What has happened to evidence- based policy...

Retirement saving issues in New Zealand

What has happened to evidence-based policy making?

28 June 2007

A presentation from the Retirement Policy & Research Centre

Agenda

A practical case studyA very short historyEvidence?Where might we be heading?


The issues on the ground

Couple (children left home)Age 55 & 53Combined income $48,000 before taxOwn own home – net value $220,000Total net assets $383,000… of which financial assets $21,000Currently saving $5,000 a year


Who is this couple?

SoFIE middle quintile… of couples aged 55 to 64New Zealand Super will be 57% of net incomeDebt under controlAlready saving ‘enough’, butKiwiSaver will deliver $63,400 (inc. $16,000 personal; $13,000 employer)… but not extra… of which $27,100 comes from taxpayers… to address which problem?


SoFIE - all older individuals

SoFIE - all individuals with assets & liabilities - age 45-64(November 2005)

Life insurance

Financial assets

Household items

Business

Other assets

Residential property

Superannuation

Bank accounts

Trusts

Vehicles and leisure equipment


SoFIE - all older individuals

SoFIE - all liabilities age 45-64

Mortgages

Credit cards

Student loans

Bank accounts

Other liabilities

Liabilities are 1.2% of assets


Reserve Bank data - households

0%

100%

200%

300%

400%

500%

600%

700%

800%

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

'Total' assets Total liabilities 'Net' assets% disposable income


Reserve Bank – too much housing?

0%

100%

200%

300%

400%

500%

600%

1979 1989 1999 2005

Gross financial Net financial Gross housing Net housing

% disposable income


Reserve Bank – ‘missing’ assets - 2004

% disposable income

Net household wealth 538%Estimated ‘missing’ 137%Total net wealth 675%Note: Estimated ‘missing’ assets exclude commercial real estate

(All debt in 2004 = 146%)


Research resource


Can governments change things?

International evidence is ‘no’For example, 48 country study: 1980 –2004$1 in pension saving adds 0-20 cents to national savingIgnores cost of incentives and sub-optimal investment decisionsSmall “improvement” with maturity“Reforming countries” don’t seem to be different

Pensions and Saving: New International Panel Data Evidence -Bebczuk and Musalem (2006)


Can governments change things? - 2

More evidence that answer is ‘no’Seven country study – 1970 to 2000Voluntary pension savings largely not ‘new’ money “We found substantial evidence that pension saving substitutes for other forms of private saving.”

Pension Reform and Saving - Bosworth and Burtless (2004)


Do tax incentives work? - 1

Evidence that answer is ‘no’No evidence that they increase savings… or ‘saving’They are regressive… and increase the taxes of all

They also distort behaviour

Current taxation of qualified pension plans: has the time come?- Munnell (1992)


Do tax incentives work? - 2

Incentives change behaviourDirect incentives probably don’t increase saving“… between 0 and 30 percent of 401(k) balances represent net additions to private saving”Ignores direct/indirect costs of incentives

The Effects of 401(k) Plans on Household Wealth - Engen and Gale (2000)


Does compulsion work?

A 13 country review of Latin America11 lessons including:

Growing ‘informality’ of labour force‘Ownership’ doesn’t solve evasionSuppliers tend to concentrate to a fewCompetition doesn’t control costsMarket doesn’t solve mortality issuesEffect on national saving is uncertainLarge, regressive, long-tail costs in transitionMay have made markets more liquid (but may not)Investment risk adds to social risk

Reassessing Pension Reform in Chile and Other Countries in Latin America – Meso-Lago (2002)


Some comments on Australia

Significant, persistent current account deficits – 4.5% p.a. for 20 years (Treasury 2005)Aggregate saving not markedly different to New Zealand’s (OECD) despite compulsionSome evidence of compulsion’s influence on household saving rate (RBA – 2000,2004)Superannuation only 6% of median household wealth (HILDA 2001-02)In the six years to 2000, superannuation assets increased by about the same as debt (Treasury 2003)No work done on financial preparedness for retirement (as per Scobie analysis for New Zealand)Financial institutions love compulsion


What drives saving?

Higher output growth boosts saving“Fiscal consolidation” linked with increased savingPrivate credit increases tend to reduce savingAgeing populations reduce savingBetter ‘terms of trade’ tends to increase savingSaving behaviour may not be affected by returnsIncreased credit may mean firms invest moreHigher cost of capital associated with lower investment

World Economic Outlook, 2005 - IMF


Higher savings = growth?

More savings matter for ‘poor’ rather than ‘rich’ countriesReview of 118 countries over 1960-2000Open capital markets disrupt theories based on closed economiesLocal savings matter for innovation in ‘poor’countries – not significant for ‘rich’

When Does Domestic Saving Matter for Economic Growth? Aghion, Comin & Howitt (2006)


Are “household saving” numbers helpful?

For “retirement saving” stocks matter, not flows“Nothing about retirement saving adequacy can be inferred from” household ‘saving’Possible adjustments could convert net national saving from 2.1% to 13%Correcting for inflation removes “the so widely cited downward trend in private saving”.The “look around” test is more usefulOECD will not now use our household numbers

Saving in New Zealand: measurement and trendsClaus & Scobie (2002)


New Zealanders behaving badly?

Scobie et al. have looked at available evidenceLatest numbers conclude that about one third are not saving ‘enough’Conservative assumptionsNo better informationSo, the problem is ……. ?

Are Kiwis Saving Enough for Retirement? Preliminary evidence from SOFIETrinh Le, Grant Scobie and John Gibson (2007)


How are New Zealand’s old faring now?

Ground-breaking work by MSD – “Economic Living Standards Index (“ELSI”)We must have been doing some things rightThe old (65+) have the smallest levels of “hardship”– only 8% have any at allUnrelated to “financial assets” – 59% have $25,000 or less Owning a debt-free home is importantSo, the problem is ……. ?

New Zealand Living Standards 2004Ministry of Social Development (2006)


SoFIE’s symmetry

Eight year longitudinal surveySubstantial population sampleStarted 2002 – first tranche of financial data for 2003/ 2004Subsequent financial data 2006 and 2008Perfectly straddles KiwiSaver’s introductionWe will be able to measure impact


KiwiSaver – “Not achieved”

OECD measures “good” regulation as:Serving clearly identified goalsHaving a sound legal & empirical basisProducing benefits greater than costsMinimising costs & market distortionsPromoting innovation through market incentives & goal-based approachesBeing clear and practicalBeing consistent with with other regulations & policiesBeing compatible with competition, trade & investment-facilitating principles

OECD Guiding Principles For Regulatory Quality And Performance (2005)


KiwiSaver – interim judgement

Some positive aspectsWorkplace participation will increaseBut … the ‘problem’ not definedFounded on questionable assumptionsLittle research – no debateRushed introduction; imperfect implementationNot designed for employersTax breaks unjustified – cost could be more than 2xIntroduces unnecessary public policy risksProbably won’t ‘work’ – definition?Could be improved but still probably won’t ‘work’


Behavioural responses

Tax treatment is now complex and lacks:TransparencyLogicBut will cost more to administerAs the boundaries are constantly tested

Amounts in superannuation will rise ….…. but not necessarily ‘saving’Tax planning will re-emerge


Where have we got to?

A unique, simple, transparent retirement income system (1990-2000) ….…. gradually unravels (2000-2007)Now we have a solution (looking for a problem)…… that reduces transparency, ….increases cost and complexityTo achieve ….now, what exactly was the problem again?

“Practical politics consists in ignoring facts.”Henry Adams

What has happened to evidence- based policy...

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