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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Second OECD World Forum on "Statistics, Knowledge and Policy". Understanding retirement saving and pensions. Len Cook Former Government Statistician. The context, impacts and options. A stable foundation but policy volatility. -. Compulsory savings. With tax incentives. - PowerPoint PPT Presentation

Transcript of Understanding retirement saving and pensions

Page 1: Understanding retirement saving and pensions

Understanding retirement saving and pensions

Second OECD World Forum on "Statistics, Knowledge and Policy"

Len CookFormer Government Statistician

Page 2: Understanding retirement saving and pensions

The context, impacts and

options

Page 3: Understanding retirement saving and pensions

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

-

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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

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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

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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

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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

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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 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

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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

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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

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

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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

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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

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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

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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

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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

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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

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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

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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