1. Intervention in household saving decisions Symposium on Retirement Income Policy Retirement Policy and Research Centre Trinh Le – 16 April 2008

2. 2 Outline Household saving behaviour before KiwiSaver Effects of KiwiSaver – initial evidence How will KiwiSaver affect New Zealanders future decisions?

3. 3 Was there a saving problem? KiwiSaver: an interventionist policy to correct a market failure The failure: before KiwiSaver kiwis did not save The average NZ household spent $1.15 for every dollar earned (Finance Minister Michael Cullen, Budget 2007) True, see data from the Institutional Sector Accounts

4. 4 Household saving: aggregate evidence

5. 5 More on saving evidence

6. 6 Source: Trinh Le, Does New Zealand have a household saving crisis? NZIER working paper 2007/01

7. 7 Was there a saving problem? Different data tell different stories NZ doesnt have a saving problem as much as a saving data problem The data that are used to support the claim that NZ households are bad savers are unreliable Careful analysis shows little support for that claim

8. 8 Micro evidence Even when error free, aggregate data on saving not as helpful as one might think Aggregate saving tends to 0 Some borrow Some save Some dissave Have to look at micro evidence to judge whether people are adequately prepared for retirement

9. 9 Modelling adequacy of retirement saving Life cycle model Objective: consumption smoothing Given their current income, assets, liabilities, age and life expectancy at retirement, how much should a single person/ couple save so that when they retire, they will have a standard of living that is similar to their current standard of living? Used unit-record data from the Household Savings Survey (2001) Found on average, people already saved more than prescribed by the model

10. 10 Saving adequacy Sample: Couples born 1940-1949 Prescribed saving rate % Actual saving rate % Actual saving rate %: durables as consumption Mean7.226.6 Median16.027.0

11. 11 Saving adequacy Source: Grant Scobie, John Gibson & Trinh Le (2005) Household wealth in New Zealand Prescribed saving rate % Actual saving rate % Actual saving rate %: durables as consumption Mean7.226.621.4 Median16.027.022.7

12. 12 Modelling adequacy of retirement saving Analysis repeated on a larger, newer data (Survey of Family, Income and Employment, wave 2, conducted 2003-04) Found most were saving enough Under relatively conservation assumptions Significant proportions have saved so much they shouldnt save more have such low incomes that they shouldnt save given that NZ Super is very high compared to their current income

13. 13 Bad savers? % saving inadequately Non-partnered individuals Ages 45-5418 Ages 55-649 Couples Ages 45-5426 Ages 55-6413 Source: Trinh Le, Grant Scobie & John Gibson (2007) Are kiwis saving enough for retirement?

14. 14 Too good savers % prescribed with negative saving rate Non-partnered individuals Ages 45-5458 Ages 55-6463 Couples Ages 45-5432 Ages 55-6437 Note: % of people who, given their current income and wealth, have saved enough for retirement and shouldnt save more

15. 15 Inertia – behavioural economics A key argument for KiwiSaver is that people are myopic, they dont plan for a distant future, they often procrastinate saving until too late Auto-enrolment was believed to overcome the power of inertia In fact, far more people have joined KiwiSaver through direct enrolment than auto-enrolment

16. 16 KiwiSaver enrolments Source: Inland Revenue, as at 29 Oct 07, Total membership: 251,736

17. 17 Does KiwiSaver mean more saving? As of April 2008, over 500,000 kiwis have joined KiwiSaver The first six-monthly evaluation report did not evaluate the very question it should evaluate: Does KiwiSaver increase saving? Gibson and Le (2008) made the first attempt and found KiwiSaver a money-go-round game

18. 18 Composition of KiwiSaver balances Note: Upper bound estimate of new saving

19. 19 Composition of KiwiSaver balances Source: John Gibson & Trinh Le, How much new saving will KiwiSaver produce? University of Waikato Economics Department working paper 2008/03

20. 20 How much KiwiSaver saving is new? 9-19% of KiwiSaver balances Not enough to cover deadweight costs of taxation which Treasury conservatively estimates to be 20% of the amount of taxes raised Let alone administration and compliance costs Net of these costs, the impact of KiwiSaver on national saving most likely negative These findings are consistent with…

21. 21 International evidence SchemeNew saving Engen & Sholz (1994)IRA-14% to 2% Engen, Gale & Scholz (1994)IRA4% Attanasio & DeLeire (2002)IRA9% Engen & Gale (2000)401(k)0–30% Benjamin (2003)401(k)25% Note: Excl. deadweight costs of taxation and administration and compliance costs

22. 22 Back to macro data NZs large current account deficit (CAD) is often used as evidence of a (household) saving problem Australias compulsory saving scheme often used as role model for NZ

23. 23 Household saving & Balance of payments

24. 24 Back to macro data Australia had falling household saving rates and widening CAD in the 1970s and 1980s A compulsory workplace saving scheme (Superannuation Guarantee) was introduced in 1992 Both household saving and CAD have worsened since Trends in household saving and CAD in Australia are very similar to those in NZ, despite a compulsory saving scheme

25. 25 Australia

26. 26 Back to macro data Similar patterns for US, despite long established saving schemes like Individual Retirement Accounts (IRA) and 401(k)

27. 27 USA

28. 28 Summary Household saving behaviour before KiwiSaver Retirement saving: most saved enough Aggregate saving: no reliable evidence of a saving crisis Initial effects of KiwiSaver Some impact on household saving Negative impact on national saving Expected future effects of KiwiSaver