7  Results of the Retirement Savings Model

The model in Figure 2 was used with three categories of wealth: Financial, Private Pension and NZ Superannuation. Financial wealth includes farms, businesses, other property (holiday homes, rental property, commercial and overseas property) together with life insurance, bank deposits, positive credit card balances, shares and managed funds, money owed, motor vehicles, cash, collectibles and other assets.. Private pension wealth is based on the holdings in personal superannuation schemes, defined contribution schemes and defined benefit schemes. The final category is computed by converting the expected flow of NZ Superannuation payments into a lump sum at retirement age. This amount is simply that, which if converted to a series of annual payments, would, for the number of years of life expectancy at retirement age, be equivalent to the payments under NZ Superannuation, assuming a continuation of current policy.

Table 4 presents the projected wealth levels at retirement (age 65) for the cohort aged 45-55 years. These projections (corresponding to W_p in Figure 2) are derived from the levels of reported wealth at the time of the survey.[14] An important conclusion is that the projected total wealth at retirement of uncoupled women exceeds that of uncoupled men. This is despite the fact that women have lower levels of financial wealth. Private pensions are a relatively minor source of wealth, and are not held by the median person of either gender. The shortfall in financial wealth for women is more than made up for by a greater expected value of NZ Superannuation. On average, NZ Superannuation provides 66 percent of mean wealth at retirement for women in this cohort, compared with only 57 percent of the mean wealth for men. At the (lower) median wealth levels, the reliance on NZ Superannuation is even more marked, as it provides 89 percent of women’s projected wealth at retirement.

Note: Net worth estimates are in NZ$.  At the time of the survey, NZ$2.38 = US$1.00.

The next use of the model in Figure 2 is to estimate the average annual (constant) saving rate that would be required in order to achieve consumption smoothing. These saving rates are denoted “prescribed”. At the same time the replacement rate can be derived. These results are summarised in Table 5.

The median uncoupled male in the 45-55 year old cohort would need to save 6.2 percent of his pre-retirement income, in order to provide for post-retirement consumption (Table 5). The median value of this post-retirement consumption (which equals income) would be at a level equivalent to two-thirds of pre-retirement income. In contrast, the median female from the same cohort does not need to save for retirement, because under the consumption smoothing objective her prescribed saving rate is essentially zero. Yet despite this lack of saving, the median replacement rate for women is 11 percentage points higher than for men.

Note:

The prescribed saving rate is that rate (as a percentage of before tax pre-retirement income) which would be required for an individual to allow consumption smoothing, given their current wealth as measured in the survey. The replacement rate is the ratio of post to pre-retirement income (i.e., R= Y_r/Y_p). Some individuals have such high levels of wealth accumulated already that, given their incomes, they would be able to smooth consumption with no further saving - in fact the model gives the result that they could "dissave" and run down current wealth (i.e. s<0).

When means are used to summarise the distributions, the prescribed saving rates are negative for both men and women, although more so for women. How can these negative prescribed saving rates be interpreted? For people with either high wealth and/or low incomes, no further saving is required in order to smooth consumption. In the case of wealthy individuals, this simply means that they already have accumulated sufficient wealth to sustain consumption given their reported incomes. For those with low incomes, NZ Superannuation offers them an income in retirement that is comparable to or higher than that which they have pre-retirement. In such a case, they would be disinclined to save further now. 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.

Overall, the results of the model suggest that for many uncoupled New Zealand women in the pre-retirement cohort, it is rational to have no other savings for retirement, and rely solely on NZ Superannuation. Note that if housing wealth had been included in the calculations, this conclusion would have been reached evenly more strongly. Given this finding for uncoupled women, it is not surprising that those married (or cohabiting) women who have greater relative power choose to bargain for lower levels of household net worth. Thus, the pattern in Section IV, whilst the opposite to what has been found in the U.S., appears to be entirely consistent with the rational exercise of bargaining power.