4.8 Effectiveness of KiwiSaver in addressing the target population

In this section, we explore the effectiveness of the KiwiSaver scheme in reaching the target population as stated in the purpose of the Act: namely, KiwiSaver aims to enhance the savings for retirement of those individuals who would not otherwise be in a position to enjoy standards of living in retirement comparable to those in pre-retirement; that is, how effective is KiwiSaver in reaching this group? In addition we estimate the extent of the “leakage,” that is, the number of KiwiSaver members who are considered to fall outside the target group?

Figure 1represents graphically the steps in identifying the target population as specified in the Act. As living standards are extremely difficult to measure, the target population is defined by two conditions which can be measured. It is those people eligible to join KiwiSaver who (a) had an expected shortfall in their retirement income relative to either basic needs or living comfortably; and (b) if they were to join KiwiSaver, would increase their savings significantly.

Figure 1: Identifying the target population

The survey does not give any indication of the additional amount that would be sufficient to close any gap, and ensure income in retirement was able to meet basic needs. Furthermore, meeting basic needs does not necessarily imply that post-retirement living standards would match their pre-retirement level.

The various components of pre- and post-retirement living standards are illustrated in Figure 2 for the case where the individual has a shortfall in their expected retirement income relative to both comfort and needs. Data from the survey provide estimates of areas labelled B, C and D. The expected basic needs gap is measured by C, while the expected gap relevant to a comfortable standard of living is given by C + D. Of course only a portion of survey respondents report an expected retirement income shortfall (see Table 9).

It should be noted that the Act refers to living standards not pre- and post-retirement incomes. It is possible that living standards which incorporate a range of non-monetary dimensions may well be comparable even if monetary income is lower. For example an individual may well place a high value on leisure time and this could more than compensate for a reduced monetary income. The standard rule of thumb for income replacement rates which are invariably less than 100% in part reflects the value that might be placed on non-monetary aspects, and the fact that some expenses associated with working are no longer needed in retirement.

Figure 2: Pre and post-retirement income

We construct two sets of measures relating to target effectiveness and leakage. The first refers only to one characteristic of the target population: that they have a shortfall in their expected retirement income. This can be visualised with reference to Figure 3 (page 23). In this case target effectiveness is defined as the number of KiwiSaver members who have a shortfall as a proportion of all those who have a shortfall (comprising both KiwiSaver and non-KiwiSaver members). This corresponds to the ratio D/(D+F). The target effectivenessof the programme would be 100% if all those who reported an expected shortfall in retirement income relative to meeting basic needs were KiwiSaver members.

Leakage refers to those who are benefitting from KiwiSaver membership but who were not expecting a shortfall in retirement income. Again with reference to Figure 3, this corresponds to 1-(D/B)=(E/B). While it is possible that some of those KiwiSaver members who report no expected shortfall (Box E) may be doing so as a result of having joined KiwiSaver, Section 4.7 provides evidence to the contrary. That is, the results of regression analysis that included KiwiSaver membership as well as a large number of other conditioning variables likely to affect retirement income outcomes, all else equal, suggest that KiwiSaver membership does not improve expected retirement income outcomes. KiwiSaver membership was associated with neither reduced expected shortfalls nor increased excesses of retirement income over the amount respondents required either to meet their basic needs or to be comfortable. Therefore, we do not expect that this possibility will have a material impact on either our measures of target effectiveness or leakage.[16]

It is not possible to apply the stylised breakdown in Figure 3to all survey respondents as a particular series of filters were applied to the questions in the survey related to expected retirement incomes. Specifically, the questions related to retirement income were directed only at those 25 years and older, who had undertaken some financial planning and who could provide estimates of expected retirement income. Again, recall from Section 4.7 that the results of a Heckman selection model (a procedure specifically designed to take account of potential bias resulting from sample selection issues such as these) found no relationship between KiwiSaver membership and improved retirement income outcomes. Therefore, it is unlikely that the survey routing described above will have a material impact either on our measures of target effectiveness or leakage.

Table 11 shows estimates of both target effectiveness and leakage based on the sub-group of respondents who were able to provide estimates of retirement income and the income they required to meet their basic needs or to be comfortable. The weighted sample counts required to make these calculations can be found in the blue section of Figure 4 (page 24). On the basis of needs, of all those with an expected shortfall, 37% were KiwiSaver members. Of the total KiwiSaver membership, 80% did not report having any expected shortfall. Both measures improve when the calculations are based on the income respondents expect to require in order to be comfortable in retirement.

We now turn to a second set of measures for target effectiveness and leakage. It is not sufficient that an individual with an expected shortfall is a member of KiwiSaver for the programme to have been effective. It must also be the case that having joined KiwiSaver, the individual would have reduced their consumption spending thus making additional retirement savings over and above those they would have made, had they not joined KiwiSaver. The corollary is that, if they would have saved the funds specifically for retirement or in some other form of saving, then there would be no net additional savings. In this case, despite having a shortfall and being a KiwiSaver member, they would not be contributing to the effectiveness of the programme by making additional savings for retirement to close some of the expected gap in their retirement income.

These measures can again be visualised with reference to Figure 3. The target group is depicted as Box I. It captures those KiwiSaver members (Box B) who have a shortfall in expected retirement income (Box D) and who in the absence of KiwiSaver would have used their contributions for current consumption (Box I). Target effectiveness is then calculated as (I/D), conditional on being in KiwiSaver. Leakage is calculated as 1-(I/B)=(H+E)/B.

As before, it is not possible to apply the stylised breakdown in Figure 3 to all respondents due to routing. For the estimates presented in Table 12 we again rely on the weighted sample counts in the blue section of Figure 4. We also require some additional information; namely the weighted counts for those KiwiSaver members with expected retirement income gaps, who in the absence of KiwiSaver would have used a significant proportion of their contributions for current consumption. Setting this proportion at anything over 30% (that is, when at least 30% of an individual’s KiwiSaver contributions represent new saving) yields weighted counts of 10 and 33 when the retirement income gaps are based on basic needs and being comfortable respectively.