<p>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.</p>

<p>So this means the optimum is for the firm to set $b &gt; 1$ 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 $b &lt; 1$.</p>

<p>I think that increased government spending wouldn't necessarily increase employer costs if more employees opt in. If employers <em>only</em> 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.</p>

<p>All in theory.</p>

CC BY-SA 3.0
2015-03-25T02:54:38.807Z
2015-03-25T02:54:38.807Z
Kitsune Cavalry
<p>In New Zealand we have a retirement saving scheme called <a href="http://en.wikipedia.org/wiki/KiwiSaver" rel="nofollow">Kiwisaver</a>. </p>

<p>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). </p>

<p>Their employer must match up to 2% of the employee's income. </p>

<p>The government matches up to ~$500 a year. </p>

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

<p>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. </p>

<p>The effects I see are:</p>

<p>There is the effect of of reduced government spending. </p>

<p>There's also the effect that it will increase consumer participation in the scheme. </p>

<p>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? </p>

CC BY-SA 3.0
2014-12-07T20:47:56.253Z
can someone please create investment and tax tags.
dwjohnston
CC BY-SA 3.0
2014-12-07T21:30:49.107Z
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%?
Alecos Papadopoulos
CC BY-SA 3.0
2014-12-07T21:48:56.317Z
^@AlecosPapadopoulos Yes.
dwjohnston
CC BY-SA 3.0
2014-12-07T21:58:29.040Z
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?
Alecos Papadopoulos
CC BY-SA 3.0
2014-12-07T22:02:25.877Z
@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.
dwjohnston
CC BY-SA 3.0
2014-12-07T22:56:25.480Z
I should think this would be an incentive to employers to seek out the type of employees who are unlikely to save --- I wonder what signals they look for.
Steven Landsburg
CC BY-SA 3.0
2014-12-08T04:17:02.820Z
@StevenLandsburg ^At a saving of 2% of the employee's income a year? They'd be better off focusing on finding employees who are 2% more productive.
dwjohnston
CC BY-SA 3.0
2015-03-25T02:53:15.047Z
If consumers began sacrificing an additional one percent of their earnings you might expect a drop in consumption. Depending upon the investment portfolios, the increase by two percent per participant might be inflationary on securities. Is there any research about how the savings plan affects investment rates of non participants? It's a very interesting question.
123
<taxation><government><saving><investment>
What is the effect of redirecting government tax intake to a consumer retirement saving incentive?
dwjohnston
# What is the effect of redirecting government tax intake to a consumer retirement saving incentive?

(Asked by: username_0 on 2014-12-07)

In New Zealand we have a retirement saving scheme called [Kiwisaver](http://en.wikipedia.org/wiki/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?

**Tags:** taxation, government, saving, investment
> **Comments:**
> **username_0**: can someone please create investment and tax tags.  
> **username_1**: 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%?  
> **username_0**: ^@AlecosPapadopoulos Yes.  
> **username_1**: 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?  
> **username_0**: @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.  
> **username_2**: I should think this would be an incentive to employers to seek out the type of employees who are unlikely to save --- I wonder what signals they look for.  
> **username_0**: @StevenLandsburg ^At a saving of 2% of the employee's income a year? They'd be better off focusing on finding employees who are 2% more productive.  
> **username_3**: If consumers began sacrificing an additional one percent of their earnings you might expect a drop in consumption. Depending upon the investment portfolios, the increase by two percent per participant might be inflationary on securities. Is there any research about how the savings plan affects investment rates of non participants? It's a very interesting question.  

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## 1 answers

### Answer by username_4 on 2015-03-25. Score: 1

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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