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There is an on-going debate about the level of savings in New Zealand. A fundamental question pervades the debate: namely, are we saving enough? This question arises at two levels: for the economy as a whole and for individual households. At the macroeconomic level, the concern is whether our aggregate level of saving as a nation is “adequate”. At the micro level, the same question arises in relation to the saving for retirement: are New Zealanders adequately preparing for retirement? This paper addresses the second of these questions. It develops a model of retirement wealth accumulation based on the findings from the Household Savings Survey. The evidence we present, tentative though it is, does suggest that there may not be widespread under-saving for retirement. The results are consistent with overseas findings.
We have chosen conservative assumptions: excluding equity in the primary residence from estimates of retirement wealth, providing for full survivor benefits and assuming that consumption spending would be maintained at pre-retirement levels throughout retirement rather than the typical pattern of falling consumption spending as people age.
It must be stressed that there is limited information about the rate at which individuals are actually saving, making it difficult to establish a solid benchmark against which to measure adequacy. We have used the Household Economic Survey as a basis for estimating actual saving rates for different age groups. The estimates are affected by definitions of consumption, in particular how the expenditure on durables is treated. We conduct sensitivity tests where durables are both included and excluded as an item of current consumption. Typically we find that the actual saving rates do in fact exceed the rates needed for maintaining living standards in retirement. This reinforces our tentative conclusion that there is no apparent gross under-saving for retirement especially in the older age cohorts.
The results apply to broad groups within which there will be a distribution of people some of whom would likely not be saving at a rate to maintain their real standard of living in retirement. The results in no way imply that every individual is saving “adequately”.
While we present results for younger age cohorts, the fact they still have many years to retirement implies that estimates made today inevitably carry much wider margins of error. More unequivocal results must await better data and methodologies; improved measures of household saving levels, and the application of micro-simulation models which are more suited to capturing uncertainty about health status, employment, incomes and life expectancies will improve our understanding of household saving behaviour.
New Zealand superannuation (NZS) provides the floor under the income for the lowest 40 percent of the income distribution, and for many in this group additional saving for retirement would not be a preferred strategy, assuming they were to be aiming to smooth their consumption over the life cycle. In other words our finding that there is no strong evidence of widespread under-saving is not inconsistent with a significant share of individuals not saving for retirement. This follows from the critical role played by NZS in providing those on low incomes with a standard of living in retirement which matched or exceeds that which their pre-retirement incomes can support. For these people the issue is the level of income rather than their level of saving.
We are most grateful to Tanya Randall, John McGuigan, Mike Camden, Irene Zeng, Peter O’Brien, Rachael Villes, Jason O’Sullivan, John Upfold, Jean Watt and Sandra McDonald of Statistics NZ for their support in organising access to the data and for guidance and comments. Malcolm McKee of the Treasury answered endless questions about benefits and Ivan Tuckwell provided valuable assistance in the analysis of the Household Economic Survey. David Feslier of the Office of the Retirement Commission (ORC) has been instrumental in guiding and supporting the project, which has been a joint undertaking between the ORC and the Treasury.
Participants in seminars at the Treasury and at the ORC, at the ORC Symposium in June 2003 where an earlier version of the was presented, Geoff Lewis and members of the Periodic Review Group have all made helpful comments as have participants in seminars at the Investment and Saving Industry (ISI), the Association of Superannuation Funds of New Zealand (ASFONZ), the Annual Conference in 2003 of the New Zealand Association of Economists, The Melbourne Institute and the Economics Society of Australia. Suggestions and comments were made on an earlier draft by Olivia Mitchell of the Wharton School, University of Pennsylvania and Richard Disney of the University of Nottingham. John Creedy, University of Melbourne and formerly at the Treasury, contributed to the earlier work and reviewed the current paper.
The financial support of the Office of the Retirement Commission and the New Zealand Treasury is gratefully acknowledged. Access to the data used in this study was provided by Statistics New Zealand in a secure environment designed to give effect to the confidentiality provisions of the Statistics Act, 1975. The results in this study and any errors contained therein are those of the authors, not Statistics New Zealand.
The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury. The Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but to inform and stimulate wider debate.