2.6  A comparison with actual saving rates (continued)

It is important to stress that the comparisons are not for exactly the same individuals. We have taken those in a particular age group from the HES and compared their actual saving rates with the mean and median rates for the similar age group from the HSS. Furthermore as we have only compared medians, it is possible that there is a tail of the distribution that is not saving “adequately” even though the median for their age group is below the actual rate. In other words, these results do not pretend to make the case that “every individual is saving adequately”. There will be those who will find that their savings will not be sufficient to sustain their pre-retirement living standards (“grasshoppers”) at one end, and at the other those who have saved enough or even more than was necessary (the “squirrels”).

We have previously discussed the treatment of durable expenditures, arguing that their exclusion from current consumption is consistent with the concept they supply a flow of services over a number of years. We also showed evidence on durables expenditure which was consistent with that which would be predicted if indeed there are intertemporal transfers made through durables; ie they have a savings element. We noted that in the absence of data to compute an annual user cost of capital, the theoretically appropriate strategy to address this issue, we had excluded durables from consumption expenditure when making estimates of the saving rate, acknowledging that this was an approximation.

A well known problem in the estimation of saving rates arise from the fact that savings is typically a small residual found as the difference between two much larger numbers, income and expenditure. For example suppose income were 100 and consumption 96, so that as a share of income the saving rate would be 4%. Now suppose durable spending of 2 were removed from the consumption spending so that the resultant estimate of the saving rate would now be 6%; ie, a small change in consumption spending, while not of major significance in absolute terms, can lead to a marked change in the derived saving rates. In short, while the absolute magnitudes might be quite small slight changes can lead to marked swings in the estimate of the savings rate.

A legitimate question arises as to the impact of our treatment of durables. What would the actual saving rates computed from the HES have been had we retained all expenditure on durables as part of consumption spending? We recomputed the actual saving rates under this extreme assumption; the results are shown in the last column of Table 6). As a result of counting all durables as current consumption, the estimated median actual saving rate for all individuals falls substantially from 15.5% to 8.7%, and is now below the prescribed rate.

It is informative however to consider the breakdown by age groups. The most dramatic reductions are in the younger age groups. This is not unexpected as savings are typically low during this stage of the lifecycle and hence any slight adjustments to the absolute numbers will have a dramatic effect of the rates as observed. If we focus on the oldest group, those approaching retirement, then we find that the effect on the estimated actual median saving rate is much less marked, and the actual and prescribed rates remain similar. It must be stressed that the median expenditure on durables for this age group was $1,000 in 2001 (Table 5) so that whether we include or exclude durables will have a limited effect on the absolute amount of saving required to achieve consumption smoothing despite the fact that it does alter the measured rate of saving.

To this point we have been comparing the prescribed rates with actual rate estimated from a single year of the HES. The prescribed rates are the annual average saving rates that would be required over the remainder of the working life to generate a stock of wealth by retirement that would provide an income sufficient to maintain pre-retirement consumption.

A more comprehensive way to make the comparison would be to estimate actual saving rates over the remainder of the working life. This was accomplished for two selected cohorts by forecasting the savings rates from regressions by age cohorts based on the pattern of saving by age reported in Gibson and Scobie (2001). A set of conditioning variables were included in the regressions to allow for the effect of house tenure, income, gender, ethnicity and employment type. The mean values of these for the respective cohort were assigned when making forecasts. For example the cohort born between 1930 and 1939 were on average 56 years old in the years covered by the HES. We used the corresponding regression equation for the actual saving rate to forecast saving rates for each year of age from 56 to the specified retirement age of 65. The results are summarised in Table 7.

Notes:

a. Average age of this cohort over the years covered by the HES was 56.

b. Average age of this cohort over the years covered by the HES was 46.

c. Computed as the average of the prescribed rates for the age groups 45-55 and 56-64 from Table 6.

d. Computed as the average of the prescribed rates for the age groups 35-44 and 45-55 from Table 6.

For both cohorts examined, those born 1930-39 and 1940-49, the actual rates of saving exceed the prescribed rates for achieving consumption smoothing when durables are excluded from consumption. When we include durables as consumption spending, the actual median rates fall below the prescribed median rates. However the mean rates remain above the prescribed rates. In other words regardless of how durables are treated, the average rates of saving across these two cohorts exceeds the rate necessary to maintain consumption levels in retirement.

We have been conservative in requiring full consumption benefits to the surviving partner and maintaining consumption throughout retirement when typically consumption needs fall. If we were to relax these assumptions it is almost certain that even the median rates would then be sufficient to meet the lower prescribed rates.

The results to this point have suggested that the preferred strategy for some groups is to make no additional provision for retirement from their current income. This arises either because they have high levels of wealth relative to income, or have low levels of pre-retirement income relative to the income expected from NZS. In either case, they would be able to achieve a level of consumption in retirement that matched their pre-retirement consumption level (ie consumption smoothing) with no further saving. How many people are in these categories? To address this we estimated the proportion of all couples or unpartnered individuals for whom the prescribed saving rates are negative. The results, grouped by age and income quintile, are summarised in Table 8.

Table 8 reveals some striking results. Consider first the overall proportions. Some 17% of couples and 38% of individuals have a prescribed saving rate which was negative. It is important that the correct interpretation of this result be made. Technically it means that those people could actually consume some of their current wealth, and use this to even out their consumption over the lifetime. However, in the case of low income households, much of their retirement wealth is represented by the value of NZS, and clearly borrowing against that future income stream is not feasible. Rather a negative saving rate should be interpreted as a signal that if consumption smoothing is indeed the underlying behavioural model of retirement savings, then no further saving would be indicated. Combining unpartnered individuals and couples, the overall share of all individuals for whom no further saving would be optimal is 24 percent. In short we would not expect up to one quarter of the population to be making additional saving for their own retirement over and above that which they have already accumulated.[20]