PensionReforms' summary and comments

This report builds on earlier work carried out by the authors (see here).  A new survey conducted by Statistics New Zealand (called the Survey of Family Income and Employment - SoFIE) is the first longitudinal study carried out in New Zealand.  It covers a large sample - 26,339 individuals of 10,224 households (from a national population of 4.2 million) and will run for eight years.  Financial data are collected every two years and the report uses the first such data, collected in 2003-04.

The report tries to answer the question  "are New Zealanders saving 'adequately' for retirement? There are two challenging conceptual and measurement issues embodied in this question. The first is how should we define what we regard as 'adequate'? The second is how do we measure the rate at which people are actually saving? Reasonable people may hold a range of views on both matters - there is no single 'right' answer."

The report answers the first question by assuming households want to consume the same amount after retirement as before.  The answer to the second question has to use a different set of data (from the Household Economic Survey - HES) because until the second wave of financial data from SoFIE (2005-06) is available, we won't know how much SoFIE households themselves are saving.  Marrying the two sets of data is not ideal but will be improved when Wave 2 SoFIE data are available.  That said, marrying data in this way is relatively common in other similar studies.

"We find that for the majority of people in the lower income brackets no further saving should be required as NZS [the Tier 1 New Zealand Superannuation] offers a higher income than their projected pre-retirement income. Likewise wealthy individuals and couples would not need further accumulation. Overall 60% of non-partnered individuals and one third of couples are estimated to require no more saving for retirement. After adjusting these baseline results for more 'realistic' assumptions these proportions rise to over 70% of non-partnered individuals and one half of couples.

"Under our baseline assumptions, about one third of the population have current saving rates below that required for 'adequacy'. Further research is underway to identify these groups and to assess the magnitude of the shortfalls, as well as to consider how changes in policy might alter their saving behaviour."

PensionReforms notes that the topic of this paper has much present relevance in New Zealand as the world's first national, auto-enrolment, Tier 2 scheme (KiwiSaver) arrives in July 2007 (see here and here).  KiwiSaver is founded on the assumption there is something wrong with what New Zealanders are doing about financial preparation for retirement. PensionReforms agrees that portable work-based saving schemes can be a good way to facilitate saving, but KiwiSaver is a complex intervention with no doubt many unintended consequences. We do not know enough about the minority who are not saving 'enough' to rely on KiwiSaver as in any way 'the answer'.

The assumptions used by the report are conservative - first, the SoFIE data are strangely deficient with respect to seemingly under-reported values for "pension schemes" - the report acknowledged that but, conservatively, used the SoFIE data as presented.  Other key assumptions included - the principal home would be bequeathed to the next generation (not "consumed"); all property assets would not increase in value at all; other financial assets would earn a net real return of only 2%;  pay would follow an age/income profile for each ethnic group/gender/education level while growing by only 1% p.a. (to reflect growth in average real wages) and retirees would not work after age 65.  Expected mortality improvements were also allowed for and retirees are expected to want to spend the same on consumption after retirement as before.

The report assumes that individuals would all reach age 65, retire and then expect to live the average life expectancy.  The assumption is that they run down their retirement savings to nil by death at this fixed age.  That's a reasonable enough simplification but, unfortunately, in the real world people face an uncertain length of life.  There is no annuity market in New Zealand that can provide insurance against living longer than average.  Without such a market, some may over-consume and others under-consume, even while providing optimally up to the point of retirement according to the assumptions in this report.

The disinterested observer might ask why the financial services industry is being turned inside out to get KiwiSaver on the road in 2007 - certainly not to answer the annuity problem.  Why, particularly, are potentially significant tax breaks for employer contributions now being allowed to KiwiSaver?  If New Zealanders seem generally to have their retirement income saving projects under control, why do they need KiwiSaver?

While about one-third of New Zealanders are seemingly not saving enough for retirement, 90% of those in the age 55-64 group seem to be. If most New Zealanders (especially those in the ten years before age 65) are saving enough for their retirement, PensionReforms wants to know just why New Zealand needs KiwiSaver? (File size 710 KB)   122