intervention in household saving decisions
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Intervention in household saving decisions. Symposium on Retirement Income Policy Retirement Policy and Research Centre. Trinh Le – 16 April 2008. Outline. Household saving behaviour before KiwiSaver Effects of KiwiSaver – initial evidence - PowerPoint PPT PresentationTRANSCRIPT
Intervention in household saving decisions
Symposium on Retirement Income PolicyRetirement Policy and Research Centre
Trinh Le – 16 April 2008
2
Outline
► Household saving behaviour before KiwiSaver► Effects of KiwiSaver – initial evidence► How will KiwiSaver affect New Zealanders’ future
decisions?
3
Was there a saving problem?
► KiwiSaver: an interventionist policy to correct a market failure
► The failure: before KiwiSaver kiwis did not save► The average NZ household spent $1.15 for
every dollar earned (Finance Minister Michael Cullen, Budget 2007)
► True, see data from the Institutional Sector Accounts
4
Household saving: aggregate evidence
-20
-15
-10
-5
0
5
1987 1990 1993 1996 1999 2002 2005
Household saving as % of household disposable income
Source: Household Income and Outlay Accounts
5
More on saving evidence
-20
-10
0
10
1984 1987 1990 1993 1996 1999 2002 2005
Household Income and Outlay Accounts
Household Economic Survey
Household saving as % of household disposable income
6
More on saving evidence
Source: Trinh Le, Does New Zealand have a household saving crisis?NZIER working paper 2007/01
-50
0
50
100
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Household Income and Outlay Accounts
Household Economic Survey
Reserve Bank of New Zealand
Household saving as % of household disposable income
7
Was there a saving problem?
► Different data tell different stories► NZ doesn’t have a saving problem as much as a
saving data problem► The data that are used to support the claim that
NZ households are bad savers are unreliable► Careful analysis shows little support for that
claim
8
Micro evidence
► Even when error free, aggregate data on saving not as helpful as one might think
► Aggregate saving tends to 0Some borrowSome saveSome dissave
► Have to look at micro evidence to judge whether people are adequately prepared for retirement
9
Modelling adequacy of retirement saving
► Life cycle model► Objective: consumption smoothing
Given their current income, assets, liabilities, age and life expectancy at retirement, how much should a single person/ couple save so that when they retire, they will have a standard of living that is similar to their current standard of living?
► Used unit-record data from the Household Savings Survey (2001)
► Found on average, people already saved more than “prescribed” by the model
10
Saving adequacy
Sample: Couples born 1940-1949
Prescribed saving rate
%
Actual saving rate %
Actual saving rate %: durables as consumption
Mean 7.2 26.6
Median 16.0 27.0
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Saving adequacy
Source: Grant Scobie, John Gibson & Trinh Le (2005) Household wealth in New Zealand
Prescribed saving rate
%
Actual saving rate %
Actual saving rate %: durables as consumption
Mean 7.2 26.6 21.4
Median 16.0 27.0 22.7
12
Modelling adequacy of retirement saving
► Analysis repeated on a larger, newer data (Survey of Family, Income and Employment, wave 2, conducted 2003-04)
► Found most were saving enough► Under relatively conservation assumptions► Significant proportions
have saved so much they shouldn’t save morehave such low incomes that they shouldn’t save given
that NZ Super is very high compared to their current income
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Bad savers?
% saving inadequately
Non-partnered individuals
Ages 45-54 18
Ages 55-64 9
Couples
Ages 45-54 26
Ages 55-64 13
Source: Trinh Le, Grant Scobie & John Gibson (2007) Are kiwis saving enough for retirement?
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‘Too good’ savers
% prescribed with negative saving rate
Non-partnered individuals
Ages 45-54 58
Ages 55-64 63
Couples
Ages 45-54 32
Ages 55-64 37
Note: % of people who, given their current income and wealth, have saved enough for retirement and shouldn’t save more
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Inertia – behavioural economics
► A key argument for KiwiSaver is that people are myopic, they don’t plan for a distant future, they often procrastinate saving until too late
► Auto-enrolment was believed to overcome the power of inertia
► In fact, far more people have joined KiwiSaver through direct enrolment than auto-enrolment
16
KiwiSaver enrolments
Source: Inland Revenue, as at 29 Oct 07, Total membership: 251,736
Auto enrolled25%
Opted in75%
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Does KiwiSaver mean more saving?
► As of April 2008, over 500,000 kiwis have joined KiwiSaver
► The first six-monthly evaluation report did not evaluate the very question it should evaluate: Does KiwiSaver increase saving?
► Gibson and Le (2008) made the first attempt and found KiwiSaver a money-go-round game
18
Composition of KiwiSaver balances
Note: Upper bound estimate of new saving
Taxpayers51%
Employers9%
Self (reshuffle)21%
Self (new saving)19%
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Composition of KiwiSaver balances
Taxpayers50%
Employers9%
Self (reshuffle)32%
Self (new saving)9%
Source: John Gibson & Trinh Le, How much new saving will KiwiSaver produce? University of Waikato Economics Department working paper 2008/03
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How much KiwiSaver saving is “new”?
► 9-19% of KiwiSaver balances ► Not enough to cover deadweight costs of
taxationwhich Treasury conservatively estimates to be 20% of
the amount of taxes raised
► Let alone administration and compliance costs► Net of these costs, the impact of KiwiSaver on
national saving most likely negative► These findings are consistent with…
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International evidence
Scheme New saving
Engen & Sholz (1994) IRA -14% to 2%
Engen, Gale & Scholz (1994) IRA 4%
Attanasio & DeLeire (2002) IRA 9%
Engen & Gale (2000) 401(k) 0–30%
Benjamin (2003) 401(k) 25%
Note: Excl. deadweight costs of taxation and administration and compliance costs
22
Back to macro data
► NZ’s large current account deficit (CAD) is often used as evidence of a (household) saving problem
► Australia’s compulsory saving scheme often used as “role model” for NZ
23
Household saving & Balance of payments
-20
-15
-10
-5
0
5
1987 1990 1993 1996 1999 2002 2005
Household saving rate
Current account balance as % of GDP
Source: Statistics New Zealand
24
Back to macro data
► Australia had falling household saving rates and widening CAD in the 1970s and 1980s
► A compulsory workplace saving scheme (Superannuation Guarantee) was introduced in 1992
► Both household saving and CAD have worsened since
► Trends in household saving and CAD in Australia are very similar to those in NZ, despite a compulsory saving scheme
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Australia
-5
0
5
10
15
20
1970 1980 1992: Super Guarantee 2000 2005
Household saving rate
Current account balance as % of GDP
Source: OECD Economic Outlook
26
Back to macro data
► Similar patterns for US, despite long established saving schemes like Individual Retirement Accounts (IRA) and 401(k)
27
USA
-5
0
5
10
1970 1981: 401(k) 1990 2000 2005
Household saving rate
Current account balance as % of GDP
Source: OECD Economic Outlook