2.7  International comparisons

The findings of this study are consistent with recent studies for the USA and the UK. In Table 10 we compare the results of the present study with two studies for the USA. The results of all three studies are remarkably similar. In all cases the prescribed saving level for the lowest income group is either close to zero or negative. The rate rises with income and reaches similar levels across all studies for the highest income group.

The uniformly low level of saving prescribed for the low income group is a reflection of the public provision of retirement income. Bernheim et al. (2000) observe:

“The fact that the recommended saving rate is close to zero for the low income group and that the rate rises with income is not surprising. Most of the low-income households will receive the majority of their post-retirement incomes from Social Security. And the higher the level of income, the smaller the fraction of pre-retirement income being replaced by Social Security”.

which is consistent with the findings of this study for New Zealand. The argument that compulsory pension schemes result in a substitution for other forms of saving receives additional support from the work of Attanasio and Rohwedder (2003). They examine household saving in the UK and conclude that the state earnings related pension scheme (SERPS) results in a significant substitution for financial wealth.[24] In other words those who had built up pension wealth in the obligatory SERPS scheme accumulated less in other forms of wealth, a result they note “is in accordance with the basic prediction of the life cycle model” (p.1515).

Note: The income categories are based on deciles: Low = 1; Lower Middle = 3 and 4; Upper Middle = 6 and 7, and High = 10. For the New Zealand results from this study the data are drawn from quintiles where: Low = 1; Lower Middle = 2; Upper Middle = 4, and High = 5.

Sources: Bernheim, Forni, Gokhale and Kotlikoff (2000) Table 1, p.290); Moore and Mitchell (1997), Table 3, p.33.

In a related study Attanasio and Brugiavini (2003) present similar evidence for Italy. Their paper provides new evidence on the substitutability between private and pension wealth by exploiting the Italian pension reform of 1992. They find convincing evidence that saving rates increase as a result of a reduction in pension wealth. By allowing for the possibility that substitutability changes with age, they find that substitutability is particularly high (and precisely estimated) for workers between 35 and 45.

A recent study by Scholz et al (2004) for the USA, asks whether Americans are saving “optimally” for retirement. They use a life cycle model but incorporate uncertain life expectancies, taxation and transfers, pension benefits and uninsurable earnings and medical expenses. Their model is able to explain over 80% of the cross sectional variation in retirement wealth accumulation and they argue that the results provide strong support for the life cycle model. The life cycle model does a much better job of explaining retirement accumulations than simply assuming that households save a given fraction of their income (depending on age and income). They find that there is “strikingly little evidence that HRS households have undersaved”. They conclude:

“The results, based on data from the Health and Retirement Study, are striking… We find that the model is capable of accounting for more than 80 percent of the 1992 cross-sectional variation in wealth. Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are under saving is generally small”.

Engen, Gale and Uccello (2004) use a simulation model of optimal wealth accumulation for retirement that is based on consumption smoothing.[25] An important feature of their work is that it allows for precautionary savings in the face of uncertain future earnings. A second innovation in their work is the use of lifetime earnings rather than current earnings. In the present study we have been restricted to using current earnings, as no data were available for lifetime earnings to date of individuals in the sample of the HSS. Current earnings may well reflect a transitory component so for example an observed low level of earnings in the survey year may understate the life time earnings level of the individual. This could result in the level of savings and retirement wealth being underestimated, and creating an impression of adequacy of saving based on a transitory rather than a permanent measure of earnings.

The authors find that households at the median level of wealth to lifetime earnings are saving as much or more than the optimal needed for consumption smoothing. At the high wealth end of the distribution, actual saving rates are significantly greater than the optimal level, but among the lowest 25 percent of the population there was undersaving.

These results are very similar to the case of New Zealand reported in this study. However because of the role played by NZS, undersaving appears to occur more in the second to lowest quintile of the income distribution than in the lowest group. Engen, Gale and Uccello also stress that any reduction in Social Security benefits “could have significant deleterious effects on the adequacy of saving especially among low-income households”. The implication is that like the case of NZS, Social Security represents the principal if not only source of retirement income for many low income households, and their retirement savings have been heavily influenced by the expectation of receiving these payments. Any changes would seriously disadvantage this group of households.