NZ Economists Warn That Taxpayer Fund May Create 'Moral Hazard'

by Caroline Maxwell, Tax-News.com, London

15 October 2001

A newly approved retirement scheme, enthusiastically promoted by New Zealand Finance Minister Michael Cullen, has come under attack from economists and tax experts alike.

The superannuation fund, whereby a certain percentage of tax receipts will be fenced off each year to partly meet future retirement costs, has come under fire from all sides, and was recently the subject of a critical report by Adrian Orr and Donna Purdue, of Westpac Trust.

'The visibility and magnitude of the proposed scheme may create a mirage that government retirement income is guaranteed,' they warned. Mr Orr and Ms Purdue also criticised the government for failing to have properly assessed alternatives to the Cullen scheme, such as reducing tax rates as surplus builds over the coming years and paying down government debt. 'Lower taxes could increase labour force participation,' they explained in the report.

Under the New Zealand Super scheme, which was approved narrowly in parliament last week, it was reported that $600 million has been earmarked from tax receipts for this financial year, with contributions eventually rising to around $2 billion per year.

However, tax experts have pointed out that even at its predicted 2025 peak of $50 billion, the retirement fund will still only cover around 14% of the state pension, leaving the burden on future taxpayers at an uncomfortably high level. 'The burden on future taxpayers remains large, with their ability to pay dependent on the size of the tax base at the time,' warned Mr Orr.

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