New Zealand Experts Propose 'Savings for Tax' Model to Address Pension Crisis

A group of economists and former officials have proposed a radical shift in New Zealand's pension system, suggesting that individuals should be allowed to save their income tax rather than pay it to the government. This plan, known as the 'savings for tax' model, aims to address the growing concerns over the sustainability of the country's pension and healthcare systems.

According to the proposal, individuals earning less than 60,000 New Zealand dollars annually would have their income tax redirected into personal savings accounts. These accounts would then be used to cover medical expenses, retirement costs, and insurance. This approach would replace the current public welfare system with private sector alternatives, while still ensuring basic support for low-income individuals.

The idea, first introduced in 2016 by former Finance Minister Sir Roger Douglas and Auckland University economist Robert MacCulloch, has been updated for the current economic climate. MacCulloch highlighted that the aging population and rising costs of healthcare and retirement are putting immense pressure on the government's budget. He warned that without reform, the system could face a slow but inevitable collapse.

Under the proposed model, individuals would have the flexibility to choose between public and private healthcare and retirement services. This shift would also allow the government to reduce its financial burden while improving the quality of services. MacCulloch argued that this approach is similar to the French system, where everyone receives basic coverage but can opt for private services if they choose.

One of the key components of the plan is the use of compound interest, which MacCulloch believes is underutilized in New Zealand. He pointed out that the average KiwiSaver balance is only 30,000 New Zealand dollars, compared to 300,000 in Australia's mandatory retirement system. He stressed that the power of compound interest could significantly improve the financial security of New Zealanders if properly harnessed.

The proposal also includes cutting certain subsidies, such as those for the film industry and winter energy support for wealthy households, to free up funds for low-income individuals. MacCulloch said this would help those who are currently unable to save adequately for retirement or medical expenses.

While the idea has not gained much political traction, MacCulloch remains concerned about the long-term viability of the current system. He warned that without significant changes, the government may soon face a crisis that could threaten the stability of the entire social welfare framework.