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Abstract
This paper examines the implications for national savings of three retirement income policy options designed to improve the fiscal sustainability of New Zealand Superannuation (NZS). A simple model is developed that employs population and longevity projections allowing estimation of the contributions that many overlapping age cohorts might make to national savings in response to policy change. Government contributions to national savings, resulting primarily from reduced NZS payments, are also considered. Results suggest that even seemingly modest changes to retirement income policies could lead to substantial cumulative changes in national savings by 2061.
Acknowledgements
Access to some of the data used in this study was provided by Statistics New Zealand under conditions designed to give effect to the security and confidentiality provisions of the Statistics Act 1975. The results presented in this study are the work of the authors, not Statistics New Zealand. The views, opinions, findings and conclusions expressed in this paper are strictly those of the authors. They do not necessarily reflect the views of the New Zealand Treasury.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. The analysis was originally undertaken to inform Treasury's 2013 Long-Term Fiscal Statement.
2. To meet residency requirements for New Zealand Superannuation, an individual must have lived in New Zealand for 10 years since they were aged 20 years, of which five years must have been since they were aged 50 years.
3. This is particularly so with respect to National Savings. In the absence of this simplification, fiscal savings resulting from the policy change would, however, be slightly delayed.
4. Comprising 1.5% productivity growth and 2% inflation.
5. Though no such mechanism exists within the current design of KiwiSaver, the current exercise requires consideration of contributions more than a century into the future, by which time inflation would have eroded the real value of the MTC and kick-start to virtually nothing without such an assumption. It also has the significant advantage of greatly simplifying the modelling of this option.
6. Of course, not all members of any given cohort will survive to the age of 65 years. However, this assumption simplifies the modelling substantially and one could argue that it is appropriate from a precautionary savings perspective.
7. That is, those who will not yet be born for 23 years (from 2013).
8. Those aged 65 years and older in 2013 will not be assumed to save more or work longer as a result of policy change. However, in the case of a change to the indexation of NZS entitlements, they will still respond by lowering consumption, hence an estimate of their total loss of NZS entitlements is still required.
9. Driven by negative self-employment income.
10. An obvious implication of this being that approximately 30% of the population of each age cohort will be assumed to suffer no loss in expected NZS entitlements due to this policy option. An equivalent assumption (from the point of view of the additional national savings that would result) would be that each individual spent 70% of their life between the ages of 25 and 64 years in employment.
11. That is, the movement of an individual throughout the income distribution over his or her lifetime.
12. If income mobility was taken into account and the income deciles in were calculated on a lifetime basis, it is likely that differences across those deciles in terms of lost NZS entitlements would be less. However, accounting for income mobility would have little effect on estimates of national savings consequences of this policy option.
13. The exception being those cohorts reaching the age of 65 years very shortly after the policy was implemented, having small amounts of accumulations to abate NZS entitlements with the kick-start being a non-trivial portion of those even for high-income individuals. Even so, for the cohort that reaches 65 years in 2021 with only one year of accumulations, those in income decile 10 still lose more than four times the amount of NZS than do those in decile 2.
14. Except to the extent that life expectancy varies with income. However, accounting for differences in life expectancy due to income is outside the scope of the current analysis.
15. As discussed earlier in this paper, those 65 years and older in 2013 will be entirely unaffected by raising the age of eligibility for NZS or compulsory private saving with abatement of NZS entitlements. This group will, however, be affected by a change to the indexation of NZS but are assumed to adjust to this only by reducing consumption.
16. Further information on KiwiSaver and aspects of its performance to date, including membership, can be found at: http://www.ird.govt.nz/aboutir/reports/research/report-ks/.
17. Where the nominal level of GDP in each year is assumed to grow at a rate of 4% (comprising 2% inflation, 1.5% productivity growth and 0.5% population growth).
18. Any improvements in the government's fiscal position generated by this option would be reduced to the extent that further incentives were added to the compulsory savings scheme over time.
19. Early in the period, these will matter little as additional savings balances will be small and hence returns on those balances as a proportion of GDP will be very small. This simplification to the estimation will not change relativities between policies.
20. These are clearly linked to New Zealand's Net International Investment Position (NIIP), a key macroeconomic indicator of vulnerability, and under certain assumptions improvements in national savings would translate one-for-one to improvements in the NIIP. However, a detailed examination of retirement income policy options effects on the NIIP is outside the scope of this paper.
21. The adjustment of 17.5% (17.647 precisely) being the maximum possible increase to the saving adjustment parameter for the youngest age cohorts under the compulsory private saving scheme with abatement of NZS given initial parameter choices outlined in . Greater change than this would mean that there would be more than complete adjustment to the policy change by this group via saving.
22. Recall that results contained in previous sections have been based on an interest rate of 5%.