Budget 2025: The Structural and Public Discourse Deficit

Why don’t we talk about social security contributions?

On Thursday, 22 May, the coalition government will deliver their second budget. It will hardly be a transformational budget, all pre-budget speeches suggested incremental and, to an extent, minuscule changes. For example, $100 million for maths teachers will not change the landscape. The Greens delivered an alternative budget; however, it does not seem credible because the capital gains tax is not among their agenda, despite it being an obvious choice for new taxes. The public discourses about the capital gains tax have been ongoing for over a decade, however, surprisingly, public discourses did not address the lack of social security contributions. Even international agencies, such as the IMF or OECD, are complicit in this discussion deficit.

Addressing the lack of social security contributions is crucial. While the introduction of a capital gains tax might bring in $5-7 billion in a few years, the introduction of social security contributions at the level of the OECD average would mean more than $30 billion in a fiscal year.

It is easy to see why it would be necessary. In the Budget 2024 plan, the total Crown expenditure on ‘social security and welfare’ was $53.402 billion, while the expenditure on healthcare was $28.557 billion. The sum of these expenses is $81.959 billion. In a traditional sense, these are “unfunded liabilities” – just to use Roger Douglas’s terminology. There is a social contract that the state provides these services, for example, superannuation, however, there are no dedicated taxes that would fund them. It is a structural deficit. Practically, three main tax revenues serve as the basis for these services: individuals’ income taxes, the GST and the corporate income tax. (There are options, such as the KiwiSaver, to supplement the superannuation payments, but the core expenses are still unfunded liabilities.)

To achieve funding for these services, we do not have to look too long. It is enough to check OECD statistics, and we can find voluminous data about the taxes on labour. The overall tax burden on gross labour income is 21.1% in New Zealand, meanwhile, the OECD average is 34.8%. Before someone gets a heart attack due to the idea that the alignment of New Zealand taxation to OECD practices means that the individuals’ income taxes should be higher, there is a piece of good news: The social security contributions are paid by the employees and the employers as well. Practically, what is missing from the New Zealand tax system is the employers’ social security contributions.

Employees’ social security contributions

There is one schematic plan about the effects of introducing social security contributions in New Zealand. The key to this plan is the minimum wage. The taxes paid after the annual sum of the minimum wage, if the employee can work 40 hours a week, is about 15%. In case this tax revenue were collected as employees’ social security contribution, that would generate $14-15.5 billion revenue for social security purposes. At the same time, the individuals’ income tax payments would decrease by the same amount.

So far, this is just gaming with the numbers. Although the overall statutory burden after the minimum wage would not change, it would become “tax-free.” Of course, it is a weak argument, however, there is a certain logic to it. Those services that are provided by the healthcare system and the social safety net are practically uniform. Everyone gets the same service, be it, say, hospital care, surgeries, or unemployment benefits, superannuation, accommodation supplement, etc. What differs is the frequency and the length of how people rely on them. This is a typical insurance scheme, where the risks and costs can be assessed, and the charges can be imposed accordingly.

Because the services are uniform, there is no justification to impose further social security payments obligations on incomes above the annual full-time minimum wage. All incomes above this threshold (in 2025, it is $48,800) should be charged by progressive income taxes. It is not the scope of this piece to assess the appropriate taxation levels.

Altogether, the taxation burden for individuals would not change. Imposing the current tax rate on the full-time annual minimum wage as a social security contribution would mean that the average salary earner in New Zealand would pay about the same rate of their salaries as social security as the OECD average (9.56%).

Employers’ social security contributions

In a way, employers already contribute to the social security system by paying for the 10 days of sick leave per year. On average, people use 5.5 days as sick leave in New Zealand, and this amounts to $2.5-2.8 billion per year. In a way, it is justified that employers pay for sick leaves, as it is in their interests too that employees recover from illnesses. However, it is also justifiable that employers do not have the authority to acknowledge whether the sick leaves are necessary. It is General Practitioners who decide, meanwhile the costs are paid by employers. This system does not allocate authority and resources fairly. The resources should be allocated where the authority lies: to the healthcare system (as part of the broader social security system).

For an employee, having 10 days sick leave can be sufficient or insufficient, the needs might not emerge in a levelled way. So, it would be crucial for employees to use as many days of sick leave days as necessary. However, it is also justified that the sick leave payments cannot amount to the full wage, because, by default, the employee does not perform work efforts. In European countries, the typical level of sick leave payments is 75-80% of the full salary. In a way, it creates an incentive for the employee not to get sick. However, the employees already pay for this, as the costs of the social security are incorporated in their contributions.

The employers are also interested in sustaining the social security system. It is in their interest that their employees feel secure that by the time they retire, there are sufficient funds set aside for their superannuation. Therefore, it is not just the sick leaves for which employers are interested in paying, but also the superannuation. On average, in 2023, in the OECD countries, employers paid 16.42% of the gross salaries in addition to the government in the form of social security contributions. Therefore, there is no justification why New Zealand employers not to pay any social security contributions. The level of their social security contribution should be at least 15% of their employees’ gross salaries.

Some OECD countries use the employers’ obligation to pay social security contributions as an incentive to employ people in full-time jobs to enhance job security. This is usually achieved by imposing a minimum level of employers’ social security contribution on all employees’ salaries, regardless of their actual salaries. If the employers’ social security contributions were 15% of the salaries, that would mean that they should pay a minimum of 15% of the annual full-time minimum wage as social security contributions for all their employees. With regards to the current minimum wage, $23.50 per hour, this would mean that employers should pay at least $142 per week for each employee, regardless of how many hours they work and earn.

With these settings, the possible additional revenue for the government would be between $32 and $34 billion per year. Many may argue that employers cannot afford that. Although the introduction of the employers’ social security contribution would be inflationary, this effect would be just a one-off effect. And, it might be dampened by employers accepting lower profit rates. This option is indeed serious! In the 2024 Budget, the forecast for corporate income tax revenue was %16.652 billion. If we consider the 28% corporate income tax rate, the corporations’ after-tax profits amount to $42.819 billion. That sum is sufficient to pay the $32-34 billion social security contributions. Not to mention that not all of the social security contributions would be paid by them, a large chunk of it would be paid by public service organisations.

We might argue that many businesses would go bankrupt by imposing such a tax burden on them. True. However, there is a flip side to this argument. We may ask whether it is acceptable for us as a society to see that businesses can garner roughly 80% of their profits, mostly because they do not pay the typical OECD level of social security contributions.

Would this resolve the structural deficit?

Altogether, the schematic plan would result in $32-34 billion additional revenue for the government. If we add that $14-15.5 billion from current individuals’ income taxes should be redirected into the social security fundings, altogether there is $46-49.5 billion funding for social security purposes. In the introduction, it has been shown that social security services and healthcare services amount to $81.959 billion in the 2024 budget. However, if we count only the healthcare expenses and the superannuation expenditures, the maths shows a much more optimistic picture. The sum of healthcare expenses ($28.557 billion) and the superannuation spending ($21.567 billion) is $50.124 billion. This is only slightly larger than the possible social contributions revenue.

Internationally, economists believe that if the superannuation system and the healthcare system are 75-80% directly funded through social security contributions, in that case they are sustainable because additional tax revenues could help. Therefore, we can see that the introduction of social security contributions at the levels of the current OECD average should easily provide sufficient and sustainable funding for these services.

Unfortunately, the coalition government does not want to risk such a relevant tax reform, and the opposition parties do not specifically raise the idea either. The Greens have a plan to extend ACC to a comprehensive healthcare system. This is just one side of the equation. The funding should be there too, and the existing level of ACC levies is far from sufficient to create a comprehensive healthcare system.

Please, help change the public discourse so that they will address the possibility of introducing social security contributions!