Intervention in household saving decisions

Symposium on Retirement Income PolicyRetirement Policy and Research Centre

Trinh Le – 16 April 2008

2

Outline

► Household saving behaviour before KiwiSaver► Effects of KiwiSaver – initial evidence► How will KiwiSaver affect New Zealanders’ future

decisions?

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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

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Household saving: aggregate evidence

-20

-15

-10

-5

0

5

1987 1990 1993 1996 1999 2002 2005

Household saving as % of household disposable income

Source: Household Income and Outlay Accounts

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More on saving evidence

-20

-10

0

10

1984 1987 1990 1993 1996 1999 2002 2005

Household Income and Outlay Accounts

Household Economic Survey

Household saving as % of household disposable income

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More on saving evidence

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

-50

0

50

100

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Household Income and Outlay Accounts

Household Economic Survey

Reserve Bank of New Zealand

Household saving as % of household disposable income

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Was there a saving problem?

► Different data tell different stories► NZ doesn’t 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

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Micro evidence

► Even when error free, aggregate data on saving not as helpful as one might think

► Aggregate saving tends to 0Some borrowSome saveSome dissave

► Have to look at micro evidence to judge whether people are adequately prepared for retirement

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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

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Saving adequacy

Sample: Couples born 1940-1949

Prescribed saving rate

%

Actual saving rate %

Actual saving rate %: durables as consumption

Mean 7.2 26.6

Median 16.0 27.0

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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

Mean 7.2 26.6 21.4

Median 16.0 27.0 22.7

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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 shouldn’t save morehave such low incomes that they shouldn’t save given

that NZ Super is very high compared to their current income

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Bad savers?

% saving inadequately

Non-partnered individuals

Ages 45-54 18

Ages 55-64 9

Couples

Ages 45-54 26

Ages 55-64 13

Source: Trinh Le, Grant Scobie & John Gibson (2007) Are kiwis saving enough for retirement?

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‘Too good’ savers

% prescribed with negative saving rate

Non-partnered individuals

Ages 45-54 58

Ages 55-64 63

Couples

Ages 45-54 32

Ages 55-64 37

Note: % of people who, given their current income and wealth, have saved enough for retirement and shouldn’t save more

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Inertia – behavioural economics

► A key argument for KiwiSaver is that people are myopic, they don’t 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

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KiwiSaver enrolments

Source: Inland Revenue, as at 29 Oct 07, Total membership: 251,736

Auto enrolled25%

Opted in75%

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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

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Composition of KiwiSaver balances

Note: Upper bound estimate of new saving

Taxpayers51%

Employers9%

Self (reshuffle)21%

Self (new saving)19%

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Composition of KiwiSaver balances

Taxpayers50%

Employers9%

Self (reshuffle)32%

Self (new saving)9%

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

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How much KiwiSaver saving is “new”?

► 9-19% of KiwiSaver balances ► Not enough to cover deadweight costs of

taxationwhich 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…

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International evidence

Scheme New saving

Engen & Sholz (1994) IRA -14% to 2%

Engen, Gale & Scholz (1994) IRA 4%

Attanasio & DeLeire (2002) IRA 9%

Engen & Gale (2000) 401(k) 0–30%

Benjamin (2003) 401(k) 25%

Note: Excl. deadweight costs of taxation and administration and compliance costs

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Back to macro data

► NZ’s large current account deficit (CAD) is often used as evidence of a (household) saving problem

► Australia’s compulsory saving scheme often used as “role model” for NZ

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Household saving & Balance of payments

-20

-15

-10

-5

0

5

1987 1990 1993 1996 1999 2002 2005

Household saving rate

Current account balance as % of GDP

Source: Statistics New Zealand

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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

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Australia

-5

0

5

10

15

20

1970 1980 1992: Super Guarantee 2000 2005

Household saving rate

Current account balance as % of GDP

Source: OECD Economic Outlook

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Back to macro data

► Similar patterns for US, despite long established saving schemes like Individual Retirement Accounts (IRA) and 401(k)

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USA

-5

0

5

10

1970 1981: 401(k) 1990 2000 2005

Household saving rate

Current account balance as % of GDP

Source: OECD Economic Outlook

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Summary

► Household saving behaviour before KiwiSaverRetirement saving: most saved enoughAggregate saving: no reliable evidence of a saving

crisis

► Initial effects of KiwiSaverSome impact on household savingNegative impact on national saving

► Expected future effects of KiwiSaver