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

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) Other assets Household items Vehicles and leisure equipment Trusts Residential property Business Financial assets Superannuation Life insurance Bank accounts A presentation from the Retirement Policy & Research Centre

SoF IE - a ll olde r individua ls SoFIE - all liabilities age 45-64 Other liabilities Student loans Credit cards Bank accounts Mortgages Liabilities are 1.2% of assets A presentation from the Retirement Policy & Research Centre

Re se rve Ba nk da ta - house holds 'Total' assets Total liabilities 'Net' assets % disposable income 800% 700% 600% 500% 400% 300% 200% 100% 0% 9 0 2 3 4 5 6 7 8 9 0 2 3 4 5 6 7 8 9 0 1 2 3 4 5 1 1 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 A presentation from the Retirement Policy & Research Centre

Re se rve Ba nk – too muc h housing ? Gross financial Net financial Gross housing Net housing % disposable income 600% 500% 400% 300% 200% 100% 0% 1979 1989 1999 2005 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 on 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 or 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