The recommendation Wellington keeps refusing
The OECD’s latest Economic Survey of New Zealand, released today, called on the government to stop taxing KiwiSaver contributions and investment earnings up front, and instead tax withdrawals at retirement. It is a shift from New Zealand’s unusual TTE model (Taxed, Taxed, Exempt) to the EET model (Exempt, Exempt, Taxed) used by most developed economies.
OECD Director Luiz de Mello said the change would “bring taxation closer to international norms, significantly raise long-term household wealth, and deepen domestic capital markets.” The OECD report was blunt about the status quo, noting that New Zealand’s “taxation of capital income and savings is complex and uneven, with housing taxed lightly relative to financial assets and especially pensions.”
Finance Minister Nicola Willis rejected the recommendation on 8 May, calling it “quite a radical tax reform” and warning that doing it “in a way which wouldn’t create a large number of people who are worse off would create a big fiscal impost.”
She is not wrong about the transition cost. But the cost of inaction compounds silently every single year.
The maths that should embarrass policymakers
In 2024, visiting professor Andrew Coleman modelled the difference between the two systems in a detailed analysis for interest.co.nz. Under TTE, a person saving $1,000 of after-tax income annually from age 25 to 65 accumulates $84,410 and can withdraw $4,875 per year in retirement. Under EET, the same gross income produces a balance of $189,310 and annual withdrawals of $8,570. That is 75% more retirement income from the same earnings.
Coleman argued in 2024 that New Zealand’s 1989 switch from EET to TTE was one of the most distortionary retirement savings decisions in the OECD, and that it had artificially inflated house prices by making owner-occupied housing relatively more tax-advantaged than financial savings.
In 2024, Xavier Waterstone of QuayStreet quantified the trans-Tasman gap: actual KiwiSaver balances sit at just 68% of what they would be in a tax-free world, compared with 79% in Australia. Waterstone said in 2024 that “the system is unambiguously in need of reform” and called for “a bolder approach to recalibrate taxation and contribution settings.”
A $123 billion pool that should be bigger
KiwiSaver funds under management reached $123.1 billion as at 30 June 2025, with record contributions of $12.2 billion flowing in during the year. The scheme has 3.39 million members and an average balance of $36,349.
Those headline figures mask structural weakness. Some 1.6 million members make no contributions at all, while another 1.16 million contribute at the minimum 3% default rate. The pool is big enough to matter but structurally smaller than it should be because the tax system bleeds returns before compounding can do its work.
This is not just a retirement problem. It is a capital markets problem. The OECD noted there have been no initial public offerings in New Zealand since 2021. A deeper domestic savings pool means more capital available to fund New Zealand businesses without relying on offshore investors who can leave when sentiment shifts.
Budget 2025 tinkered where it should have reformed
Budget 2025 raised default contribution rates from 3% to 3.5% starting April 2026, with a further increase to 4% in April 2028. But the government simultaneously halved its own contribution, cutting the member tax credit from 50 cents per dollar to 25 cents, reducing the maximum annual government top-up from $521.43 to $260.72.
The net message to savers: put more in, but expect less help. The structural tax treatment that erodes returns before they compound remains untouched.
The fiscal argument cuts both ways
Willis’s caution about the transition cost is not irrational. But the cost of the status quo does not appear in any single year’s fiscal accounts. NZ Super costs are climbing fast. Willis herself has acknowledged that the cost of NZ Super will increase by roughly $6 billion per year over the forecast period, rising from just over 16% to more than 20% of every tax dollar collected.
A larger KiwiSaver pool means more New Zealanders arriving at retirement with meaningful private savings, reducing pressure on NZ Super. The OECD is not recommending an overnight switch. It is recommending a gradual transition, the kind that gets cheaper the earlier you start.
As Politik noted, the OECD has been recommending capital tax reform to New Zealand since 1984. Successive finance ministers have said no. Each refusal looks more expensive than the last, because the compounding clock does not wait for political courage. For every business owner wondering why domestic capital is so scarce and so expensive, the answer is partly sitting in a tax framework that punishes financial savings while rewarding housing. The OECD has drawn the map. The question is whether any finance minister will ever follow it.
Sources
- RNZ: OECD report suggests raft of reforms to help New Zealand economy (2026-05-10)
- Politik: Once again Willis says ‘no’ to the OECD (2026-05-08)
- FMA: KiwiSaver Annual Report 2025 (2025-09-30)
- IRD: Statistics on payments to scheme providers (2025-09-30)
- Budget 2025: KiwiSaver changes factsheet (2025-05-22)
- Interest.co.nz: New Zealand’s odd taxation of retirement savings is bad for the country (2024-08-30)
- Interest.co.nz: Is the KiwiSaver system fit for purpose? (2024-07-11)
- NZ Herald: OECD suggests linking NZ Super eligibility to life expectancy and hiking KiwiSaver contributions