4 Do those enrolled in super schemes substitute them for other forms of saving?
A central question is whether or not those who enrol in a workplace or personal superannuation scheme simply substitute these schemes for other forms of saving; if so, then we would expect little or no addition to net household wealth, rather a rearrangement of portfolios. Certainly, based on the findings of the previous section we would be inclined to conclude that in some cases there is less than complete substitution, and hence total net worth is actually greater for members relative to non-members. The purpose of this section is to formally test that proposition. In this section we first review some findings from the international literature (Section 4.1); we then present the results of tests for New Zealand based on the Household Savings Survey (Section 4.2).
4.1 Some International Evidence
In one of the earliest studies, Cagan (1965) explored the effect of belonging to an employer-provided (ie, workplace) pension scheme on personal saving. He reported that those in workplace schemes saved more in other forms and attributed this to a “recognition effect”. The workplace scheme was seen to raise awareness of the need to save for retirement and hence those covered in the workplace scheme tended to save more in other forms of retirement wealth accumulation.
Subsequent research was based on the notion of expected pension wealth; ie, it is argued that the relevant concept is not whether a person belongs to a scheme, nor even the current value of the scheme, but rather the expected value by the time of retirement. The difficulty of course is that considerable uncertainty surrounds this expected value, as it will be influenced by future health status, time to retirement, future income, bequests, etc.
Munnell (1976) found a substantial effect, with expected pension wealth reducing private savings by as much as 62 cents for each dollar of expected pension wealth. “The results clearly indicate that, in contrast to earlier work of Cagan and Katona and others, pension coverage reduces savings in other forms” (p.1013). In summarising other studies Venti and Wise (1996) write:
“Blinder, Gordon and Wise (1981), Hubbard (1985), and Avery, Elliehausen and Gustafson (1986) however, find little or no evidence of a tradeoff. Diamond and Hausman (1984) find a modest tradeoff. Thus these findings would suggest that the tradeoff is far from dollar for dollar and the consensus view appears to be little or no effect” (p.26).
In their own study Venti and Wise (1996) for the USA report that typically they find a tradeoff, with a dollar of additional pension wealth being associated with 4 to 19 cents less of personal financial assets in 1991. However almost none of these results is statistically different from zero. They conclude that
“….there is unlikely to be much if any substitution of personal financial saving for employer-provided pension entitlement” (p.25). “This should not be interpreted to mean that employer pensions have no effect on individual behavior. It seems apparent that employer pensions together with Social Security have led to dramatic declines in typical retirement ages and the labour force participation of older Americans. Thus even if pensions have not reduced the amount employees save in other forms, they surely have reduced the amount older persons earn” (pp.28-29).
