Intervention in household saving decisions

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