Understanding retirement saving and pensions Second OECD World Forum on "Statistics, Knowledge and Policy" Len CookFormer Government Statistician

The context, impacts and options

A stable foundation but policy volatility UniversalFlat ratePension(taxed)SupportJobPensionsAffordableHousingPublicInvestmentMarket reduces defined benefit pensions, defined benefit schemes growIncome tested benefitInflation eroded personal saving1972 Royal Commission considered NZ served wellStrong public surpluses from now on, job growthRetirement pensions funded by cutting benefits to othersCompulsory savings. With tax incentives-

UK NZ Comparisons

Durability of NZ arrangementsCharacteristicsNo coherence in long run pathDespite continual change, sometimes reversals, NZ system is still simple.Generates risk of continuing tinkeringNo accepted framework for understanding long term drivers of change, across cohorts

Population impactReduced capacity for understanding handed down by othersContinued change may increase risk aversion among populationStrong incentives for continued labour market participationLimited scale and continuity of equity investmentFinancial services do not match demand (annuities, reverse mortgages, fund management fees)Unclear commitments to emigrant and immigrants as mobility increases

New Zealand Superannuation its contextdemographic change, Post war baby boomNear replacement fertility since late 1970sMigration strong, 15% of net growthliving standards, Retired have high standard of living since 1970sMany have retirement pension higher than working life income savings and investmentHousing dominant, equities and finance lowNon financial investments unknown but strongeconomic necessityResponse to 1980s downturn within model Voluntary increase in post 65 employmentFailure of equities during 1980sInflation from 1970 to early 1990sNo tax subsidies to capture by high incomesjudgements about the well-being of the retiredIncomes adequate as judged by RCSS in 1972Retirement age fixation reduced training of older workers

New Zealand Superannuation its futuredemographic change, NZ ageing slower than OECD, fertility good, (50,000 births in 2040)Migration part of national fabricHigh loss of educated young, and othersliving standards, Sustainable per capita costDivergence between baby boom and later cohortsChanges in life courseIncreasing longevity not seen in all groupssavings and investmentHuman capital, non-financial investments substantialConcentration on housing is a riskRegional imbalances in infrastructureSavings and investment linkages uncertain and changing

Information issues affecting the retiredAttitudes to forms of savingUnderestimation of longevityPolicy failures result in unintended capital lossInsufficient information on future market volatility for equity based savingImpact of economic cycle on affordability

The baby boomers bonusIncreased 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 pensionLabour 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 classesHouse 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 paysThe baby boomers as consumers are an increasingly significant economic force

After the baby boomersHealth improvements appear to be less evenly distributed, and some such as obesity, diabetes, heart conditions are strongly influenced by economic well being when youngSocial mobility among later age cohorts is declining significantlyJob growth from labour market flexibility affects returns from work of lower income groups much moreSignificantly reduced levels of home ownership of cohorts born after 1960Individual funding of training for skilled occupations leaves high levels of debt held by people at conclusion of educationGrowth in numbers living at home after the age of twenty reflects economic restraintsHigh targeting of benefits for single parents, unemployment and disability create long periods of low accumulation of assetsLessening of employer contribution of retirement pensionsUncertainty about life expectancy trends and health gradient

A framework for understanding long term drivers of change, across cohorts

Cohort life expectancy estimated at stages of life cycleInfancyEducation Housing/Family DevelopmentRetirementBirth family stability Health / disabilityIncome of birth family Lifestyle/ dietGender equity Relevance of educationHousehold stability Structural shifts in jobs Migration Home ownership Partner history Lifestyle Parents Family arrangementsParents Wealth accumulationParents Education Health eventsParticipationEstimated Life Expectancy at key stages of life cycleBIRTH TO DEATH EXPERIENCESLifestyle provision COHORT LIFEEXPECTANCY

InfancyEducation Housing/Family DevelopmentLifestyle provision RetirementBirth family stability Health / disabilityIncome of birth family Lifestyle/ dietGender equity Relevance of educationHousehold 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 retirementWorking life income Sufficient to avoid dependence on public pensionLife Expectancy Health eventsParticipationCOHORT INCOME DISTRIBUTION BY AGE Stages oflife cycleWorking life incomeBIRTH TO DEATH EXPERIENCESSufficientHighInsufficient

IncomeCohorts, by birth year1910-19301945-19601930-19451960-19751975-199019902005House inflationHouse Price RiseHealthier lifestylesTopgroupMiddlegroupLowestgroupExtended labour market Extended labour market Extended labour market Poor job startstrong emigrationstrong emigrationHouse inflation/ house subsidyHouse inflation/ house subsidyPoor job startSingle parent families/ child povertyHealthier lifestylesHealthier lifestylesHealth gradient effectCompulsory savingsSavings tax subsidyHouse inflation/ house subsidyNon-financial savingNon-financial savingLoss of unskilled jobs/ wear-out before age 651910-19301945-19601930-19451960-19751975-199019902005Cohorts, by birth yearFamily aggregationLack of comprehensive tax systemComprehensive targeting of public programmesBusiness profit shiftOccupational HazardsOccupational HazardsContinued use of debt financingContinued use of debt financing

IncomeCohorts, by birth year1910-19301945-19601930-19451960-19751975-199019902005House inflationHouse Price RiseHealthier lifestylesTopthirdMiddlethirdLowestthirdExtended labour market Extended labour market Extended labour market Poor job startstrong emigrationstrong emigrationHouse inflation/ house subsidyHouse inflation/ house subsidyPoor job startSingle parent families/ child povertyHealthier lifestylesHealthier lifestylesHealth gradient effectCompulsory savingsSavings tax subsidyHouse inflation/ house subsidyNon-financial savingNon-financial savingLoss of unskilled jobs/ wear-out before age 651910-19301945-19601930-19451960-19751975-199019902005Cohorts, by birth yearFamily aggregationRedistribution presumed in retirement pensions

IncomeCohorts, by birth year1910-19301945-19601930-19451960-19751975-199019902005House inflationHouse Price RiseHealthier lifestylesTopthirdMiddlethirdLowestthirdExtended labour market Extended labour market Extended labour market Poor job startstrong emigrationstrong emigrationHouse inflation/ house subsidyHouse inflation/ house subsidyPoor job startSingle parent families/ child povertyHealthier lifestylesHealthier lifestylesHealth gradient effectCompulsory savingsSavings tax subsidyHouse inflation/ house subsidyNon-financial savingNon-financial savingLoss of unskilled jobs/ wear-out before age 651910-19301945-19601930-19451960-19751975-199019902005Cohorts, by birth yearFamily aggregationEffective Redistribution from compulsory savings

IncomeCohorts, by birth year1910-19301945-19601930-19451960-19751975-199019902005House inflationHouse Price RiseHealthier lifestylesTopthirdMiddlethirdLowestthirdExtended labour market Extended labour market Extended labour market Poor job startstrong emigrationstrong emigrationHouse inflation/ house subsidyHouse inflation/ house subsidyPoor job startSingle parent families/ child povertyHealthier lifestylesHealthier lifestylesHealth gradient effectCompulsory savingsSavings tax subsidyHouse inflation/ house subsidyNon-financial savingNon-financial savingLoss of unskilled jobs/ wear-out before age 651910-19301945-19601930-19451960-19751975-199019902005Cohorts, by birth yearFamily aggregationWithin cohort transfers

IncomeCohorts, by birth year1910-19301945-19601930-19451960-19751975-199019902005House inflationHouse Price RiseHealthier lifestylesTopthirdMiddlethirdLowestthirdExtended labour market Extended labour market Extended labour market Poor job startstrong emigrationstrong emigrationHouse inflation/ house subsidyHouse inflation/ house subsidyPoor job startSingle parent families/ child povertyHealthier lifestylesHealthier lifestylesHealth gradient effectCompulsory savingsSavings tax subsidyHouse inflation/ house subsidyNon-financial savingNon-financial savingLoss of unskilled jobs/ wear-out before age 651910-19301945-19601930-19451960-19751975-199019902005Cohorts, by birth yearFamily aggregationMobility driversCurrentLabour market flexibilityEquality/ diversityWomen

- Post warSchoolsFree university educationSkillsUniversal benefitsHealthHousing

Cohorts born after 1960 - influences on incomeStrong 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.

Policy ImplicationsPrivate savings through individual accountslead to huge variations in end of working life savings of individuals, depend on savings period and institution performance. cannot guarantee lifelong consumption levelsfinal asset value reduced by management fees Targeting of entitlements has big effects on labour supplyThe cohorts born after 1960 will be smaller, with different wealth accretionGovernment 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 populationsSocial 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 RatioImplications that people in all cohorts are similar at any particular ageImplication that threshold ages relate to people of similar attributes, across long time periodsEmphasises cross cohort links rather than within cohort linksUse usually assumes some linearity of trends and consistency in cross cohort relationshipsDoes not include consideration of changes in relative inequalities across cohorts