4.4 Alternative use of funds now going to KiwiSaver (additionality)

KiwiSaver was designed as a mechanism to foster increased individual savings and greater preparedness for retirement. However, experience with subsidised schemes such as KiwiSaver indicates that while some additional savings may be achieved there is inevitably a degree of substitution that occurs, as individuals switch their saving from non-subsidised to subsidised forms. One measure of the success of KiwiSaver therefore will be the extent to which KiwiSaver membership is associated with additional savings, as distinct from members simply having diverted funds from other savings vehicles or debt reduction. The analysis that follows is based on a questionthat asked respondents how the contributions they were making currently to KiwiSaver would have been used in the absence of the scheme.

Each respondent was given 10 points to allocate across various categories, some of which related to saving and debt reduction, while others related to consumption. The averages shown in the last column of Table 4 refer to the mean score across all individuals reporting an allocation to a particular category. For example, when asked how many of their 10 points they would have allocated to spending on daily activities and normal outgoings in the absence of the scheme, on average respondents used 3.58 of their 10 points on this item.

Notes:

1. Based on 503 observations and using sample weights; 18 missing observations have been excluded. Note that the number of observations is greater than the total number of respondents who were KiwiSaver members as the “additionality” question was asked of respondents who were either members themselves, or whose partner was a member, on the basis that financial decisions tend to be made at the level of the economic family unit. The total score adds to 10 in all cases as each respondent was asked to allocate 10 points across the stated categories.

2. ‘Other’ has been assigned to consumption in the absence of any further information.

KiwiSaver members report that on average they would have applied 64% of the money they are now contributing to KiwiSaver to other forms of saving and/or debt reduction. In other words 64% of the money in KiwiSaver represents on average a substitution from funds that would have already been applied to savings or debt reduction in the absence of the scheme. The remaining 36% is, on average, money that would have otherwise been consumed (see Table 4, last column). It is possible that as a result of raising the level of awareness about the need for retirement savings, respondents would in general now consume less and save more, thus causing us to underestimate the additional saving due to KiwiSaver. However, the survey provides no basis for evaluating this possibility.

Gibson and Le (2008) provided an early estimate of additionality based on a nationwide survey carried out a few months after the introduction of KiwiSaver. They estimated that only between 9% and 19% of KiwiSaver balances represented new saving by members, with the remaining balances being either existing saving or debt reduction that had been shifted into KiwiSaver, or government and employer transfers. However, a more comparable figure to our 36% estimate is the ratio of additional member saving to total member saving. Gibson and Le estimated this additionality measure to be between 23% and 48%; the midpoint of this range is 36%, corresponding precisely to the estimate from the present analysis.

It is of interest to enquire about estimates of additionality from other countries. While there have been numerous studies for the United States,[10] the institutional, regulatory and tax contexts differ significantly from those prevailing in New Zealand, limiting the value of such comparisons. While there are still some very important differences, comparisons with Australia are arguably somewhat more relevant. In an early study, Morling (1995) obtained an estimate of additionality of 26 cents in the dollar, a result close to the estimate in this study. Connolly (2003) estimated an additionality of 62 cents in the dollar for the Australian compulsory superannuation scheme, and in a more recent study Connolly (2007) estimated that the scheme had increased retirement savings by the equivalent of an additional two years of retirement consumption.[11]

The extent to which KiwiSaver contributions would otherwise have been saved, including through debt reduction, may well be different for those who own a home. Some homeowners will be repaying mortgages, and for many, reducing mortgage debt gives the highest and surest return to saving.

To examine the effect of home ownership, the respondents were grouped into two categories: those owning and those not owning a home. Table 4 shows that homeowners on average would have allocated around 15 percentage points more of their contributions to other forms of saving or paying down debt than non-homeowners in the absence of KiwiSaver (7.06 versus 5.56). It is interesting that this difference is not solely due to mortgage repayment. Homeowners would have also allocated more of their contributions to both superannuation schemes and other savings or investments for retirement than non-homeowners. This pattern may result both because homeowners with a mortgage may have been motivated to reduce debt, while those who are mortgage-free might be at the stage of making greater provision for retirement.

To examine the distribution of saving, respondents were then assigned a score between 0 and 10 representing the sum of the points they allocated to the saving and debt reduction categories listed in Table 4, or in other words, the extent to which their KiwiSaver contributions are substitutes for other forms of saving. For example, a respondent who allocated one of their 10 points to spending on daily activities, another three to a superannuation scheme and six points to debt repayment would have been assigned a value of 9 (= 3 + 6). In contrast, had all of their KiwiSaver contributions come from current consumption, they would have been assigned a score of zero.

The results are summarised in Table 5. For the total sample, 47% of the respondents had a score of 8 or higher (indicating high levels of substitution). Amongst the group not owning their home this share was 36% while for home-owners it was 57%. Over 40% of home owners would have saved the entire amount compared to only 20% of non-home owners. In fact, 10 (ie, all contributions would have been saved) was the most prevalent score amongst both homeowners and non-homeowners.

It appears that home ownership does have an important bearing on the extent of saving. However, the results in Table 5 do not control for other factors which might influence individual saving behaviours. One cannot claim unequivocally that home ownership matters until other factors are accounted for.