What has happened to evidence- based policy making? 28 June 2007 - - PowerPoint PPT Presentation

Re tire me nt sa ving issue s in Ne w Ze a la nd

What has happened to evidence- based policy making?

28 June 2007

A presentation from the Retirement Policy & Research Centre

Ag e nda

A practical case study A very short history Evidence? Where might we be heading?

A presentation from the Retirement Policy & Research Centre

T he issue s on the g round

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

A presentation from the Retirement Policy & Research Centre

Who is this c ouple ?

SoFIE middle quintile … of couples aged 55 to 64 New Zealand Super will be 57% of net income Debt under control Already saving ‘enough’, but KiwiSaver 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?

A presentation from the Retirement Policy & Research Centre

SoF IE

• a ll olde r individua ls

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

A presentation from the Retirement Policy & Research Centre

SoF IE

• a ll olde r individua ls

SoFIE - all liabilities age 45-64

Mortgages Credit cards Student loans Bank accounts Other liabilities

Liabilities are 1.2% of assets

A presentation from the Retirement Policy & Research Centre

Re se rve Ba nk da ta - house holds

0% 100% 200% 300% 400% 500% 600% 700% 800% 1 9 7 9 1 9 8 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5

'Total' assets Total liabilities 'Net' assets

% disposable income

A presentation from the Retirement Policy & Research Centre

Re se rve Ba nk – too muc h housing ?

0% 100% 200% 300% 400% 500% 600% 1979 1989 1999 2005

Gross financial Net financial Gross housing Net housing

% disposable income

A presentation from the Retirement Policy & Research Centre

Re se rve Ba nk – ‘missing ’ a sse ts - 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%)

A presentation from the Retirement Policy & Research Centre

Re se a rc h re sourc e

A presentation from the Retirement Policy & Research Centre

Ca n g ove rnme nts c ha ng e thing s?

International evidence is ‘no’ 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 different

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

A presentation from the Retirement Policy & Research Centre

Ca n g ove rnme nts c ha ng e thing s? - 2

More evidence that answer is ‘no’ Seven country study – 1970 to 2000 Voluntary 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)

A presentation from the Retirement Policy & Research Centre

Do ta x inc e ntive s 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)

A presentation from the Retirement Policy & Research Centre

Do ta x inc e ntive s work? - 2

Incentives change behaviour Direct 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)

A presentation from the Retirement Policy & Research Centre

Doe s c ompulsion work?

A 13 country review of Latin America 11 lessons including:

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 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 Latin America – Meso-Lago (2002)

A presentation from the Retirement Policy & Research Centre

Some c omme nts on Austra lia

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 compulsion Some 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

A presentation from the Retirement Policy & Research Centre

Wha t drive s sa ving ?

Higher output growth boosts saving “Fiscal consolidation” linked with increased saving Private credit increases tend to reduce saving Ageing populations reduce saving Better ‘terms of trade’ tends to increase saving Saving behaviour may not be affected by returns Increased credit may mean firms invest more Higher cost of capital associated with lower investment

World Economic Outlook, 2005 - IMF

A presentation from the Retirement Policy & Research Centre

Hig he r sa ving s = g rowth?

More savings matter for ‘poor’ rather than ‘rich’ countries Review of 118 countries over 1960-2000 Open capital markets disrupt theories based

• n closed economies

Local savings matter for innovation in ‘poor’ countries – not significant for ‘rich’

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

A presentation from the Retirement Policy & Research Centre

Are “house hold sa ving ” numbe rs he lpful?

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 useful OECD will not now use our household numbers

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

A presentation from the Retirement Policy & Research Centre

Ne w Ze a la nde rs be ha ving ba dly?

Scobie et al. have looked at available evidence Latest numbers conclude that about one third are not saving ‘enough’ Conservative assumptions No better information So, the problem is ……. ?

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

A presentation from the Retirement Policy & Research Centre

How a re Ne w Ze a la nd’s old fa ring 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” – only 8% have any at all Unrelated to “financial assets” – 59% have $25,000

• r less

Owning a debt-free home is important So, the problem is ……. ?

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

A presentation from the Retirement Policy & Research Centre

SoF IE ’s symme try

Eight year longitudinal survey Substantial population sample Started 2002 – first tranche of financial data for 2003/ 2004 Subsequent financial data 2006 and 2008 Perfectly straddles KiwiSaver’s introduction We will be able to measure impact

A presentation from the Retirement Policy & Research Centre

KiwiSa ve r – “Not a c hie ve d”

OECD measures “good” regulation as: Serving clearly identified goals Having a sound legal & empirical basis Producing benefits greater than costs Minimising costs & market distortions Promoting innovation through market incentives & goal- based approaches Being clear and practical Being consistent with with other regulations & policies Being compatible with competition, trade & investment- facilitating principles

OECD Guiding Principles For Regulatory Quality And Performance (2005)

A presentation from the Retirement Policy & Research Centre

KiwiSa ve r – inte rim judg e me nt

Some positive aspects Workplace participation will increase But … the ‘problem’ not defined Founded on questionable assumptions Little research – no debate Rushed introduction; imperfect implementation Not designed for employers Tax breaks unjustified – cost could be more than 2x Introduces unnecessary public policy risks Probably won’t ‘work’ – definition? Could be improved but still probably won’t ‘work’

A presentation from the Retirement Policy & Research Centre

Be ha vioura l re sponse s

Tax treatment is now complex and lacks:

Transparency Logic But will cost more to administer As the boundaries are constantly tested

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

A presentation from the Retirement Policy & Research Centre

Whe re ha ve we g ot 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 complexity To achieve ….now, what exactly was the problem again?

“Pra c tic a l politic s c onsists in ig noring fa c ts.”

Henry Adams