2.6  A comparison with actual saving rates (continued)

Note: A negative saving rate is interpreted as meaning that to a achieve an adequate retirement income (defined as the ability to maintain pre-retirement consumption levels) then given current and projected levels of wealth and income, no further saving would be required.

We can compare this finding with the survey results reported by Weiss and Drillien (2003) who find that almost 50% of those interviewed are not saving for retirement. Our results predict that at there are sound reasons to expect at least half this number have rational reasons not to be saving for retirement.

There are two reasons for this. As illustrated in Figures 3 and 4, the prescribed saving rates are typically negative in the lowest income group and the highest wealth group. A low present income relative to the expected retirement income which NZS offers under current policies means that the preferred savings strategy is not to reduce present consumption further from the low income. Equally those with high current wealth (typically having high incomes) have no need to save additional amounts. Their existing wealth would be sufficient to provide a retirement income which smoothed their lifetime consumption.

How many of those for whom additional saving is not the preferred strategy to achieve consumption smoothing come from the low income groups whose primary source of retirement income is NZS? Among couples 73% and among unpartnered individuals some 84% of those with negative prescribed saving rates are from the lowest 40% of the income distribution. In the case of unpartnered individuals in the lowest income quintile, 100% of every age group has a negative prescribed rate; based on a consumption smoothing model, we would not expect any of this group to be making additional retirement savings.

To explore this distributional aspect further we have computed the predicted retirement incomes of couples by age and income quintile and compared these to an income level represented by 60 percent of the median predicted retirement income. This level is sometimes used as poverty line. The results are presented in Figure 5. Those whose medians fall below the overall poverty line are aged 56-64 and in the lower two income quintiles.

Figure 5 – Median predicted retirement income for couples retiring at 65 by income quintile and age group

Finally we can ask: what proportion in each group has a projected retirement income level which falls below the poverty line? These results are summarised by age and ethnicity in Table 9.

Note: Ethnicity of a couple refers to that of the respondent.

The results show that a greater proportion of the Maori and Pacific Island population have predicted incomes below 60 percent of the overall median; this is especially marked for the oldest age group.

It must be recalled however that NZS provides a floor under the retirement income, so while there a significant share of the population falling below the poverty line, the actual gap in dollar terms is quite small. This is illustrated in Figure 6.

For the purposes of illustration we have taken the total population of couples aged 56-64. The mean and median predicted retirement income of this group is $38,253 and $29,465 respectively, again emphasising the skewness of these distributions. Of this group, 9.5% were predicted to have incomes below the value corresponding to 60% of the median for their group; ie, below $17,679.[21] However NZS places a floor on the retirement income of a couple of $19,100 so that in effect no retirees fall below 60% of the median retirement income for this group.

Two points emerge from this analysis. The first is that some 32% of this older age group is projected to have no other savings for retirement, and would therefore rely solely on NZS. Note however, that where their pre-retirement incomes are low, then their behaviour is still consistent with wishing to smooth their consumption. It is true that additional pre-retirement saving would provide them with a higher income in retirement– but that would come at the expense of reducing their already low level of pre-retirement consumption.

Figure 6 – Distribution of predicted retirement incomes for couples aged 56-64, retiring at age 65 with no consumption of housing wealth

This finding mirrors recent results for the USA. Engen, Gale and Uccello (2004) use a model for estimating optimal wealth accumulation which, like the present study, is based on a measure of consumption smoothing. Unlike the present study however, it allows for uncertainty in life-time earnings. They compare the optimal level of lifetime wealth accumulation derived from the model with the actual levels of reported wealth accumulation. They report that while some people have very low levels of wealth accumulation this is completely consistent with rational behaviour.

“The low level of wealth accumulation exhibited by a significant minority of households in the simulation model is consistent with optimizing behaviour and in no way implies a retirement saving shortfall owing to myopia, irrationality, or poor information”. (p.10)

The second point is that almost 10% of retired couples would have projected retirement incomes below 60% of the median retirement income[22] for this age cohort in the absence of NZS. However, once NZS is allowed for, these couples receive an income from NZS that is above the so-called poverty line by some 8% ($19,100 compared to $17,679). In other words, it would appear that payments under NZS are in fact set to provide an income slightly above the basic minimum standard of living for retirees.

It is worth noting however that the Survey of Living Standards of Older New Zealanders (2001) reports that:

Overall, the results show that most older people were doing relatively well, with any restrictions relating to more “luxury” oriented items ….A preliminary comparison across the total population showed that older people tended to report fewer material restrictions and difficulties than younger people with this trend holding for both Maori and non-Maori respondents.

Living Standards of Older New Zealanders: A Technical Account, p.13

This finding suggests that the level of NZS does appreciably limit deprivation among older people and that the findings that people are saving adequately for retirement is consistent with the fact that little deprivation amongst retirees is found.[23]