Best practice in sm oothing Best practice in sm oothing the tax - - PowerPoint PPT Presentation

Best practice in sm oothing Best practice in sm oothing the tax burden?

• the New Zealand experience

1 3 July 2 0 1 0

Outline Outline

• New Zealand pensions landscape
• The ‘New Zealand Superannuation Fund’
• but …

.

• The NZSF in a ‘total accounting context’
• The cost of debt is the ‘hurdle rate’
• Will the NZSF actually help?
• A ‘fallacy of composition’?

NZ pensions landscape : Tier 1 pe s o s a dscape e

• ‘New Zealand Superannuation’

– Universal (modest residence requirements): no income or asset tests – Taxed as ordinary income Taxed as ordinary income – State Pension Age is 65 – Non-contributory and was purely PAYG – Relatively generous – Linked to average wages Virtually eliminated age poverty – Virtually eliminated age poverty

• Current net cost 4% of GDP; 2050 cost: 8%
• No Tier 2 (compulsory saving)
• No Tier 2 (compulsory saving)

NZ pensions landscape : Tier 3 pe s o s a dscape e 3

• KiwiSaver (since 2007): national, auto-

l t t t d fi d t ib ti enrolment, opt-out, defined contribution scheme, tax-subsidised (0.6% of GDP)

• All other saving

‘tax neutral’ (TTE)

• All other saving – tax neutral (TTE)

New Zealand Superannuation Fund ‘NZSF’

• ‘NZSF’
• Started 2003
• Government contributes more than cost of

NZS 2003-2025 and less after 2025 A ‘ h d PAYG’ f di b i

• A ‘smoothed PAYG’ funding basis
• ‘Arms-length’ Guardians run investments
• Traditional approach to strategy
• Current assets $15.8 bn (8.3% of GDP)
• Projected to grow to 50% of GDP

NZSF: 2 0 0 5 -2 1 0 0 S 0 0 5 0 0

NZSF – projected flow s: 2 0 0 2 -2 0 5 0

I nvestm ent perform ance to 2 0 0 9 est e t pe

• a

ce to 0 0 9

.............. but is the NZSF

A fallacy of com position? A fallacy of com position?

First – the NZSF is losing m oney st t e S s os g

• ey
• Every dollar in the NZSF is effectively

b d borrowed

• To 30 June 2009, the NZSF cost taxpayers

about $2 4 billion about $2.4 billion

• To make investment sense, the NZSF’s return

must beat the ‘hurdle rate’ – currently 6 35% must beat the hurdle rate – currently 6.35%

• Returns should be higher to compensate for

investment risk investment risk

• Government’s borrowing to buy financial

assets makes little investment sense

W hat m atters w ith ageing populations at atte s t age g popu at o s

• Raise future output:

– Immigration – Encourage later retirement – Increase State Pension Age – Increase State Pension Age – Increase labour participation at all ages

• Restrict working-age consumption

Restrict working age consumption

• Improve productivity (especially per capita)
• How might the NZSF contribute?

How might the NZSF contribute?

Other issues Ot e ssues

• PAYG at Tier 1 is more efficient, cheaper,

f i d fl ibl fairer and more flexible

• Governments should focus on their natural

strengths strengths

• Current NZSF contribution holiday should be

made permanent made permanent

• The NZSF:

– Avoided an ‘unnecessary’ tax reduction Avoided an unnecessary tax reduction – Does not make NZS more secure – Is an ineffective and potentially expensive distraction – Should be disbanded (with care)

.... in conclusion

Please don’t follow the New Z l d l Zealand exam ple