Housing liquidation and financial adequacy of retirees in New Zealand

Abstract

This study investigates the impact of housing on financial adequacy of New Zealand retirees using the Survey of Family, Income, and Employment (SoFIE) data for the period 2002–2009. We examine the differential effect of housing liquidation options, rent imputation and asset liquidity on financial adequacy. We report evidence of financial adequacy variation across five housing liquidation options and this is influenced by rent imputation. The results show that non-homeowners are less financially adequate than homeowners. We find that Māori, renters and individuals living in multi-dwelling occupancies have much lower levels of financial adequacy. Individuals of Pākehā or Asian ethnicity, homeowners and those living alone benefit more from imputed rent derived through home ownership. Our study highlights the need for the New Zealand government to address the lack of suitable public housing, rising housing and rental prices and mandate compulsory contributory retirement savings plans.

Keywords:

• Financial adequacy
• retirement
• housing wealth
• asset liquidity
• home ownership
• imputed rent

Notes

Acknowledgements

The authors acknowledge valuable input from participants attending the Department of Accountancy and Finance PhD workshops. They also thank the participants of the 25th Annual Colloquium of Superannuation Researchers 2017 by the Centre of Excellence in Population Ageing Research (CEPAR) for their feedback on the presentation of this paper. Particular mention to Professor Timothy Crack of the University of Otago, the editor and three anonymous reviewers for valuable feedback on earlier versions of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Statistics New Zealand integrated data infrastructure disclaimer

The result of this presentation are not official statistics, they have been created for research purposes from the Integrated Data Infrastructure (IDI), managed by Statistics New Zealand. The opinions, findings, recommendations, and conclusions expressed in this presentation are those of the authors, not Statistics NZ. Access to the anonymised data used in this study was provided by Statistics NZ in accordance with security and confidentiality provisions of the Statistics Act 1975. Only people authorized by the Statistics Act 1975 are allowed to see data about a particular person, household, business, or organization, and the result on this presentation have been confidentialised to protect these groups from identification. Careful consideration has been given to the privacy, security, and confidentiality issues associated with using administrative and survey data in the IDI. Further detail can be found in the Privacy impact assessment for the Integrated Data Infrastructure available from www.stats.govt.nz. Access to the data presented was managed by Statistics New Zealand under strict micro-data access protocols and in accordance with the security and confidentiality provisions of the Statistics Act 1975. Our findings are not Official Statistics. The opinions, findings, recommendations, and conclusions expressed are those of the authors, not Statistics NZ. Further detail can be found in the Privacy impact assessment for the Integrated Data Infrastructure available from www.stats.govt.nz.

Notes

1 We acknowledge that our findings are restricted to this group of retirees. Widowed and separated retirees require more complex analysis because of asset transfers.

2 Law & Scobie, 2014; Le et al., 2012, 2009; Scobie & Henderson, 2009.

3 This is the only time that New Zealand data has been gathered for a period of eight years with four waves where individual wealth and asset composition has been tracked.

4 Imputed rent should be included as it is a form of return on investment (Venti & Wise, 2004).

5 New Zealand European.

6 Auckland reports lower proportions of financially adequate singles and Wellington has fewer financially adequate married or partnered individuals compared to other regions.

7 See Bajtelsmit et al., 2013; Benartzi, 2012; Pang & Warshawsky, 2014.

8 See Baldwin et al., 2012; Crawford & O’Dea, 2016; Knoef et al., 2016; Munnell & Soto, 2005.

9 The difference between current wealth and wealth in the previous period.

10 The income replacement rate is the ratio of post-retirement income to pre-retirement income. See Benartzi, 2012; Binswanger & Schunk, 2012; Crawford & O’Dea, 2012; Scholz & Seshadri, 2009.

11 See Baldwin et al., 2012; Crawford & O’Dea, 2016; Knoef et al., 2016; Le et al., 2009.

12 The other 11 reasons for heterogeneity are life expectancy, health levels of retirees, retirement timing, lifestyle choice in retirement, inter-generational support, bequest motives, private pension benefits, financial net worth, public pension benefits, health insurance and health care in retirement, financing long-term care and living arrangements (Poterba, 2015).

13 See Baldwin et al., 2012; Crawford & O’Dea, 2016; Knoef et al., 2016; Munnell & Soto, 2005.

14 See Baldwin et al., 2012; Crawford & O'Dea, 2016; Knoef et al., 2016; Munnell & Soto, 2005.

15 These options are only relevant for homeowners. Renters’ financial adequacy will not change across each option.

16 Another form of home equity release is a reversionary home loan. Unlike a reverse mortgage that requires an interest bearing loan to be taken on a housing asset, a reversion home loan is an agreement that transfers ownership rights to the fund provider, allowing the seller to occupy the house for life while sometimes paying rent (New Zealand Government, 2018a, 2018b).

17 The home is used as collateral and ownership transfers to the financial institution at the end of the specified period or at the end of the borrower’s lifetime.

18 See Munnell & Soto, 2005; Venti & Wise, 2004.

19 See Coleman, 1998; Gibson et al., 2010; Le et al., 2009, 2012; Scobie et al., 2006.

20 Real equivalent median household income in 2013 was $38,500 (Pākehā), $28,500 (Māori) and $27,500 (Pacific).

21 Due to the eight-year window of SoFIE, individuals of age 73 or older in 2008 will not have information on their pre-retirement income. Information on income is available yearly but data on wealth are present in even-numbered waves (2, 4, 6 and 8). Personal income in SoFIE includes employment income and non-employment income to account for self-employed individuals and those who rely on other means of income.

22 Pākehā/Asian, Māori and Pacific Island.

23 The survey also includes data for individuals classified as married not partnered (only one individual in a couple is a participant of the survey), and divorced/widowed. These groups are more complex to analyse than SMRs due to asset transfers. They have been separated out for future analysis.

24 New Zealand law recognises equal contributions of both partners to their relationship and that in the event of break-up, divorce, and death, assets are equally distributed between individuals.

25 Adequacy rates for singles cannot be directly compared to married or partnered individuals because we do not account for the economies of scale and scope that lower living expenses for couples achieve.

26 This method has been adopted in previous studies (see Benartzi, 2012; Binswanger & Schunk, 2012; Crawford & O’Dea, 2012; Scholz & Seshadri, 2009).

27 Baldwin et al. (2012) define potential income as the income available from the selling of assets and converting them to a stream of income.

28 Following Hurd (1987) bequests are treated as unintentional in this study.

29 A replacement rate of 80% is common for studies based in the United States (Binswanger & Schunk, 2012). We have conducted robustness tests using 60% and 80% replacement rates and find that the results are similar. These findings are available from the authors upon request.

30 Individually sourced for each year from Statistics New Zealand. www.stats.govt.nz

31 See Baldwin et al., 2012; Crawford & O’Dea, 2012; Engen et al., 2000; Knoef et al., 2016; Le et al., 2009; Munnell & Soto, 2005.

32 Less liquid assets, such as business investments and assets held in trust, are excluded because of the complexity and time-consuming nature of liquidating such assets. Vehicles are not included because retirees may use their vehicles for transportation. Similar to household goods, sporting goods are excluded because their value drops significantly when sold.

33 See Baldwin et al., 2012; Crawford & O’Dea, 2016; Knoef et al., 2016; Le et al., 2009; Munnell & Soto, 2005.

34 Twenty-five percent is based on the information gathered by the authors for New Zealand banks and institutions that offer reverse mortgages (Consumer Organisation New Zealand, 2017).

35 This result concurs with the findings of Coleman (1998), Gibson et al. (2010), Le et al. (2012), Le et al. (2009) and Scobie et al. (2006).

36 Household items and illiquid assets, business investment/assets and assets in trust.

37 The lower wealth among women in the ‘Rest of South Island’ is mainly due to the lower housing prices in this region (based on median house price information from the Real Estate Institute of New Zealand).

38 See pages 295–309.

39 81% of males in the study are married; 60% of females are married. The partnered or married individuals equally split housing assets for income determination resulting in similar adequacy rates for both genders.

40 See Engen et al., 2005; Knoef et al., 2016; Scholz et al., 2006.

41 Table A2 reports equivalent measures for 70RR.

42 Table A4 in the Appendix show the equivalent adequacy measures using 70RR.

43 Table A5 in the Appendix reports the equivalent results for 70RR.

44 We acknowledge that the sub-sampling procedure means that there is limited data for Māori and Pacific Island respondents.

45 See Baldwin et al., 2012; Crawford & O’Dea, 2016; Knoef et al., 2016; Munnell & Soto, 2005.

46 De Nardi et al., 2009; Telyukova & Nakajima, 2011; Venti & Wise, 2004.

47 For example, a health shock that creates a need for close proximity to medical facilities, a need for cash or a decision to seek paid residential care.

48 The Federal Housing Administration (FHA)-insured reverse mortgage program or the Home Equity Conversion Mortgage Insurance Demonstration (HECM) was authorized by Congress in 1987.

49 A 2017 survey by the Commission for Financial Capability found that while 51% of retirees were financially healthy, 35% were “not in great shape” and 13% were struggling (Catherall, 2018).

50 This finding supports McCarthy et al. (2002) of retired Singaporeans who are asset rich but cash poor.

51 Australia practices compulsory contributions. The UK system uses auto-enrolment with a voluntary opt-out feature. Department for Work and Pensions UK (2013) report that the rate of opting out is low at 9%.

52 The 10% tax rate assumption is a conservative assumption based upon the 2009 income tax rate for the lowest income cohort of 13%.

53 Le et al. (2012) utilise the SoFIE database in their study. They apply cross-sectional weighting for net worth analysis and longitudinal weighting for the saving analysis.

Additional information

Funding

This work was supported by the Indonesian Endowment Fund for Higher Education (Lembaga Pengelola Dana Pendidikan) for funding one of the author’s (Jelita Noviarini) PhD degree programme and funding this research paper. Any remaining errors are the authors.