2.6  A comparison with actual saving rates

In this paper we have estimated the rates of saving that we have defined as prescribed rates. These rates are those which, if people’s saving behaviour was governed by a desire to smooth consumption over their lifetimes, would be consistent with that objective. Of course, modelling behaviour requires us to formulate a theory of how we think people behave with respect to savings and consumption now versus later. It is impossible to know for certain if the proposed theory is really how people behave. Often, evidence of a counter example will be used to imply that the theory cannot be valid. Some individuals might appear to behave in a way quite counter to that which the theory of savings would predict.

Theoretical models do not, however, try or pretend to predict the behaviour of every individual. They are by their very nature abstractions from the complexity of real world observations; were they not they would cease to be useful constructs. We do not claim that people actually behave in the way set out in the model and accumulate wealth converting the stock of all assets to an annuity at retirement. The question is whether the outcomes of such models are consistent with observed behaviour. In other words, are people acting as if they were endeavouring to smooth consumption over their lifetimes? The most powerful test of the underlying theory we have proposed about savings behaviour is whether or not it is capable of predicting how people actually behave.

In order to conduct the comparison we need data on actual savings behaviour. Unfortunately there are no surveys in New Zealand which have been designed to measure savings at individual household level. This represents an important limitation. We have used the Household Economic Survey (HES) as our source in the absence of any better measures.[16]

From that survey we were able to derive estimates of the ratio of household saving to disposable income by quintile of disposable income. We then adjusted these to ratios of savings to pre-tax (gross) income, using the relevant tax rates.[17] The results apply to couples rather than unpartnered individuals for whom it was not feasible to extract estimated saving rates from the HES.

Included in the data on consumption used to derive the measure of saving (defined as income less consumption expenditure) is expenditure on durables. The appropriate treatment of durables is to remove them from current consumption on the grounds that they provide a flow of services extending over years, in contrast to consumables which are fully used in the current year. One then calculates an annual charge (known as the user cost of capital) which allows for changes in valuation, interest on the capital and depreciation. This is then added back to expenditure to reflect annual costs of ownership. In the case of the HES it was not possible to construct a complete inventory and hence a true user cost of durables. In our base case we chose to exclude durable expenditures, which will understate the true costs of ownership by the amount of the user costs. It is argued that this is preferable to including all durables and overstating current consumption spending. Clearly the true value lies between these extremes, and we address this issue with sensitivity tests below.

The argument for excluding durables expenditure rests on the premise that these articles provide a flow of services over time. Anecdotal evidence suggests that people often replace these articles in the years leading up to retirement. If this were the case, then it would reinforce the argument that these items represent a form of saving. To test this proposition we examined the levels of spending on durables recorded in the HES. We compared the mean and median levels of expenditure for those in the pre-retirement age group (55-64) with those in the first decade of retirement (ages 65-74).[18] The results are summarised in the Table 5.

Source: Computed from the Household Economic Survey.

Median spending on durables falls by about one half in the first decade of retirement. These findings are consistent with the proposition that durable spending is undertaken, like any form of saving, to provide a flow of services in years beyond the year of purchase.

The results for the medians for the prescribed and actual saving rates are summarised in Table 6, for both including and excluding durables as part of consumption spending. When durables are excluded, the median actual saving rate (estimated from the HES) exceeds the prescribed rate for the population as a whole. In fact the actual rates excluding durables are greater than the prescribed rates for every age cohort. This implies that individuals are actually saving at a rate which would allow them to meet the somewhat stringent test of sustaining pre-retirement consumption that we have applied.

Note: The age category is based on the older of the couple in the HSS analysis, while the HES is defined as the age of the head of the household.

Figure 4 presents the results broken down by income quintile within each of the four age groups. For the poorest quintile of the two older age groups, the model prescribed saving rates that were negative and in fact that is exactly what is observed. For the top three quintiles the prescribed rates are quite comparable to the actual rates in almost all age cohorts.[19] It is the bottom 40% of those in the age range 25-44 who appear to have made insufficient provision for their retirement. But this is not particularly worrying, since these people, many of whom have just started their career, still have a long working time to adjust their saving behaviour appropriately.

Figure 4 – Median prescribed saving rates compared to actual saving rates from the Household Economic Survey (HES) for couples by age groups and 5 quintiles of income: 2001 with durables excluded from consumption