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Intervention in household saving decisions

This symposium focuses on the impact of KiwiSaver on household saving decisions in New Zealand. It discusses pre-KiwiSaver saving behaviors, evidence of KiwiSaver's effects, and whether KiwiSaver effectively corrects past market failures in saving practices. Key insights include that many New Zealanders were saving less than needed, and while KiwiSaver increased enrollment, questions remain on its role in stimulating new saving. Evidence suggests some households may already have sufficient savings for retirement, challenging the perception of widespread saving inadequacy.

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Intervention in household saving decisions

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  1. Intervention in household saving decisions Symposium on Retirement Income Policy Retirement 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?

  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. Household saving: aggregate evidence

  5. More on saving evidence

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

  7. 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

  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. 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. Saving adequacy Sample: Couples born 1940-1949

  11. Saving adequacy Source: Grant Scobie, John Gibson & Trinh Le (2005) Household wealth in New Zealand

  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 shouldn’t save more • have such low incomes that they shouldn’t save given that NZ Super is very high compared to their current income

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

  14. ‘Too good’ savers Note: % of people who, given their current income and wealth, have saved enough for retirement and shouldn’t save more

  15. 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

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

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

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

  22. 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

  23. Household saving & Balance of payments

  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. Australia

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

  27. USA

  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

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