Time to get real with money

"We've had the fun, the big spend-up, bought overpriced houses and farms, and a lot of bling. Now, unfortunately, it's time to pay and lay a more secure foundation for future sustainable wealth," the report says.

The report notes New Zealand has a small mandatory retirement saving scheme compared to other OECD countries and "provides relatively few incentives for voluntary saving."

On the issue of making KiwiSaver saving compulsory the report outlines more pros than cons.

It says evidence from Australia suggests compulsion would increase national savings and the addition of thresholds, such as compulsion only kicking in above a certain earnings level, would address some of the concerns around compulsion.

"Soft compulsion", the automatic enrolment of everybody with an opt-out choice is also mentioned as an option.

Another KiwiSaver issue  the report highlights is the lack of rules regarding how retirees should withdraw  their savings and a shortage of suitable investment products for the less financially-savvy.

"Should the government issue tax-free, inflation-indexed bonds with, say a 2% real rate of return, so that individuals can inflation-proof their own retirement investments. Or should there be an option for individuals to use part of their KiwiSaver funds to buy a higher level of NZ Super? Or should the government provide annuities, on a full-cost basis, to remove the risk of institutional failure?"

Questions over the effects of tax on savings and investments were also raised by the report.

The different tax treatment for income earned and spent is highlighted, as the report says "income taxes tax the returns to saving  more heavily and provide an incentive to select tax-advantaged investments such as owner-occupied property."

Tax discrepancies and situations are also believed to be impacting savings and investment choices.

"Differences in effective marginal tax rates strongly favour owner-occupied housing and investment housing. Simple savings products, such as bank term deposits, are seriously penalised."

The SWG said it favoured some inflation-indexation of taxes on savings and an extension of tax rates applying to current the PIE regime.

However, it ruled out adopting the so-called Nordic system, favouring other options.

"In most countries, earnings of retirement savings are tax-exempt, but not in New Zealand. This taxation of returns on retirement income over time heavily cuts back the returns to saving. The SWG considers that there should be a close examination of this issue, in a more comprehensive policy context."

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