KEY POINTS:
Most middle-aged people are saving enough for their retirement. That is the conclusion of research reported by Waikato University economics professor John Gibson to the New Zealand Association of Economists' recent conference.
Under conservative assumptions about a third of the population between 45 and 64 were not saving enough for retirement, he said, but using more realistic assumptions the proportion of problem savers fell below 20 per cent.
"For the group approaching retirement only 9 per cent of non-partnered individuals and 13 per cent of couples need to increase their savings rates in order to smooth out consumption between now and retirement."
Does this mean KiwiSaver is, as some would have it, a solution that won't work to a problem that doesn't exist?
Not necessarily.
Most people is not all people.
And not everyone is middle-aged. Younger age groups may harbour doubts about one of the key assumptions the researchers make, that New Zealand Superannuation entitlements will continue as is.
There is, moreover, a stark and unresolved disagreement between the sanguine view arising from this bottom-up micro-economic research and the alarming top-down macroeconomic view provided by the current account data.
The latter tells us that in the year ended March 2007 national savings fell short of net national investment by $13.9 billion, or 8.5 per cent of gross domestic product.
But the work by Gibson and his colleagues has to be taken seriously.
It is based on a large and rich new source of information on household incomes, assets and liabilities - Statistics New Zealand's survey of family income and employment, affectionately known as Sofie. It covers more than 26,000 people in more than 10,000 households and, crucially, tracks them over successive years.
The researchers' model is based on the notion of consumption-smoothing. The idea is that people in their earning years will sacrifice some of their income to build up enough wealth by the time they retire so that if they draw it all down they will be able to maintain their pre-retirement standard of living for the rest of their days.
They do not count the family home in this stock of wealth.
People have to live somewhere and you can't eat the house. But you can trade down or take out a reverse mortgage, so not including equity in the primary residence is a conservative assumption.
Investment properties are included, but they assume no capital gains on them - another conservative assumption.
Financial assets such as shares, bank deposits, private superannuation, farms and businesses are assumed to increase in value by 2 per cent a year, after tax and inflation.
Real wages and salaries are assumed to increase by 1 per cent a year, reflecting productivity trends, and people are assumed to stop working altogether at 65. The latter is a conservative assumption. The former, alas, is not.
An important component of "wealth" at retirement is the entitlement to draw New Zealand Superannuation.
For those on lower incomes it can represent all, or virtually all, of their wealth upon retirement. It may deliver a higher income than they currently enjoy, in which case under this model they should not be saving any of their income.
Even so, for that group the entitlement to NZ Superannuation is a smaller asset than for people on higher incomes because they tend not to live as long.
But as an indication of how important NZ Super is, consider this. For people in the 45 to 54 age group, their future entitlement to the state pension is worth half as much again as the net equity in their homes.
Clearly people on higher incomes can afford to save more. Under this model they also need to save a higher proportion of their incomes in order to maintain their standard of living in retirement.
At the 75th percentile, for example (where three of your contemporaries have lower incomes for every one who has a higher income), the model says single people should be saving 10 per cent of their after-tax income if they are between 45 and 54, or 13 per cent if they are between 55 and 64.
For couples at that point in the income scale the prescribed savings rates are 23 per cent and 31 per cent respectively.
So how are we doing by these standards of thrift and providence?
Based on the same Sofie data and some educated guesswork about household expenditures, most people are saving enough.
Put the other way, 37 per cent of couples between 45 and 64 are not saving enough and between 28 and 34 per cent of single people aren't either.
Those results assume people want to maintain their pre-retirement consumption levels all through their retirement years.
In practice, however, people tend to consume less after they retire.
When the model is run assuming that superannuitants' consumption declines with advancing years the proportion of couples not saving enough falls to 13 per cent for those in the decade before retirement and 26 per cent for the 10 years before that. For the singles the proportions fall to 9 and 18 per cent respectively.
An obvious limitation in this approach is that it makes no allowance for uncertainty.
It asks how much wealth a group of people would need to accumulate if they were to use it all up before they die and maintain the same standard of living throughout. It is based on average life expectancies.
"In the face of uncertainty some precautionary savings may be accumulated which, if not needed, may lead to bequests," Gibson said.
But some of the risks precautionary savings might otherwise be accumulated for are taken care of by the state, such as rest-home care for those whose assets and income fall below a certain level.
Further research along these lines should illuminate who the groups are who are not saving enough, and whether policies like KiwiSaver accurately target them.
It is important to remember Gibson's paper is confined to people in their peak earning years, 45 to 54, and in the subsequent decade before retirement.
For younger age groups the assumption of no change to New Zealand Superannuation may be subject to greater political risk.
A later age of eligibility or some form of means testing would reduce the value of this "asset".
And the flipside of not counting the family home as an asset is the assumption that by the time they retire most people own the roof over their heads.
But year after year as house price inflation outstrips wage growth that assumption becomes more and more unsafe.
