2.2  Understanding saving, wealth and debt (continued)

2.2.2 New Zealand's wealth and assets

In recent years, household net wealth has increased significantly, due largely to the rapid rise in land and house prices. This has led to what appears to be the paradoxical situation of household net wealth increasing significantly, despite the official household saving rate being negative and declining. This is illustrated in Figure 2.14 which graphs the change in household net wealth as a percentage of household disposable income and compares this with the official household saving rate.

This apparent anomaly is explained by the fact that almost all of the increase in net wealth is due to property revaluations which are specifically excluded from the saving measure. This is shown in Figure 2.15, which also provides an alternative to the official flow–based saving series. It is derived from a combination of data from the RBNZ household balance sheet and the national accounts. It is important to note that there are several data issues that impact on the accuracy of estimates of wealth in New Zealand. More detail on the measurement of wealth can be found in Section 9.1 of the Report.

Figure 2.14: Household saving and change in net wealth (% of household disposable income, 3-year moving average)

Source:  Statistics NZ; Reserve Bank of NZ

Figure 2.15: Contributions to changes in net wealth

Source:  Reserve Bank of NZ; Hodgetts, Briggs et al (2006)

2.2.3  The adequacy of household wealth and assets

While an important issue, saving for retirement is but one reason for households to save. The view of the SWG is that, based on a number of recent studies using household survey data, there is relatively little problem currently with retirement savings.[4] The government provision of NZ Superannuation, combined with private savings, means that there is little poverty among the aged (especially when New Zealand is compared to other developed countries). There are nevertheless significant problems with national saving. Even for retirement saving the SWG has concerns about whether many younger people are saving adequately for their retirement – in a different world from that of their parents with falling home ownership rates, student debt and worries about the sustainability of NZ Superannuation.

Furthermore, the SWG considers that wealth accumulation in New Zealand has been inadequate for reasons that reflect both inadequate national saving rates and poor asset choices. Evidence supporting the SWG's view is provided in Section 9.1. The evidence is ambiguous, not only because of data problems, but because the links between saving levels and wealth levels are not straightforward.

Even if most households have adequate retirement savings (and they may be adequate only on the presumption that NZ Superannuation is sustainable), it does not follow that the country overall has adequate wealth. A key reason is that New Zealand operates a pay-as-you-go government retirement scheme in which pensions are paid directly from tax receipts and, apart from the NZ Superannuation Fund, there is no national saving or wealth accumulation involved.

2.2.4  The need to entrench higher household saving

While the recent economic downturn has closed the gap between domestic saving and net investment, this is as much due to a fall in investment levels as a turn-around in saving behaviour. Indeed, as economic activity recovers, unless there is a major shift in saving patterns, the difference between domestic saving and investment and hence the size of the current account deficits are expected to continue to be large.

It is too early to tell whether the recent improvement in household saving will develop into a structural change in behaviour. Recent data suggest that households are still dissaving, albeit at a lower rate. The increase in private saving has also been offset by public sector dissaving. In fact, available data suggest that there has not been much rebalancing at an aggregate level. Consumption to GDP has been steady, while private investment and imports have fallen substantially – trends typically observed in the aftermath of recession (see Figure 2.16 below). The problem remains of low national saving relative to investment. The SWG therefore believes it is important to support and entrench any shifts in household behaviour that may currently be underway.

Figure 2.16: Real GDP growth by components (% change December 2007 to September 2010)

Source:  Statistics NZ