2.5 Results from the model
Table 3 presents the projected wealth levels at retirement (age 65). These projections (corresponding to Wp in Figure 2) are based on the levels of reported wealth, including housing wealth, at the time of the survey.[14] Again, it is helpful to consider the median values. An important conclusion is that the projected wealth accumulated by age 65 is similar for all age groups. Although the younger age groups typically have a lower current level of wealth, the fact that they have a longer period until retirement for that wealth to grow means their projected wealth by the time they retire turns out to be remarkably similar to those close to retirement.
| Couples | Unpartnered Individuals | |||
|---|---|---|---|---|
| Age Group | Mean | Median | Mean | Median |
| 25-34 | 659,847 | 526,409 | 314,991 | 287,496 |
| 35-44 | 782,549 | 616,447 | 423,007 | 307,371 |
| 45-55 | 863,158 | 684,146 | 448,780 | 347,413 |
| 56-64 | 853,473 | 667,842 | 453,084 | 372,560 |
| Total | 794,607 | 607,687 | 394,777 | 310,100 |
While the projected levels of retirement wealth are similar across age groups, this is based solely on the growth in the real value of existing net assets. It does not reflect the fact that real incomes will grow - and the longer until retirement the more potential there is to have saved out of rising lifetime real incomes. As a result, we find that the projected median retirement incomes for couples by age group (all in $2001) are:
- 25-34: $45,565
- 35-44: $46,141
- 45-55: $38,872
- 56-64: $29,465
It is evident that when measured in constant 2001 terms, the real retirement income of the youngest age groups will be over 50% higher than that of the oldest cohort retiring over the next decade. At first glance this may seem inconsistent with the fact that the projected real levels of retirement wealth are comparable. However, there is nothing surprising in this result when it is recalled that the projections incorporate a real annual growth rate in incomes and NZS of 1%. Steady growth rates, even at modest annual levels, imply a significantly higher real income in future decades, parallel to the real incomes that people today enjoy compared to the real incomes of their grandparents.[15]
The next step is to estimate the average annual (constant) saving rate that would be required in order to achieve consumption smoothing. These saving rates are denoted “prescribed”. At the same time the replacement rate can be derived. These results are summarised in Table 4.
| Age Group | Couples | Unpartnered Individuals | ||||||
|---|---|---|---|---|---|---|---|---|
| Prescribed Saving Rate | Replacement Rate | Prescribed Saving Rate | Replacement Rate | |||||
| Mean | Median | Mean | Median | Mean | Median | Mean | Median | |
| 25-34 | 8.1 | 10.9 | 63.6 | 64.3 | 1.0 | 5.0 | 71.2 | 72.4 |
| 35-44 | 9.9 | 13.8 | 60.3 | 56.8 | 0.6 | 7.8 | 70.5 | 66.6 |
| 45-55 | 6.0 | 18.2 | 66.0 | 54.3 | -5.4 | 4.0 | 78.1 | 69.1 |
| 56-64 | 1.6 | 14.9 | 72.9 | 60.4 | -27.8 | -13.9 | 103.8 | 90.9 |
| Total | 6.9 | 13.5 | 65.0 | 57.4 | -4.6 | 4.9 | 77.1 | 71.4 |
Note: The prescribed saving rate is that rate (as a percentage of before tax pre-retirement income) which would be required for a couple or individual to meet the definition of adequacy used in the model; ie to allow consumption smoothing, given their current wealth as measured in the survey. The replacement rate is the ratio of post to pre-retirement income (ie, R= Yr/Yp). Some individuals have such high levels of wealth accumulated already that, given their incomes, they would be able to smooth consumption with no further saving - in fact the model gives the result that they could "dissave" and run down current wealth (ie s<0). As a result it is possible in these circumstances that Yr can exceed Yp (ie R>1).
When the results are further disaggregated it is found that those with high wealth and those with low incomes tend to have negative rates of prescribed saving. This is illustrated in Figure 3 for couples aged 45-55 planning to retire at age 65. This can be interpreted that for those people, in order to smooth consumption no further saving is required. In the case of high wealth couples, this simply means that they already have accumulated sufficient wealth to sustain consumption given their reported incomes.
Of note is the fact that median prescribed rate of those in the lowest income quintile is also negative. This arises because NZS offers them an income in retirement that is comparable to or higher than that which they have pre-retirement. In such a case, they would be disinclined to save further now.
- Figure 3 – Median prescribed saving rates for couples aged 45-55 retiring at age 65 by wealth and income quintiles
Note: Quintiles of either income or wealth are shown on the horizontal axis
The saving rates in Table 4 are derived from a model, which has as its starting point the assumption that people save for retirement at a rate which would allow them to have the same standard of living (as measured by real consumption) in retirement that they had pre-retirement. Clearly there are many other rules for saving adequacy that could have been applied. How well do these prescribed rates match the rates at which people actually save? This comparison is presented in the next section.
