Retirement saving issues in New Zealand

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Retirement saving issues in New Zealand

• What has happened to evidence-based policy making?

28 June 2007
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Agenda

• A practical case study
• A very short history
• Evidence?
• Where might we be heading?

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The issues on the ground

• Couple (children left home)
• Age 55 53
• Combined income 48,000 before tax
• Own own home net value 220,000
• Total net assets 383,000
• of which financial assets 21,000
• Currently saving 5,000 a year

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Who is this couple?

• SoFIE middle quintile
• of couples aged 55 to 64
• New Zealand Super will be 57 of net income
• Debt under control
• Already saving enough, but
• KiwiSaver will deliver 63,400 (inc. 16,000
  personal 13,000 employer)
• but not extra
• of which 27,100 comes from taxpayers
• to address which problem?

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SoFIE - all older individuals
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SoFIE - all older individuals
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Reserve Bank data - households
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Reserve Bank too much housing?
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Reserve Bank missing assets - 2004

• disposable income
• Net household wealth 538
• Estimated missing 137
• Total net wealth 675
• Note Estimated missing assets exclude
  commercial real estate
• (All debt in 2004 146)

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Research resource
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Can governments change things?

• International evidence is no
• For example, 48 country study 1980 2004
• 1 in pension saving adds 0-20 cents to national
  saving
• Ignores cost of incentives and sub-optimal
  investment decisions
• Small improvement with maturity
• Reforming countries dont seem to be different
• Pensions and Saving New International Panel
  Data Evidence - Bebczuk and Musalem (2006)

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Can governments change things? - 2

• More evidence that answer is no
• Seven country study 1970 to 2000
• Voluntary pension savings largely not new money
  
• We found substantial evidence that pension
  saving substitutes for other forms of private
  saving.
• Pension Reform and Saving - Bosworth and
  Burtless (2004)

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Do tax incentives work? - 1

• Evidence that answer is no
• No evidence that they increase savings
• or saving
• They are regressive
• and increase the taxes of all
• They also distort behaviour
• Current taxation of qualified pension plans has
  the time come?
• - Munnell (1992)

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Do tax incentives work? - 2

• Incentives change behaviour
• Direct incentives probably dont increase saving
• between 0 and 30 percent of 401(k) balances
  represent net additions to private saving
• Ignores direct/indirect costs of incentives
• The Effects of 401(k) Plans on Household Wealth
  - Engen and Gale (2000)

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Does compulsion work?

• A 13 country review of Latin America
• 11 lessons including
• Growing informality of labour force
• Ownership doesnt solve evasion
• Suppliers tend to concentrate to a few
• Competition doesnt control costs
• Market doesnt solve mortality issues
• Effect on national saving is uncertain
• Large, regressive, long-tail costs in transition
• May have made markets more liquid (but may not)
• Investment risk adds to social risk
• Reassessing Pension Reform in Chile and Other
  Countries in Latin America Meso-Lago (2002)

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Some comments on Australia

• Significant, persistent current account deficits
  4.5 p.a. for 20 years (Treasury 2005)
• Aggregate saving not markedly different to New
  Zealands (OECD) despite compulsion
• Some evidence of compulsions influence on
  household saving rate (RBA 2000,2004)
• Superannuation only 6 of median household wealth
  (HILDA 2001-02)
• In the six years to 2000, superannuation assets
  increased by about the same as debt (Treasury
  2003)
• No work done on financial preparedness for
  retirement (as per Scobie analysis for New
  Zealand)
• Financial institutions love compulsion

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What drives saving?

• Higher output growth boosts saving
• Fiscal consolidation linked with increased
  saving
• Private credit increases tend to reduce saving
• Ageing populations reduce saving
• Better terms of trade tends to increase saving
• Saving behaviour may not be affected by returns
• Increased credit may mean firms invest more
• Higher cost of capital associated with lower
  investment
• World Economic Outlook, 2005 - IMF

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Higher savings growth?

• More savings matter for poor rather than rich
  countries
• Review of 118 countries over 1960-2000
• Open capital markets disrupt theories based on
  closed economies
• Local savings matter for innovation in poor
  countries not significant for rich
• When Does Domestic Saving Matter for Economic
  Growth? Aghion, Comin Howitt (2006)

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Are household saving numbers helpful?

• For retirement saving stocks matter, not flows
• Nothing about retirement saving adequacy can be
  inferred from household saving
• Possible adjustments could convert net national
  saving from 2.1 to 13
• Correcting for inflation removes the so widely
  cited downward trend in private saving.
• The look around test is more useful
• OECD will not now use our household numbers
• Saving in New Zealand measurement and trends
• Claus Scobie (2002)

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New Zealanders behaving badly?

• Scobie et al. have looked at available evidence
• Latest numbers conclude that about one third are
  not saving enough
• Conservative assumptions
• No better information
• So, the problem is . ?
• Are Kiwis Saving Enough for Retirement?
  Preliminary evidence from SOFIE
• Trinh Le, Grant Scobie and John Gibson (2007)

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How are New Zealands old faring now?

• Ground-breaking work by MSD Economic Living
  Standards Index (ELSI)
• We must have been doing some things right
• The old (65) have the smallest levels of
  hardship only 8 have any at all
• Unrelated to financial assets 59 have
  25,000 or less
• Owning a debt-free home is important
• So, the problem is . ?
• New Zealand Living Standards 2004
• Ministry of Social Development (2006)

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SoFIEs symmetry

• Eight year longitudinal survey
• Substantial population sample
• Started 2002 first tranche of financial data
  for 2003/ 2004
• Subsequent financial data 2006 and 2008
• Perfectly straddles KiwiSavers introduction
• We will be able to measure impact

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KiwiSaver Not achieved

• OECD measures good regulation as
• Serving clearly identified goals
• Having a sound legal empirical basis
• Producing benefits greater than costs
• Minimising costs market distortions
• Promoting innovation through market incentives
  goal-based approaches
• Being clear and practical
• Being consistent with with other regulations
  policies
• Being compatible with competition, trade
  investment-facilitating principles
• OECD Guiding Principles For Regulatory Quality
  And Performance (2005)

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KiwiSaver interim judgement

• Some positive aspects
• Workplace participation will increase
• But the problem not defined
• Founded on questionable assumptions
• Little research no debate
• Rushed introduction imperfect implementation
• Not designed for employers
• Tax breaks unjustified cost could be more than
  2x
• Introduces unnecessary public policy risks
• Probably wont work definition?
• Could be improved but still probably wont work

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Behavioural responses

• Tax treatment is now complex and lacks
• Transparency
• Logic
• But will cost more to administer
• As the boundaries are constantly tested
• Amounts in superannuation will rise .
• . but not necessarily saving
• Tax planning will re-emerge

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Where have we got to?

• A unique, simple, transparent retirement income
  system (1990-2000) .
• . gradually unravels (2000-2007)
• Now we have a solution (looking for a problem)
• that reduces transparency,
• .increases cost and complexity
• To achieve .now, what exactly was the problem
  again?

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Practical politics consists in ignoring facts.

• Henry Adams