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In New Zealand we have a retirement saving scheme called Kiwisaver.

The scheme is opt in. If a consumer opts in, they must save at least 3% of their income, which they can't access until retirement. (They can also withdraw it to buy a first house).

Their employer must match up to 2% of the employee's income.

The government matches up to ~$500 a year.

My question is, what happens if the government, instead of giving a tax cut, increases its contribution to the retirement scheme?

e.g. The government cuts services, and so can afford to give taxpayers a 1% tax cut. Instead of simply giving the tax cut, they announce that they'll be instead matching an additional 1% on the saving scheme.

The effects I see are:

There is the effect of of reduced government spending.

There's also the effect that it will increase consumer participation in the scheme.

But there's also the effect that all this extra money has on the investment world. Would this simply be inflationary on existing stock prices? Or is it likely to increase new (risky?) investment?

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  • $\begingroup$ can someone please create investment and tax tags. $\endgroup$ – dwjohnston Dec 7 '14 at 20:47
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    $\begingroup$ Interesting (although too complex to model in a post). So if the employee decides unilaterally to opt in, the employer is obliged to follow and pay the 2%? $\endgroup$ – Alecos Papadopoulos Dec 7 '14 at 21:30
  • $\begingroup$ ^@AlecosPapadopoulos Yes. $\endgroup$ – dwjohnston Dec 7 '14 at 21:48
  • $\begingroup$ Hmm, that creates another source of production costs that is out of the control of the employer. Is there any research as to whether this plan may have some depressing effect on NZ wages? As a "preemptive" response of the firms to the possibility that they will see their labor costs suddenly rise just because their employees one day decided to opt-in? $\endgroup$ – Alecos Papadopoulos Dec 7 '14 at 21:58
  • $\begingroup$ @AlecosPapadopoulos - Absolutely its a production cost for the employer, (just as tax, health and safety regulations, etc are). But the isn't so much about that (given that Kiwisaver is in effect). I guess you could argue that increased government contribution means would also increase employer costs if more employees opt in. $\endgroup$ – dwjohnston Dec 7 '14 at 22:02
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If you've ever looked at the ratchet effects model, you might be able to glean insight from there? Basically, if a worker is paid in a piece rate $a + bq = S, for \space e(q)$, where e is the effort exerted by the worker, we know that it is the most efficient--normally--to set $b = 1$ (no deadweight loss of "taxation" of labor, so to speak), assuming that e is measurable. However, given the cost of effort, the firm will always try to guess what that ($C(e)$) is so that $a + be - C(e) = 0$, to minimize the salary $S$ that is paid out. Workers, anticipating this, ratchet their productivity downwards, since working hard will tell a firm that the job being done by the worker is very easy, and not worth much pay.

So this means the optimum is for the firm to set $b > 1$ in a two period model where you observe effort, and then set the piece rate pay in the second period. Imagine how this might work for employers. They know that the amount they put into the Kiwisave is dependent on how much they pay out to the worker, given some chance that the employee actually puts aside the 3%. So the firm will set pay lower than they normally would if the government raised their investment into Kiwisave. The question is, would firms lower $b$ or $a$. When you optimize a simple model like this, $a$ usually doesn't go into the FOC, so probably what will happen is $b < 1$.

I think that increased government spending wouldn't necessarily increase employer costs if more employees opt in. If employers only had to pay the 2% if employees successfully paid their share that is, 100% chance employees who opt in, then more government spending would do almost nothing, barring elasticity. Those who opt in would simply have their wage set lower by the firm.

All in theory.

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