4.9 Implications for national saving

In this section, we draw on the results of the survey and use them in a wider context to consider the implications for national savings.[17]

As shown in Table 4 of Section 4.4, the extent of additional saving by respondents in the survey was on average 36%. Clearly, those on low incomes have limited scope for substitution and their additionality would be expected to be much higher. Conversely, those on higher incomes would have additionality less than the average. As a result, the estimates for individuals need to be weighted by income to get an aggregate estimate of additionality. As high-income individuals contribute a disproportionate share of total saving, weighting in this manner reduces aggregate additionality to 29%.[18] In other words, each additional dollar a member allocates to their KiwiSaver account, results on average in a net increase in saving of 29 cents.

This figure applies to the contributions made by members. However, the total amount applied to a member's account in KiwiSaver is made up of their own contributions, plus those of their employer and finally direct taxpayer-funded contributions from the government. It is therefore necessary to consider the extent of additionality that is associated with employer and government contributions.

At one extreme, an argument could be made that all of the contributions by employers and the government are pure net additions to a household's overall retirement accumulation. In the very short run, it is possible that this is in fact the case. However, for this to hold in the longer term would imply that people do not take into account their overall KiwiSaver balances when making decisions about their overall savings portfolio. This seems improbable, and would be inconsistent with the evidence that a significant number of people make no provision for retirement beyond the expectation of NZS. Furthermore, employer contributions are simply part of an overall remuneration package, and as wages and salaries will be commensurately lower when employers are making these payments to KiwiSaver, individuals will quickly realise that it is “their money” rather than a “gift” from employers that is being contributed.[19] They may then view this in a similar light as their own direct contributions.

An assumption of a life-cycle model of savings is that individuals seek to smooth their consumption over the pre- and post-retirement years. In order to do this, they forgo some consumption during their working lives in order to accumulate a stock of wealth at the time of retirement.[20] The size of that stock will be determined so as to achieve the desired level of post-retirement consumption. In other words, given their desired standard of living, their life expectancy, expected asset returns and prices, and taking into account public policies such as taxation and pension eligibility, they will aim to achieve a “target” level of wealth at retirement.

The recent boom in house prices in New Zealand, to the extent that some part was sustainable, arguably increased the wealth of home owners. This revaluation of asset prices is generally referred to as “passive saving” in contrast to making conscious decisions to forgo current consumption (termed “active saving”).[21] Hull (2003) and De Veirman and Dunstan (2008) find that passive and active saving are negatively related, reinforcing the view that money is fungible and different forms of saving are potential substitutes in achieving a retirement-income wealth target. This evidence is consistent with the view adopted here in which, in the long run, all contributions to KiwiSaver are viewed in a similar manner - all contribute to achieving a long-run goal. Were this not to reflect actual saving behaviour, we would expect to see either large and widespread bequests (over-saving) or substantial drops in post-retirement living standards (under-saving). Typically, neither is observed.

The following estimates, summarised in Table 13, are partial in the sense that they relate to KiwiSaver accounts held by employees. Two cases are presented. Our preferred estimates pertain to the long run in which individuals look at the total amount of their KiwiSaver balances regardless of the source when making decisions about their saving for retirement, and additionality is set at 29% based on the estimates from the survey. The second case is a sensitivity analysis in which additionality is set at much higher levels for both Crown and employer contributions to individuals' KiwiSaver accounts. In both instances, each additional dollar of subsidy provided by the Crown to an individual's KiwiSaver account represents a dollar less saving by the Crown.[22]

In the long run, when members adjust their overall saving behaviour such that net additionality is 29% on all contribution sources, the costs to the government exceed the additional saving with the result that the scheme would reduce total national saving. Less than $1 of additional household saving is generated for each dollar of government contributions.

Sensitivity analysis allowing for much higher levels of additionality yields modest net additions to saving. This arises as the total additional saving by members exceeds the costs to the government. The fiscal costs (identical for both cases) shown in the last column are made up of the initial kick-start grant, the member tax credit and exemption from the employer superannuation contribution tax. Of these, the largest share (some 75%) is made up of the member tax credits.

Notes:

1. Based on KiwiSaver members with employer contributions.

2. Change in national savings is the additional savings by households net of the fiscal costs.

3. The sensitivity analysis (short-run values) assumes additionality applying to employee contributions of 29%, employer contributions of 39% and Crown contributions of 59% respectively.

4. Our preferred estimates (long-run values) are based on an additionality applying to all contributions of 29%.

5. The fiscal costs are made up of the initial grant, the member tax credits and the exemption for the Employer superannuation contribution tax.

6. Net present values are the discounted sum of the 10-year flows, using a discount rate of 6%.

There is yet another dimension to the long-run view of retirement saving. Setting aside the issue of bequests, households accumulate retirement wealth so they can draw that down for income in retirement. In other words, in the long-run equilibrium, regardless of whether the additionality was 100%, the net effect is that household saving would be zero as the accumulations would be matched by the decumulations.

Also worth noting is that our analysis does not attempt to account for any changes in investment returns that might result from any change in the flow of saving into the capital markets or their allocation. However, it is not necessarily the case that this would increase national saving.

For example, consider the thought experiment where a couple buying a house was first allowed to use the resources allocated to their KiwiSaver account to pay down their mortgage and only when this was repaid began saving specifically for retirement. Compared to the case where they paid down their mortgage at a slower rate and put resources into KiwiSaver at the same time, our estimates suggest that this couple could have had around 25% more financial wealth at retirement. Given that a significant proportion of people are likely to own a home with a mortgage at some point throughout their life, this effect may significantly reduce national saving.

These estimates of course are based on a number of assumptions around income, house value, wage growth, initial mortgage term, the proportion of their budget they allocate to saving or paying down debt, and others. However, the main factor driving this result is the superior after-tax real returns from paying down one's mortgage as opposed to investing in a retirement fund such as KiwiSaver. So long as this persists, then the general result is robust to these other assumptions.