Michael Littlewood: People best judges of own welfare

COMMENT

New Zealanders could reasonably get a little fed up with people constantly telling them they are not saving enough for their retirement.

The managing director of a major insurance company has said that only 52 per cent of New Zealanders are saving for retirement - seemingly a dismal figure. According to him, most of us want to be either forced into saving or paid by other taxpayers to save (through tax incentives).

We have also had the head of the financial services industry's lobby group say we must have immediate action from the Government to "encourage increased personal savings for future retirees".

So, the product-sellers seem worried. People aren't doing enough; penury in old age seems the inevitable consequence. The question is, should New Zealanders be worried about all this? The answer, based on new research, is probably not.

But, I can hear you say, hang on a moment. People aren't good at saving; the overall household saving numbers are terrible; we put too much into our homes and second houses; we don't have enough in productive assets; we've all borrowed too much and we won't have enough to live on in retirement. We must be in trouble.

There are several ways of looking at this. Recent work by the Treasury has come up with a different and illuminating look at how we are doing. The results are in "Saving for Retirement: New Evidence for New Zealand" by Grant Scobie and Trinh Le.

Before summarising its conclusions, we need to examine what is "enough"? If you were asked whether you were saving "enough" for retirement, the most important issues should be: when do I want to retire; how much will I need to spend in retirement; and how long will I live after I retire?

Scobie and Le based their work on Statistics New Zealand's 2002 household saving survey. They have mined this huge database to estimate what the participants might actually get to live on in retirement, given their assets and liabilities.

For all the participants, Scobie and Le answered the three key questions as follows: all would retire when New Zealand Superannuation starts (65); everyone would try to spend the same on consumption after retirement as before (in other words, their standard of living would stay about the same); and everyone would survive for the average expectation of New Zealanders (adjusted for sex and ethnicity).

Importantly, everyone would also know they would consume all their assets during their retirement and not run out. But they would not "eat the home"; the value of the main residence would pass to the next generation as an inheritance.

All these are relatively conservative assumptions. Although some will be forced to retire before 65, many will work on after New Zealand Superannuation starts. For example, a quarter of New Zealanders aged 65 to 69 work, and that proportion is likely to rise and stretch into older age groups.

Again, most would expect their level of consumption to drop after retirement and, finally, not having to "eat the home" means there is effectively an emergency fund if things go wrong in retirement.

With that in mind, the authors' main conclusions were:

* Tentatively, there is little evidence that New Zealanders are undersaving for retirement.

* New Zealand Superannuation plays a crucial role in this conclusion - a significant proportion of people's expected retirement wealth is in the payments they will receive from it.

* There is little difference in average net retirement wealth across males and females and little difference across the age cohorts in projected retirement wealth (including, again, present levels of New Zealand Superannuation).

Both these conclusions were unexpected, the received wisdom being that females would have less net retirement wealth (low lifetime incomes and long retirements), and that older employed New Zealanders (the "selfish generation") would be better off than younger New Zealanders.

* Based on indications of actual saving behaviour from the separate household expenditure survey, people may be saving, on average, a bit more than they need to smooth consumption from work to retirement, assuming New Zealand Superannuation stays at present real levels.

The conclusion also broadly applies if the age for New Zealand Superannuation were either reduced to 62 or increased to 68. There are expected differences in these two cases but they are relatively insignificant.

* The "excess" savings could be seen as precautionary in that people don't know exactly when they are going to retire, how long they are going to live or what their health will be like after they retire. So having a bit in reserve makes sense.

* Those that cannot or are not saving really don't need to. The poor cannot afford to save and are, in any event, looked after by the state, based on the consumption test adopted in the research.

At the other end, the rich don't need to save. They already have enough squirrelled away for retirement and, anyway, we don't need to worry too much about them.

It seems that, despite dire pronouncements, people are responding rationally to the public policy signals they are receiving.

For the past 15 years or so, successive governments have taken a hands-off approach and said, effectively, that it is up to people to decide for themselves when, how and how much to save.

In short, the research finds (unsurprisingly) that people do, in fact, have a collective sense of what they ought to be doing about retirement provision. People really do seem to be the best judges of their own welfare.

Does this mean that we don't need to worry about this subject any more? Not at all. For a start, it assumes that people keep doing the things they are doing.

Next, you will see the crucial significance of the role New Zealand Superannuation will play in all this. For most New Zealanders, that constitutes the bulk of their retirement wealth - the research shows that for many, it is their entire retirement wealth. Nothing at all wrong with that except that we haven't yet had a debate about the size and shape of New Zealand Superannuation from, say, 2020 onwards.

The debate should start soon. The new research emphasises the importance of doing that now, not in 20 years, so younger people can take a sensible view on what they need to save privately to top up New Zealand Superannuation.

But we can take considerable comfort from this research. It's much more interesting to find out what people are actually doing, as opposed to what they say they are thinking or what we suppose they are doing.

It also questions whether those who support a tax break for retirement saving or even a compulsory saving scheme have any justification for such expensive, intrusive (and largely ineffective) policy changes.

If New Zealanders are, generally, already saving enough, why would we pay them (through an incentive) or force them to save more? It doesn't make sense.

* Michael Littlewood was a member of the first Todd superannuation taskforce.