Saving for Retirement: New Evidence for New Zealand

There is an on-going debate about the level of savings in New Zealand. A fundamental question pervades the debate: namely, are we saving enough? This question arises at two levels: for the economy as a whole and for individual households. At the macroeconomic level, the concern is whether our aggregate level of saving as a nation is "adequate". At the micro level, the same question arises in relation to the saving for retirement: are New Zealanders adequately preparing for retirement? This paper addresses the second of these questions. It develops a model of retirement wealth accumulation based on the findings from the Household Savings Survey. The evidence we present, tentative though it is, does suggest that there may not be widespread undersaving for retirement. The results are consistent with overseas findings. We have chosen conservative assumptions: excluding equity in the primary residence from estimates of retirement wealth, providing for full survivor benefits and assuming that consumption spending would be maintained at pre-retirement levels throughout retirement rather than the typical pattern of falling consumption spending as people age. It must be stressed that there is limited information about the rate at which individuals are actually saving, making it difficult to establish a solid benchmark against which to measure adequacy. We have used the Household Economic Survey as a basis for estimating actual saving rates for different age groups. The estimates are affected by definitions of consumption, in particular how the expenditure on durables is treated. We conduct sensitivity tests where durables are both included and excluded as an item of current consumption. Typically we find that the actual saving rates do in fact exceed the rates needed for maintaining living standards in retirement. This reinforces our tentative conclusion that there is no apparent gross under-saving for retirement especially in the older age cohorts. The results apply to broad groups within which there will be a distribution of people some of whom would likely not be saving at a rate to maintain their real standard of living in retirement. The results in no way imply that every individual is saving "adequately". While we present results for younger age cohorts, the fact they still have many years to retirement implies that estimates made today inevitably carry much wider margins of error. More unequivocal results must await better data and methodologies; improved measures of household saving levels, and the application of micro-simulation models which are more suited to capturing uncertainty about health status, employment, incomes and life expectancies will improve our understanding of household saving behaviour. New Zealand superannuation (NZS) provides the floor under the income for the lowest 40 percent of the income distribution, and for many in this group additional saving for retirement would not be a preferred strategy, assuming they were to be aiming to smooth their consumption over the life cycle. In other words our finding that there is no strong evidence of widespread under-saving is not inconsistent with a significant share of individuals not saving for retirement. This follows from the critical role played by NZS in providing those on low incomes with a standard of living in retirement which matched or exceeds that which their pre-retirement incomes can support. For these people the issue is the level of income rather than their level of saving.