W hat is it w ith W hat is it w ith com pulsory saving? com - - PowerPoint PPT Presentation

W hat is it w ith W hat is it w ith com pulsory saving? com pulsory saving?

Michael Littlew ood Retirem ent Policy and Research Centre Retirem ent Policy and Research Centre

A d Agenda

• Is New Zealand Superannuation sustainable?

Is New Zealand Superannuation sustainable?

• Do we need the New Zealand Superannuation

Fund?

• Do we need KiwiSaver, let alone compulsion?
• What can governments actually do?

g y

• What should New Zealand really do next?

NZS - can w e afford it?

• Population aged 65+ will more than double
• Cost of NZS will more than double
• Dependency ratio will worsen, but:

Total ( as % GDP) : 32% i 2006

• 32% in 2006
• 37% in 2050

NZS ( net cost) :

• 3.4% in 2010
• 7.1% in 2050

Source: Retirement Commissioner 2007

NZS – the Treasury’s LTFM 2 0 0 0 -2 0 0 7

• Demography drives expected cost
• GDP drives ‘affordability’
• 2009 estimates lowest in real terms

10%

Net cost of New Zealand Superannuation - 2004 to 2100

% GDP

V i 2 (2000)

7% 8% 9% 10%

Version 4 (2004) Version 3 (2003) Version 2 (2000) Version 1 (2000) Version 5 (2005) Version 6 (2006)

4% 5% 6%

( )

Version 7 (2009) 1% 2% 3% 0% 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067 2070 2073 2076 2079 2082 2085 2088 2091 2094 2097 2100

W hat about other countries? EU1 5

25.0 Belgium

% GDP

20.0 Belgium Denmark Germany Greece Spain France 15.0 France Ireland Italy Luxembourg Netherlands Austria 10.0 Austria Portugal Finland Sweden UK 5.0

Source: European Commision 2006

0.0 2004 2010 2015 2020 2025 2030 2040 2050

W hat about other countries? - 2

14.0

% GDP

10.0 12.0

EU2 5

6 0 8.0 4.0 6.0

New Zealand

0.0 2.0 2004 2010 2015 2020 2025 2030 2040 2050

Australia Sources: European Commision, LTFM (net), Intergenerational Report 2010

2004 2010 2015 2020 2025 2030 2040 2050

Does the NZSF change things?

• The cost of NZS is not changed by $1
• The incidence of cost is changed slightly:
• The incidence of cost is changed slightly:

– Contributions holiday until 2018/ 19 – By 2050, net outgo reduced by 0.6% of GDP (-8% )

• Exposure to risk
• ‘Total accounting context’: borrowing to invest

g g

• Cost taxpayers $2.6 bn at 30 June 2009
• Example of ‘cookie jar economics’

p j

• Purports to ‘lock-in’ NZS benefit design &

Budget process We should agree what to pay for before how

W hat do w e know ? at do e

• Public reviews – 1992, 1997, 2003, 2007

(2010 d ) (2010 underway)

• New Zealanders’ responses

S i

• Some questions:

– Do tax incentives increase saving? Might compulsion help? – Might compulsion help? – Can governments really change behaviour? – Does domestic saving matter? g – How do we resolve this apparent dilemma?

Let’s look at som e evidence Let s look at som e evidence

www.PensionReforms.com

Can governm ents actually change things?

• International evidence is ‘no’
• For example 48 country study: 1980–2004
• For example, 48 country study: 1980 2004
• $1 in pension saving adds 0-20 cents to

national saving

• Ignores cost of incentives and sub-optimal

investment decisions

• Small “improvement” with maturity
• “Reforming countries” don’t seem to be

g different

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

Can governm ents change things? - 2

• More evidence that answer is ‘no’

S t t d 1970 t 2000

• Seven country study – 1970 to 2000
• Voluntary pension savings largely not ‘new’

money money

• “We found substantial evidence that pension

saving substitutes for other forms of private saving substitutes for other forms of private saving.”

Pension Reform and Saving Bosworth and Burtless (2004)

Do tax incentives w ork? - 1

• Evidence that answer is ‘no’
• No evidence that they increase savings
• No evidence that they increase savings
• …
• r ‘saving’
• They are regressive
• They are regressive
• …

and increase the taxes of all

• They also distort behaviour

ey a so d sto t be a

• u

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

Do tax incentives w ork? - 2

• Incentives change behaviour
• Direct incentives probably don’t increase saving
• “…

between 0 and 30 percent of 401(k) balances ddi i i i ” 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) Engen and Gale (2000)

Does com pulsion w ork?

A 13 t i f L ti A i

• A 13 country review of Latin America
• 11 lessons including:

– Growing ‘informality’ of labour force – Growing informality of labour force – ‘Ownership’ doesn’t solve evasion – Suppliers tend to concentrate to a few – Competition doesn’t control costs – Market doesn’t solve mortality issues – Effect on national saving is uncertain Effect on national saving is uncertain – Large, regressive, long-tail costs in transition – May have made markets more liquid (but may not) – Investment risk adds to social risk Reassessing Pension Reform in Chile and Other Countries in g Latin America Meso-Lago (2002)

W hat drives saving?

• Higher output growth boosts saving
• “Fiscal consolidation” linked with increased saving
• Fiscal consolidation linked with increased saving
• Private credit increases tend to reduce saving
• Ageing populations reduce saving

g g p p g

• Better ‘terms of trade’ tends to increase saving
• Saving behaviour may not be affected by returns

g y y

• Increased credit may mean firms invest more
• Higher cost of capital associated with lower

investment

World Economic Outlook 2005 World Economic Outlook, 2005 International Monetary Fund

Higher savings = grow th?

• More savings matter for ‘poor’ rather than ‘rich’

countries countries

• Review of 118 countries over 1960-2000
• Open capital markets disrupt theories based on
• Open capital markets disrupt theories based on

closed economies

• Local savings matter for innovation in ‘poor’
• Local 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’ num bers helpful? e

• use
• d sa

g u be s e p u

• For ‘retirement saving’, stocks matter not flows

“N thi b t ti t i d

• “Nothing about retirement saving adequacy can

be inferred from” household ‘saving’

• Possible adjustments could convert net national
• Possible adjustments could convert net national

saving from 2.1% to 13%

• Correcting for inflation removes “the so widely

g y cited downward trend in private saving”.

• The ‘look around’ test is more useful

O C ll h h ld b

• OECD will not now use our household numbers

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

New Zealanders behaving badly? - 1 e ea a de s be a g bad y

• A look at available evidence
• Review concludes that about one third are not
• Review concludes that about one third are not

saving ‘enough’

• Conservative assumptions

Co se at e assu pt o s

• Data could be better
• So, the problem is …

… . ? , p

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

New Zealanders behaving badly? - 2 e ea a de s be a g bad y

• Treasury: A "least regrets" approach today seems

defensible (2007) defensible (2007)

• Report: NZrs getting richer despite ‘spending more

than they earn’

• ... “and not just because of housing”
• “reasons that have been used to justify pro-saving

li i l k i d i i ” policies lack economic underpinnings.”

• “Pro-saving policies are more likely to be regrettable

than not ” than not.

• So, the problem is …

… . ?

Does New Zealand have a household saving crisis? Trinh Le, NZIER (2007)

New Zealanders behaving badly? - 3

• Compares SoFIE (individual) data for 2004 and 2006

S t ‘ t’ d ‘t it ’ ff t

• Separates ‘permanent’ and ‘transitory’ effects
• Measurement issues
• Median saving rate: 16% p a of real incomes (5%
• Median saving rate: 16% p.a. of real incomes (5%

ex-property)

• Wide distribution – data may improve

Wide distribution data may improve

• So, the problem is …

… . ?

Saving Rates of New Zealanders: A Net Wealth Approach Grant Scobie & Katherine Henderson (2009)

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 right
• The old (65+ ) have the smallest levels of ‘hardship’:
• nly 8% have any at all
• Unrelated to ‘financial assets’ – 59% have $25,000
• r less
• r less
• Owning a debt-free home is important
• So the problem is

?

• So, the problem is …

… . ?

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

More on New Zealand’s old

• 2008 Living Standards Survey
• Non-income measures of hardship
• Supplements usual income-based measures
• “older New Zealanders (65+ ) have low hardship

t (4% )” ( f EU25 14% ) rates (4% )” (cf. EU25: 14% )

• whole population: 13% ; children 19% ; sole

parents: 39% ; beneficiaries: 51% parents: 39% ; beneficiaries: 51%

• So, the problem is …

… . ?

Non-income measures of material wellbeing and hardship: first results from the 2008 New Zealand Living Standards Survey with international comparisons Bryan Perry (2010)

SoFI E’s sym m etry

• Eight year longitudinal survey
• Substantial population sample
• Substantial population sample
• Started 2002 – first tranche of financial data

for 2003/ 2004 for 2003/ 2004

• Subsequent financial data 2006, 2008 & 2010
• Straddles KiwiSaver’s introduction
• Straddles KiwiSaver s introduction
• We might be able to see impact
• Australia’s equivalent is HILDA
• Australia s equivalent is HILDA

HI LDA ( Aust) vs. SoFI E ( NZ) : 2 0 0 6 ( ust) s So ( ) 0 0 6

As % net assets HI LDA SoFI E H + th 50 3% 46 2% House + other prop 50.3% 46.2% Pensions/ super 18.6% 2.1% Businesses/ farms 9.3% 22.2% Businesses/ farms 9.3% 22.2% Shares, funds etc 7.7% 9.3% Bank accounts 4.7% 4.6% Vehicles 3.9% 2.7% Other assets 5.7% 13.9% Liabilities (% gross) 14.4% 13.9%

HI LDA vs. SoFI E: 2 0 0 6 s So 0 0 6

• Governments can influence aspects of behaviour
• Probably have limited impact overall
• Convertible to cash in 2006:

– Australians: 54.5% of net assets – New Zealanders: 48.5%

Debt abo t the same

• Debt about the same:

– Australians: 14.4% of gross assets – New Zealanders: 13 9% New Zealanders: 13.9%

More from HI LDA: 2 0 0 5 -2 0 0 9

• ‘Financial’ savings tracked (excludes home, lifestyle

assets) by individuals ) y

• Inflation-adjusted, ‘active’ saving
• Savings (p.a.)

g (p )

– All adult Australians: $300 p.a. (1.3% disposable income) – Age 45-54: $2,260 p.a. – Age 65-74:

• $110 p.a.

– Top quintile earners:

• $25,710 to + $39,120 (med. $8,060)

“With t SG t ib ti th t i l A t li

• “Without SG contributions, the typical Australian

would have spent $210 more than they received.”

Saving Tomorrow – the saving and spending patterns of Australians

NATSEM, University of Canberra (2010)

New Zealanders behaving badly? - 4

• Report compares SoFIE 2004 and 2006
• Wealth at both years compared - ‘stocks’ measure

A i d l ( )

• Average saving per adult (over two years):

– Total: $29,900 – Excluding housing gains: $12 600 (18% gross incomes) Excluding housing gains: $12,600 (18% gross incomes) – Excluding property & durables: $9,700

• “…

passive saving from the property boom did not crowd out other forms of saving”

• Concerns on lack of saving “strongly overstated”

S th bl i ?

• So, the problem is …

… . ?

Household Wealth and Saving in New Zealand: Evidence from Household Wealth and Saving in New Zealand: Evidence from the Longitudinal Survey of Family, Income and Employment Trinh Le, John Gibson and Steven Stillman (2010)

Do w e need Kiw iSaver? Do w e need Kiw iSaver?

• New Zealanders are bad savers (?)

( )

• Australia shows the way (?)
• Future retirees won’t have enough to live on (?)

Future retirees won t have enough to live on (?)

• We need to finance an ageing population (?)
• New Zealand lacks sufficient local capital (?)

New Zealand lacks sufficient local capital (?)

• Fewer New Zealanders own their homes (?)
• ‘Behavioural economics’ can help savers make
• Behavioural economics can help savers make

‘appropriate’ saving decisions (?)

Kiw iSaver – interim judgem ent

• Some positive aspects
• Workplace participation has increased
• Workplace participation has increased
• But …

the ‘problem’ not defined

• Founded on questionable assumptions

q p

• Next-to-no research – no debate
• Rushed introduction; imperfect implementation

p p

• Not designed for employers
• Tax breaks & housing subsidies unjustified
• Introduces unnecessary public policy risks
• Probably won’t ‘work’ – definition?

Kiw iSaver – ‘Not achieved’

OECD measures ‘good’ regulation as:

– Serving clearly identified goals – Having a sound legal & empirical basis – Producing benefits greater than costs – Minimising costs & market distortions Minimising costs & market distortions – Promoting innovation through market incentives & goal- based approaches B i l d ti l – Being clear and practical – Being consistent with other regulations & policies – Being compatible with competition, trade & investment- g p p , facilitating principles OECD Guiding Principles For Regulatory Quality And Performance OECD Guiding Principles For Regulatory Quality And Performance (2005)

Behavioural responses e a

• u a

espo ses

• Tax treatment is now complex and lacks:

– Transparency – Logic – but costs more to administer – … but costs more to administer – … and the boundaries are constantly tested

• Amounts in superannuation will rise …

. Amounts in superannuation will rise … .

• …

. but not necessarily ‘saving’

• Tax planning is re-emerging

Tax planning is re emerging

• “Social assistance integrity”?

W hat can governm ents really do?

• Little influence over saving levels (except their
• wn)
• Growth matters (almost above all else)
• NZS design a strong influence on behaviour
• Good data matter
• Education matters

Di l tt ( d th l t i )

• Disclosure matters (and the regulatory regime)
• Tax matters – TTE the ‘gold standard’
• Everything else should be left to:
• Everything else should be left to:

– Employers – Employees Employees – Other individuals

W hat do w e need to fix/ discuss? W hat do w e need to fix/ discuss?

• Let’s start a proper, evidence-based debate on:

– NZS benefit design from 2030 onwards – The NZ Superannuation Fund – KiwiSaver KiwiSaver – Tax incentives/ compulsory private provision – Tax regime for ‘collective saving vehicles’ – Interface with income-tested benefits – Disclosure regime

• Depends on better information than we have
• Depends on better information than we have
• Requires a more robust framework than we have

been used to

• Politicians can participate but can’t lead debate

A thought:

“There is no greater tyranny than to force a m an to pay for w hat he does not force a m an to pay for w hat he does not w ant because you think it w ill be good for him .” for him . Robert Heinlein