it" that we did a couple of decades ago.

The reasons are not hard to find. On the one hand the Government scrubbed the old "front end rebate/no tax on earnings/tax on benefits" (tET) regime in favour of the present "no front end incentive/tax on income/no tax on benefits" (TTE) system. That was a discouragement towards savings compounded by the fact that the middle capital "T" is a flat tax of 33%, way above the tax paid by around 45% of those who save through superannuation schemes.

If that wasn't bad enough the "discouragement" factor was then, I suspect somewhat unwittingly, compounded by the establishment of the Big Cullen Superannuation Fund.

The two taken together mean that private savings were discouraged whilst a clear message along the lines of "don't worry, the Government will see you right" was delivered to NZ savers.

The results are predictable. Superannuation fund savings have declined rapidly over the last 20 years and employer-based schemes now cover only 14.6% of the work force.

In my view nothing will change until we take practical steps to implement the first leg of the maxim set out above namely "if you encourage something you will get more of it." That must, in my view, include front end incentives and a proper alignment fund income tax with the rate of the individual saver. Unless we do that I can, with confidence, forecast that the present negative trend lines will continue on into the future.

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