5  Saving for retirement - results

The model in Section 4.2 prescribes saving rates as a share of gross income. These figures may not be immediately intuitive, hence for the empirical results we will report after-tax saving rates. To assess the level of consumption smoothing, we also compute a consumption replacement rate as the ratio of pre-retirement consumption to post-retirement consumption.

Some households are prescribed a negative saving rate. Literally, this means that these households should either draw down their current wealth before retirement or borrow against their NZS income to supplement their current consumption, which is hardly feasible in practice. We suggest that negative prescribed saving rates be interpreted as no further saving being needed to sustain their consumption levels in retirement, given the household's current wealth.[11] Even without extra savings, these households would already be able to afford higher consumption in retirement than their present level.

5.1  Baseline results

Table 7 contains the rate at which households need to save until age 65 so that they could enjoy a level of consumption in retirement similar to what they had before retirement. The median required saving rate is higher for households aged 45-54, but the distribution is far more uneven among older households. While 49% of non-partnered people aged 55-64 are prescribed a negative saving rate, 10% would need to set aside over 40% of their after-tax income for retirement. The `typical' non-partnered individual aged 45-54 has a prescribed saving rate of 14%, but at the 90th percentile this rate only rises to 34%.

Note: Entries are percentages. Saving rates here are expressed as a proportion of after-tax income.

The prescribed saving rates are considerably higher for couples than for non-partnered individuals (Table 8). There are at least three reasons for this. First, the retirement period for couples is longer; it extends from when the older partner retires until when the last partner dies. Second, couples earn more than twice as much as non-partnered people (reflecting the phenomenon of assortative mating), so they have a higher per capita consumption level to sustain. Third, our model does not account for economies of household size in consumption, but NZS does - it pays couples only 54% more than the rate for individuals.[12]

Table 8 – Median prescribed saving rates, consumption replacement rates and retirement consumption

Wealth quintile	Ages 45-54			Ages 55-64
Non-partnered individuals
1	11	89	18,300	0	100	11,200
2	21	79	20,100	2	98	13,700
3	21	79	24,200	9	91	15,100
4	18	82	26,600	20	80	20,500
5	1	99	35,300	0	100	29,500
Total	14	86	23,100	1	99	15,800
Couples
1	23	77	39,000	18	82	27,600
2	25	75	44,500	26	74	33,200
3	26	74	50,900	29	71	36,600
4	25	75	58,700	26	74	46,200
5	1	99	81,200	0	100	70,700
Total	23	77	50,600	22	78	37,700

Note: = prescribed after-tax saving rate, consumption replacement rate, retirement consumption. Entries for and are percentages.

Across the wealth distribution, there is little variation in median prescribed saving rates for the lowest four quintiles. For non-partnered individuals aged 45-54, for example, the median prescribed saving rate ranges from 11% for quintile 1 to 21% for quintile 2, while it is almost zero for the 20% wealthiest people. These saving rates will enable them to attain a retirement consumption level of around 80% as much as their pre-retirement level. Non-partnered individuals aged 45-54 will expect to have median retirement consumption of $23,100, compared with $15,800 for those nearing retirement. For couples, the corresponding difference between the two cohorts is 34%.

The prescribed saving rate rises with income level (Figure 6). While the 20% lowest earners should save no more for retirement, the `typical' household in the top income quintile will need to save a third of their after-tax income to smooth consumption over the life cycle.

Figure 6 – Median prescribed saving rates by wealth and income quintiles

(a) Non-partnered individuals aged 45-54

(b) Couples aged 45-54

Note: Saving rates here are expressed as a proportion of after-tax income.

Our model prescribes no further saving for 25% of couples and 41% of non-partnered individuals aged 45-64. These households either are earning too little or hold significant wealth.[13] Indeed, 27% of non-partnered individuals and 9% of couples in our sample reported income that was below the current NZS payment; additional saving is not justified for these people as NZS would already provide them more consumption than they can currently afford. Likewise, no more saving is necessary if the household has accumulated sufficient wealth to sustain their pre-retirement consumption levels.

We must stress that we do not advise against saving. These results just mean that no more saving for retirement is required for those households if they are to retire at 65, given our assumptions in Section4. It may still be advisable that they save for things other than retirement, for a different objective than consumption smoothing, for early retirement, more bequests, or simply as a buffer against uncertainties about health, life expectancy and so on.

Our prescribed saving rates appear high, as they are based on conservative assumptions. First, we assume pre-retirement consumption will be sustained throughout retirement. Yet empirical evidence often suggests that private consumption spending declines with age (Gibson and Scobie, 2001). Second, the level of wealth in private pension schemes reported in SOFIE has been underestimated due to some technical problems with the questionnaire. In a subsequent paper (Le et al, 2007) we will examine if actual household saving is in line with the required level.