3  Conclusions

This paper has focussed on the accumulation by New Zealand households for retirement. The question addressed in the paper is as follows: based on the results of the Household Savings Survey, what can be said about how adequately New Zealanders are saving for retirement? To answer this question one must establish some criterion of adequacy.

There are many candidates, but this paper uses a life cycle approach and posits that retirement savings are undertaken in order to smooth lifetime consumption. Using a model derived from this premise, and based on the observed wealth accumulations at the time of the survey, we are able to estimate for individuals and couples the rate of saving they would need to achieve an “adequate” retirement income. By comparing this rate with independent estimates of saving rates from the Household Economic Survey, we are able to offer a tentative conclusion on the question of adequacy. Our results are based on the assumption that current NZS policies will be maintained in the future. Other critical assumptions are that real incomes grow at 1% annually, individuals plan to retire at 65, life expectancies are known with certainty, and that no bequests are made other than the current equity in the principal residence.

The evidence suggests that actual saving rates are quite consistent with people behaving as if they were attempting to smooth consumption over their life cycle. If among the many possible definitions of adequacy, one were to agree that saving at a rate which would allow consumption smoothing represents a plausible definition, then based on the limited information we have available, we find no significant evidence of gross under-saving for retirement by New Zealanders.

There are important limitations in the data for measuring what the actual rate of household saving really is. It has been shown that the definition of saving has a critical effect. In particular when durable expenditure is all regarded as current consumption in the year of purchase the actual saving rates fall, as they are quite sensitive to small changes in absolute levels of income and consumption. With durables included in consumption the median actual saving rates typically fall below the prescribed rates; however this is not the case for the average savings rates for a particular group; they appear to be more than sufficient to sustain their consumption levels in retirement.

There is of course a distribution of saving rates across any population group, and regardless of the median level of savings for the group, some individuals might be saving at a rate which later, they may come to view as “too low”. Even if all households were saving adequately this should not be interpreted as indicating that the nation as a whole is saving adequately. That may or may not be the case – but in any event is not a question that can be resolved by looking at the savings of one sector in isolation.[26]

It should be stressed that we have deliberately adopted a conservative position in estimating future retirement incomes; the net effect of these conservative assumptions is to make the required saving rates we estimate higher than they would otherwise be. We allow for no further capital appreciation on housing, farms, commercial or rental properties, time shares and all other property. We exclude the primary residence from the calculation of the retirement annuity; ie no equity in the house is used to support retirement incomes. We assume a modest rate of return on other assets.

We assume full survivor benefits; ie, the same real consumption as enjoyed prior to the death of a partner is available to the surviving partner. In other words, the level of pre-retirement consumption is assumed to be sustained until the death of the surviving partner. In fact consumption requirements typically fall with age. Based on an analysis of the Household Economic Survey, Gibson and Scobie (2001) show that the median level of consumption expenditure falls by some 30% as the age of the household head increases from 65 to 75. Arguably this could arise due to income being constrained, forcing a decline in real consumption. In fact savings rates (both mean and median) rise, not fall over this period. One would not expect to observe rising saving rates if consumption were to be constrained by inadequate income. We conclude that our assumption of requiring a constant level of retirement consumption is conservative, given the evidence that people in fact appear to have reduced consumption needs as they grow older. The effect is to make the prescribed savings rates higher than they would otherwise be.

We assume that people face no uncertainty about their life expectancy.[27] Clearly this is not the case in reality. However for those on modest pre-retirement incomes and for whom NZS will constitute the majority of their post-retirement income, this is not an issue due to the lifetime annuity aspect of NZS. This applies to a very significant share of the population.

However, in higher income deciles not all of their retirement income is so protected. That part which is represented by NZS carries the lifetime annuity, but the remainder is by our assumptions, only protected until they reach the age of their life expectancy, given their gender and ethnicity. It would, therefore be expected that in order to compensate for this uncertainty people in the upper income deciles would save at a rate somewhat greater than that which would be needed if they could accurately forecast their age at death. In fact, this is precisely that which we observed – those in the upper 40% of the pre-retirement income distribution appear to save at a rate greater than that prescribed by our approach to adequacy. This phenomenon might well be reinforced by their desire to leave bequest beyond the equity in the primary residence which we allowed for. In short, the fact that actual overall saving rates for these age groups exceed those necessary to achieve consumption smoothing may well reflect the fact that people do allow for uncertainty and their saving incorporates a precautionary component.

A significant proportion of individuals has little or no accumulation and will rely exclusively on NZS. This provides a floor under retirement incomes. For those aged 56-64 planning to retire at 65, NZS would represent an income close to 60% of the median predicted retirement income for that group. Those relying on NZS are from the lower income quintiles, and for them the preferred strategy is not necessarily to try and save more; that would reduce their current consumption levels which are already low. If their retirement incomes are felt to be too low, higher pre-retirement earnings must eventually be the route to greater savings and higher retirement incomes. Across the entire population 24% would make no further savings for retirement if their preferred strategy is to achieve consumption smoothing. Of these over half come from the lowest income quintile.

A dominant theme that emerges from this study, albeit not a surprising one, is that NZS plays a critical role in the planning, saving and income for retirement. There are three reasons for this. In the first place NZS places a floor under the incomes of retirees, such that even where some fall below what is arguably a poverty line, the gap is negligible. Second, the presence of NZS significantly reduces the inequality of retirement wealth accumulation. Finally, the finding that NZS represents a major portion of the retirement wealth accumulation for some groups is consistent both with the basic predictions of the life cycle model, and is reinforced by findings for the USA and the UK. For almost half of those in the lowest 40% of the income distribution, their preferred strategy for achieving consumption smoothing is to make no additional saving for retirement. The case for arguing that this group is saving “inadequately” for retirement may better be viewed as a statement about the absolute level of their pre-retirement incomes, rather than their saving behaviour. Given their level of income together with the expectation of NZS, we find that their behaviour is rational when assessed against a model based on smoothing lifetime consumption.