5 Conclusions
The KiwiSaver scheme has been a major addition to New Zealand's retirement savings options. While it is voluntary, it has undoubtedly led to increased attention on retirement savings and savings more generally. Furthermore, there is reasonable evidence that some people are now saving more than they would have in the scheme's absence. In short, the scheme has arguably enhanced a culture of saving and overall household savings may be higher than they would otherwise have been. However, this has come at a cost. In 2010/11 the cost to the government in forgone tax revenues, grants and tax credits exceeded $1 billion. It is, therefore, pertinent to inquire about the efficacy of the scheme with respect to the retirement saving behaviour of individuals.
This study has examined both the participation in the scheme and the extent of changes in saving behaviour. Overall, about one third of the eligible population were members of the scheme. Importantly, those who expected NZS to be their main source of retirement income were significantly more likely to have become a member. This finding is consistent with the notion that individuals aim to achieve a target level of retirement wealth. Those expecting NZS to be their primary source of income were also more likely to have opted in, while higher-income individuals were more likely to have opted out.
A crucial question is the extent to which the scheme has engendered additional household savings. The evidence from the survey is that for each dollar of member contributions to the scheme, saving in alternative vehicles is reduced by 64 cents (substitution). In other words, members of the scheme have increased the net saving (additionality) by 36 cents on average. Those owning their own home would have saved 12 percentage points more of their KiwiSaver contributions than non-homeowners had they not been members of KiwiSaver, after correcting for differences in age, income, family status, education, etc. It is interesting that this difference is not due solely to mortgage repayment. Homeowners also indicated they would have contributed more to other superannuation schemes, saving and investments for retirement in the absence of KiwiSaver. In addition, respondents with higher levels of education would also have saved 4 percentage points more of their contributions for every additional year of education. In contrast, those in part-time employment as opposed to full-time employment tended to spend more of their contributions (12 percentage points more), as did females as opposed to males (7 percentage points more).
An analysis was undertaken of the income respondents expected to have in retirement in relation to that which they reported would be required to meet either their basic needs or to be comfortable. The results indicated that only 22% have a shortfall in expected retirement income based on needs. In contrast, some 50% reported an expected shortfall with respect to being comfortable. These results were broadly similar for both KiwiSaver members and non members.
By comparing the expected outcomes of KiwiSaver members and non-members using regression analysis which controlled for an extensive set of variables likely to affect retirement income expectations, it was possible to test whether KiwiSaver membership was associated with changes in retirement income expectations. We find only a few factors help explain respondents’ expected retirement outcomes. Factors that decrease retirement shortfalls (or increase the excess) include income and employment status other than full-time employment. Factors that increase retirement shortfalls include having very good or fair health relative to excellent health, and home ownership.
Importantly, KiwiSaver membership was not statistically significant. In other words, all else equal, KiwiSaver membership was not found to improve expected retirement income outcomes; that is, 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. This result is robust to any selection bias that may have resulted owing to survey routing.
In conducting any evaluation, it is critical that the yardstick against which success is to be measured is clearly specified and quantifiable. The analysis of the effectiveness of the KiwiSaver scheme in this paper centres on the stated purpose of the Act. This refers to a target population who would not otherwise been in a position to enjoy a standard of living in retirement comparable to their pre-retirement level.
Using information on respondents' expected retirement outcomes and the degree to which KiwiSaver had changed their saving behaviour, we construct measures of target effectiveness and leakage for the scheme. Target effectiveness ranged from a third to a half, while leakage was as high as 93%, when the measure was based on retirement income shortfalls with respect to meeting basic needs, and 78% based on being comfortable. In other words, of all those eligible to join KiwiSaver, less than half of all those in the target population became members, and for each one of those a further 4 to 14 people joined from outside the target population. This implies that the ongoing cost of the scheme per target member could exceed $13,000 per year.
The possibility exists that respondents reported smaller shortfalls (larger excesses) in retirement income merely as a consequence of having joined KiwiSaver. However, 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, suggest that KiwiSaver membership does not improve expected retirement income outcomes. Further, as a Heckman selection model was used, these results are robust to any selection bias that might have occurred due to survey routing. Therefore, we do not expect that this possibility will have had a material impact on either our measures of target effectiveness or leakage.
We recognise that the scheme may have had broader objectives not explicitly stated in the Act. An implicit objective of KiwiSaver may have been to increase national saving. After weighting for individuals' income we find that only around 29% of respondents' contributions to KiwiSaver represent new saving. With the Government effectively borrowing one dollar for each dollar it contributes to KiwiSaver, it is not surprising then that in the long run we find KiwiSaver would likely have a minimal contribution to national saving and could actually be contributing to reducing national saving.
The survey on which this analysis has been based was a national survey allowing statistically valid population estimates. It represents the most comprehensive survey of households since the inception of the KiwiSaver scheme. These are significant strengths of the data used here. However, there are limitations which need to be taken into account when considering the results of the study.
In the first place, the survey is a “snap shot” at a point in time; it does not provide a comprehensive basis for assessing changes in individual saving behaviour over time. Ideally, one would want to trace all assets and liabilities (both financial and non-financial) through time. Only a longitudinal panel survey can provide that sort of information. As the survey was taken less than three years after the initial launch of the KiwiSaver scheme, and as some of the respondents had joined subsequently, the data relate to a relatively short period. For this reason, one cannot infer that the results from the scheme to date would necessarily reflect the outcomes that will prevail once the scheme has matured.
On a positive note, the relatively short time since the scheme's introduction may well have allowed respondents to report with greater accuracy any changes in their saving behaviour. In 10 years' time, say, the degree of recall bias could well be significantly greater as people would be less likely to remember their savings habits in the years prior to the introduction of KiwiSaver.
A critical set of questions that were central to the analysis of additionality required respondents to reflect on what they would have done with their KiwiSaver contributions in the absence of the scheme. Clearly, this is a hypothetical question, the answers to which may not necessarily reflect what the respondents really would have done. For example, it could be that some respondents felt they would appear in a better light with the interviewer by not admitting they would have spent the money on consumption items. This could result in biasing downward our estimates of additionality. If the respondent stated, for example, that all the money would have been saved (to create the impression of prudence), then switching to KiwiSaver would have implied no additional saving by that individual. On the other hand, a current member of the KiwiSaver scheme could have responded that all their contributions would have been spent rather than saved, thereby creating a “good” impression by demonstrating their conversion from profligacy to prudence. We are left with no basis in evidence to assess either the possible direction or the magnitude of any theoretical response bias.
Given the importance of KiwiSaver as an element of New Zealand's retirement income saving policies, further evaluation will be highly desirable. In conjunction with IRD, the Treasury has developed a set of questions on KiwiSaver to be included in the last wave of a major longitudinal panel study (SoFIE) conducted by Statistics New Zealand. It is expected the results of that survey will be available for analysis in the first half of 2012, and the findings should shed further light on the behavioural changes induced by KiwiSaver.
