Understanding retirement saving and pensions

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Understanding retirement saving and pensions
Second OECD World Forum on "Statistics,
Knowledge and Policy"
Len Cook Former Government Statistician
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The context, impacts and options
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A stable foundation but policy volatility
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Compulsory savings. With tax incentives
Strong public surpluses from now on, job growth
Market reduces defined benefit pensions, defined
benefit schemes grow
Retirement pensions funded by cutting benefits to
others
Inflation eroded personal saving
1972 Royal Commission considered NZ served well
Income tested benefit
Universal Flat rate Pension (taxed)
Support Job Pensions
Affordable Housing
Public Investment
4
UK NZ Comparisons
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Durability of NZ arrangements

• Characteristics
• No coherence in long run path
• Despite continual change, sometimes reversals, NZ
  system is still simple.
• Generates risk of continuing tinkering
• No accepted framework for understanding long term
  drivers of change, across cohorts
• Population impact
• Reduced capacity for understanding handed down by
  others
• Continued change may increase risk aversion among
  population
• Strong incentives for continued labour market
  participation
• Limited scale and continuity of equity investment
• Financial services do not match demand
  (annuities, reverse mortgages, fund management
  fees)
• Unclear commitments to emigrant and immigrants as
  mobility increases

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New Zealand Superannuation its context

• demographic change,
• Post war baby boom
• Near replacement fertility since late 1970s
• Migration strong, 15 of net growth
• living standards,
• Retired have high standard of living since 1970s
• 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 1980s downturn within model
• Voluntary increase in post 65 employment
• Failure of equities during 1980s
• Inflation from 1970 to early 1990s
• 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

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New Zealand Superannuation its future

• demographic change,
• NZ ageing slower than OECD, fertility good,
  (50,000 births in 2040)
• Migration part of national fabric
• 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

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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

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The baby boomers bonus

• Increased longevity has come alongside a
  healthier lifestyle at each age,
• The stages of the life course have been extended
• Labour market flexibility has created opportunity
  for new working patterns, after the usual age of
  eligibility for pension
• 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
• 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.
• 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
• The baby boomers as consumers are an increasingly
  significant economic force

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After the baby boomers

• 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
• Social mobility among later age cohorts is
  declining significantly
• Job growth from labour market flexibility affects
  returns from work of lower income groups much
  more
• Significantly reduced levels of home ownership of
  cohorts born after 1960
• Individual funding of training for skilled
  occupations leaves high levels of debt held by
  people at conclusion of education
• Growth in numbers living at home after the age of
  twenty reflects economic restraints
• High targeting of benefits for single parents,
  unemployment and disability create long periods
  of low accumulation of assets
• Lessening of employer contribution of retirement
  pensions
• Uncertainty about life expectancy trends and
  health gradient

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A framework for understanding long term drivers
of change, across cohorts
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Cohort life expectancy estimated at stages of
life cycle
COHORT LIFE EXPECTANCY
Estimated Life Expectancy at key stages of life
cycle
Health events Participation
Home ownership Partner history Lifestyle
Parents Family arrangements
Household stability Structural shifts in jobs
Migration
Parents Education
Lifestyle/ diet Gender equity Relevance of
education
Parents Wealth accumulation
Birth family stability Health /
disability Income of birth family
Housing/Family Development
Lifestyle provision
Infancy
Education
Retirement
BIRTH TO DEATH EXPERIENCES
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COHORT INCOME DISTRIBUTION BY AGE
BIRTH TO DEATH EXPERIENCES
Life Expectancy
Health events Participation
Retirement
Lifestyle provision
Home ownership Partner history Lifestyle
Stages of life cycle
Housing/Family Development
Household stability Structural shifts in jobs
Migration
Lifestyle/ diet Gender equity Relevance of
education
Education
Birth family stability Health /
disability Income of birth family
Infancy
Sufficient
High
Insufficient
Working life income
Working life income Sufficient to avoid
dependence on public pension
Working life income leads to consumption below
that of retirement
Working life income Enables retirement
Consumption to exceed that from public pension
(BASE 1000)
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1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
Income
Lack of comprehensive tax system
Top group
Healthier lifestyles
Business profit shift
House inflation
House inflation/ house subsidy
Savings tax subsidy
strong emigration
Extended labour market
Family aggregation
Occupational Hazards
Healthier lifestyles
Continued use of debt financing
Middle group
Non-financial saving
strong emigration
House inflation/ house subsidy
Poor job start
Extended labour market
Non-financial saving
Comprehensive targeting of public programmes
Occupational Hazards
Lowest group
Loss of unskilled jobs/ wear-out before age 65
Compulsory savings
Healthier lifestyles
Continued use of debt financing
Health gradient effect
Single parent families/ child poverty
House Price Rise
House inflation/ house subsidy
Poor job start
Extended labour market
1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
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1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
Income
Top third
Healthier lifestyles
Redistribution presumed in retirement pensions
House inflation
House inflation/ house subsidy
Savings tax subsidy
strong emigration
Extended labour market
Family aggregation
Healthier lifestyles
Middle third
Non-financial saving
strong emigration
House inflation/ house subsidy
Poor job start
Extended labour market
Non-financial saving
Lowest third
Loss of unskilled jobs/ wear-out before age 65
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
House inflation/ house subsidy
Poor job start
Extended labour market
1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
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1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
Income
Top third
Healthier lifestyles
Effective Redistribution from compulsory savings
House inflation
House inflation/ house subsidy
Savings tax subsidy
strong emigration
Extended labour market
Family aggregation
Healthier lifestyles
Middle third
Non-financial saving
strong emigration
House inflation/ house subsidy
Poor job start
Extended labour market
Non-financial saving
Lowest third
Loss of unskilled jobs/ wear-out before age 65
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
House inflation/ house subsidy
Poor job start
Extended labour market
1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
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1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
Income
Top third
Healthier lifestyles
Within cohort transfers
House inflation
House inflation/ house subsidy
Savings tax subsidy
strong emigration
Extended labour market
Family aggregation
Healthier lifestyles
Middle third
Non-financial saving
strong emigration
House inflation/ house subsidy
Poor job start
Extended labour market
Non-financial saving
Lowest third
Loss of unskilled jobs/ wear-out before age 65
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
House inflation/ house subsidy
Poor job start
Extended labour market
1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
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1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
Income
Top third
Healthier lifestyles

• Mobility drivers
• Current
• Labour market flexibility
• Equality/ diversity
• Women
• - Post war
• Schools
• Free university education
• Skills
• Universal benefits
• Health
• Housing

House inflation
House inflation/ house subsidy
Savings tax subsidy
strong emigration
Extended labour market
Family aggregation
Healthier lifestyles
Middle third
Non-financial saving
strong emigration
House inflation/ house subsidy
Poor job start
Extended labour market
Non-financial saving
Lowest third
Loss of unskilled jobs/ wear-out before age 65
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
House inflation/ house subsidy
Poor job start
Extended labour market
1910- 1930
1945- 1960
1930- 1945
1960- 1975
1975- 1990
1990 2005
Cohorts, by birth year
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Cohorts born after 1960 - influences on income

• 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 (1980s),
  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)
• 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.
• The impact of high debt at younger ages for
  consumption and human capital rather than housing
  is unknown.
• Highly trained employees will have more
  opportunity with dynamism of job market.
• Smaller families may concentrate inherited wealth.

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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

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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