Understanding retirement saving and pensions
Second OECD World Forum on "Statistics, Knowledge and Policy"
Len CookFormer Government Statistician
A stable foundation but policy volatility
UniversalFlat ratePension(taxed)
SupportJob
Pensions
AffordableHousing
PublicInvestment
2006 X XXXX XXX XX XXX Personal compulsory savings, externally invested, tax subsidy, no pension
2003 X XXXX X X X Fund to invest budget surplus in equities until baby boom demands reach peak. Continuity in mix
1996 – 2006
X XXXX X X X Surcharge removed, new wage price adjustment
1991 XXXX
X X X
Age of eligibility rises from 60 to 65 years 1990–2001
Continuity in mix
1987 – 1996
XXXX
X X X
Tax subsidy removed for occupational pensions, Tax surcharge on NZ Super
1977 -1987
X XXXX XX X XXX New Zealand Superannuation, to all from PAYE, taxed only, linked to wages
1976 - 1977
XXXX XX XX XX XX Return to past system as transition to NZS
1974- 1976
XXXX XX XXXX XXX XXXX Compulsory contribution to retirement scheme
1938-74 XXXX XX XX XXX XXXX Age benefit consistent for first 26 years
Market reduces defined benefit pensions, defined benefit schemes grow
Income tested benefit
Inflation eroded personal saving
1972 Royal Commission considered NZ served well
Strong public surpluses from now on, job growth
Retirement pensions funded by cutting benefits to others
Compulsory savings. With tax incentives
-
UK – NZ Comparisons
UK NZBenefit focus Occupational schemes Flat rate public pension for all
Common elements
Income tested, with income linked addition
Flat rate, taxed only
Frequency of change
Several after deliberation Frequent, quick changes
Complexity of system
Significant, compounding Simple
Income base Not comprehensive, exclusions
Not comprehensive, exclusions
Capital taxation Mixed and distorting Mixed and distorting
Ageing impact Moderate numbers only Moderate numbers only
Pensioner well being
Low in Europe High in New Zealand
Work disincentives
High Very low
Future sustainability
Simplification intended by 2020
Resilient now, policy change increases risk
Durability of NZ arrangements
Characteristics1. No coherence in long run path2. Despite continual change, sometimes reversals, NZ system is still
simple.3. Generates risk of continuing tinkering4. No accepted framework for understanding long term drivers of
change, across cohorts
Population impact1. Reduced capacity for understanding handed down by others2. Continued change may increase risk aversion among population3. Strong incentives for continued labour market participation4. Limited scale and continuity of equity investment5. Financial services do not match demand (annuities, reverse
mortgages, fund management fees)6. Unclear commitments to emigrant and immigrants as mobility
increases
New Zealand Superannuation – its context
• demographic change, • Post war baby boom• Near replacement fertility since late 1970’s• Migration strong, 15% of net growth
• living standards, • Retired have high standard of living since 1970’s• Many have retirement pension higher than working life income
• savings and investment• Housing dominant, equities and finance low• Non financial investments unknown but strong
• economic necessity• Response to 1980’s downturn within model • Voluntary increase in post 65 employment• Failure of equities during 1980’s• Inflation from 1970 to early 1990’s• No tax subsidies to capture by high incomes
• judgements about the well-being of the retired• Incomes adequate as judged by RCSS in 1972• Retirement age fixation reduced training of older workers
New Zealand Superannuation – its future
• demographic change, 1. NZ ageing slower than OECD, fertility good, (50,000 births
in 2040)2. Migration part of national fabric3. High loss of educated young, and others
• living standards, • Sustainable per capita cost• Divergence between baby boom and later cohorts• Changes in life course• Increasing longevity not seen in all groups
• savings and investment• Human capital, non-financial investments substantial• Concentration on housing is a risk• Regional imbalances in infrastructure• Savings and investment linkages uncertain and changing
Information issues affecting the retired
• Attitudes to forms of saving• Underestimation of longevity• Policy failures result in unintended capital loss• Insufficient information on future market volatility for equity
based saving• Impact of economic cycle on affordability
The baby boomers bonus1. Increased longevity has come alongside a healthier lifestyle at each
age,2. The stages of the life course have been extended 3. Labour market flexibility has created opportunity for new working
patterns, after the usual age of eligibility for pension4. Labour supply constraints from the clustering of the baby boom
generation in some occupations have extended working opportunities as they retire. These occupations span the whole range of occupational classes
5. House price appreciation has benefited all income levels in the baby boom cohorts because of their high home ownership rates regardless of incomes. This benefit continues.
6. Uncertainty about access to health care as increased longevity and active life course has generated demands for health care that may be mitigated by technological change, or need rationing through user pays
7. The baby boomers as consumers are an increasingly significant economic force
After the baby boomers
1. Health improvements appear to be less evenly distributed, and some such as obesity, diabetes, heart conditions are strongly influenced by economic well being when young
2. Social mobility among later age cohorts is declining significantly
3. Job growth from labour market flexibility affects returns from work of lower income groups much more
4. Significantly reduced levels of home ownership of cohorts born after 1960
5. Individual funding of training for skilled occupations leaves high levels of debt held by people at conclusion of education
6. Growth in numbers living at home after the age of twenty reflects economic restraints
7. High targeting of benefits for single parents, unemployment and disability create long periods of low accumulation of assets
8. Lessening of employer contribution of retirement pensions9. Uncertainty about life expectancy trends and health gradient
Cohort life expectancy estimated at stages of life cycle
Infancy Education Housing/Family
DevelopmentRetirement
Birth family stability Health / disability
Income of birth family
Lifestyle/ dietGender equity
Relevance of education
Household stability Structural shifts in jobs
Migration
Home ownership Partner history
Lifestyle
Parents Family arrangements
Parents Wealth accumulation
Parents Education
Health eventsParticipation
Estimated Life Expectancy at key stages of life cycle
BIRTH TO DEATH EXPERIENCES
Lifestyle provision
COHORT LIFEEXPECTANCY
Infancy
Education
Housing/Family Development
Lifestyle provision
Retirement
Birth family stability Health / disability
Income of birth family
Lifestyle/ dietGender equity
Relevance of education
Household stability Structural shifts in jobs
Migration
Home ownership Partner history
Lifestyle
Working life income Enables retirement Consumption to exceed that from
public pension (BASE 1000)
Working life income leads to consumption below that of retirement
Working life income Sufficient to avoid dependence on public pension
Life Expectancy
Health eventsParticipation
COHORT INCOME DISTRIBUTION BY AGE
Stages oflife cycle
Working life income
BIRTH TO DEATH EXPERIENCES
Sufficient HighInsufficient
Income
Cohorts, by birth year1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005
House inflation
House Price Rise
Healthier lifestyles
Topgroup
Middlegroup
Lowestgroup
Extended labour market
Extended labour market
Extended labour market
Poor job start
strong emigration
strong emigration
House inflation/ house subsidy
House inflation/ house subsidy
Poor job start
Single parent families/ child poverty
Healthier lifestyles
Healthier lifestyles
Health gradient effect
Compulsory savings
Savings tax subsidy
House inflation/ house subsidy
Non-financial saving
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005 Cohorts, by birth year
Family aggregation
Lack of comprehensive tax system
Comprehensive targeting of public programmes
Business profit shift
Occupational Hazards
Occupational Hazards
Continued use of debt financing
Continued use of debt financing
Income
Cohorts, by birth year1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005
House inflation
House Price Rise
Healthier lifestyles
Topthird
Middlethird
Lowestthird
Extended labour market
Extended labour market
Extended labour market
Poor job start
strong emigration
strong emigration
House inflation/ house subsidy
House inflation/ house subsidy
Poor job start
Single parent families/ child poverty
Healthier lifestyles
Healthier lifestyles
Health gradient effect
Compulsory savings
Savings tax subsidy
House inflation/ house subsidy
Non-financial saving
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005 Cohorts, by birth year
Family aggregation
Redistribution presumed in retirement pensions
Income
Cohorts, by birth year1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005
House inflation
House Price Rise
Healthier lifestyles
Topthird
Middlethird
Lowestthird
Extended labour market
Extended labour market
Extended labour market
Poor job start
strong emigration
strong emigration
House inflation/ house subsidy
House inflation/ house subsidy
Poor job start
Single parent families/ child poverty
Healthier lifestyles
Healthier lifestyles
Health gradient effect
Compulsory savings
Savings tax subsidy
House inflation/ house subsidy
Non-financial saving
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005 Cohorts, by birth year
Family aggregation
Effective Redistribution from compulsory savings
Income
Cohorts, by birth year1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005
House inflation
House Price Rise
Healthier lifestyles
Topthird
Middlethird
Lowestthird
Extended labour market
Extended labour market
Extended labour market
Poor job start
strong emigration
strong emigration
House inflation/ house subsidy
House inflation/ house subsidy
Poor job start
Single parent families/ child poverty
Healthier lifestyles
Healthier lifestyles
Health gradient effect
Compulsory savings
Savings tax subsidy
House inflation/ house subsidy
Non-financial saving
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005 Cohorts, by birth year
Family aggregation
Within cohort transfers
Income
Cohorts, by birth year1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005
House inflation
House Price Rise
Healthier lifestyles
Topthird
Middlethird
Lowestthird
Extended labour market
Extended labour market
Extended labour market
Poor job start
strong emigration
strong emigration
House inflation/ house subsidy
House inflation/ house subsidy
Poor job start
Single parent families/ child poverty
Healthier lifestyles
Healthier lifestyles
Health gradient effect
Compulsory savings
Savings tax subsidy
House inflation/ house subsidy
Non-financial saving
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
1910-1930
1945-1960
1930-1945
1960-1975
1975-1990
19902005 Cohorts, by birth year
Family aggregation
Mobility drivers-CurrentLabour market flexibilityEquality/ diversityWomen
- Post warSchoolsFree university educationSkillsUniversal benefitsHealthHousing
1. Strong pressure generated inequality of opportunity and incomes within the cohort, (Health gradient effect, House price rises, Loss
of unskilled jobs, wearing out before pension eligibility, Poor job start period (1980’s), Compulsory savings impact on working life consumption, Savings/tax subsidy versus targeted benefits, Family aggregation different at top levels, compared to single parent costs and child poverty, These income inequalities coincide with increasing health inequalities)
2. Globalisation exacerbates these pressures as wages stabilise or drop at the lower end, profits rise but the company tax base becomes more difficult to tax heavily.
3. The impact of high debt at younger ages for consumption and human capital rather than housing is unknown.
4. Highly trained employees will have more opportunity with dynamism of job market.
5. Smaller families may concentrate inherited wealth.
Cohorts born after 1960 - influences on income
Policy Implications• Private savings through individual accounts
• lead to huge variations in end of working life savings of individuals,
• depend on savings period and institution performance. • cannot guarantee lifelong consumption levels• final asset value reduced by management fees
• Targeting of entitlements has big effects on labour supply• The cohorts born after 1960 will be smaller, with different wealth
accretion• Government transport and energy investment, education and
health services provide a return on capital to later cohorts, • Within cohort transfers may be more critical than transfers from
the working to retired populations• Social mobility through job market shifts, education and migration
offset by change in concentration of births in poorer households through shifts in fertility
Limitations of Dependency Ratio
• Implications that people in all cohorts are similar at any particular age
• Implication that threshold ages relate to people of similar attributes, across long time periods
• Emphasises cross cohort links rather than within cohort links
• Use usually assumes some linearity of trends and consistency in cross cohort relationships
• Does not include consideration of changes in relative inequalities across cohorts