PensionReforms summary and comments

Countries that have diminishing or negative 'household saving rates' worry about the apparently profligate ways of their citizens.  New Zealand is an outstanding case.  Its household saving rate has been negative and steadily deepening since 1994.

This 2002 report from the government's Treasury suggests that while the household saving numbers might be telling us something about the macro-economic situation, they don't tell us a lot that is useful about behaviour at an individual household level. The paper looks at different ways that saving can be measured in New Zealand (and the gaps in those numbers) and compares the results with other OECD countries.

"There are two fundamental approaches to the measurement of saving: the flow and the stock approach. The flow approach measures saving as a residual, by subtracting consumption spending from total income. In New Zealand, the net national saving rate, as measured by the conventional flow approach in the national accounts, has been trending downward for the last 30 years. While business saving shows no clear trend, there has been an apparent decline in household saving, offset to some extent by a marked rise in government saving over the 1990s. Flow data on household saving from the Household Economic Survey paint a rather different picture, in part due to definitional differences.

"The stock approach to measuring saving is based on the changes in net wealth of households, businesses and the government. In the case of households and businesses, the net wealth measure of saving produces quite different estimates, as the stock approach includes changes in both the quantity and the price of assets in the portfolio. Rising equity prices in the 1990s meant that household net wealth in countries such as Australia, the United Kingdom and the United States was rising strongly, while the flow measure showed a continued decline.

"Arguably, when concerns arise about the adequacy of retirement saving, it is the stock (and distribution) of household wealth, which is the more relevant variable, rather than the aggregate rate of the flow of household saving.  In fact, nothing about retirement saving adequacy can be inferred from the current levels of household saving. As the population ages, more and more people are retired relative to the working age population. During their working lives people might be saving a high proportion of their incomes, and then drawing down those saving in retirement. It is quite conceivable therefore that an economy could have a high level of private saving for retirement and yet show household saving in aggregate to be zero."

'Saving' numbers for both the government and households are drawn from the 'System of National Accounts' (SNA) that make some seemingly arbitrary decisions about what counts as 'current consumption'. 

"Expenditure by individuals and the public sector on education is a case in point. A strong argument can be made that educational expenditure is an investment (as is expenditure on vehicles, defence hardware, consumer durables and some parts of health). The paper illustrates that when these adjustments are made, the net national saving rate could be as high as 13 percent compared to 2.1 percent in the national accounts.

"Moreover, adjusting for the effects of inflation removes the so widely cited downward trend in private (household plus business) saving. In fact, we find no evidence that private saving has moved to a lower rate in the past decade when correcting for inflation. Much of the debate about saving is based on estimates that do not reflect the true, in an economic sense, level of national or household saving. This paper clarifies some of the issues surrounding the measurement and interpretation of the data on saving."

PensionReforms suggests that New Zealand's seemingly dire household 'saving' numbers (now standing in 2006 at  -10% of GDP) were one of the main drivers for the introduction of the national, auto-enrolment KiwiSaver scheme (that starts on 1 July 2007).  Households are seemingly spending more than they earn - we have to try to staunch the flow.  But, as the paper itself implies, if New Zealand households have really been spending more than they earn since 1994 (when the 'saving' numbers first went negative) they would by 2002 have significantly depleted their assets.  PensionReforms thinks that the 'look around' method is more useful than the 'household saving' rates and other subsequent reports clearly support that.  We might need to worry about the SNA numbers but they don't tell us anything useful about New Zealanders' preparation for retirement.       86