Michael Littlewood: How robust is that $350k target?

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Retirement Policy and Research Centre co-director questions a call by the Financial Services Council for Kiwis to save $350,000 for their retirement.
Michael Littlewood, co-director of the Retirement Policy and Research Centre at Auckland University. Photo/ Richard Robinson.
Michael Littlewood, co-director of the Retirement Policy and Research Centre at Auckland University. Photo/ Richard Robinson.

The Financial Services Council (FSC) suggests that the average New Zealander needs a nest egg of $350,000 "for a comfortable retirement".

But what is a "comfortable retirement"?

The way in which the FSC worked that out was through a Horizon Research opinion survey in December 2011.

Essentially, that asked respondents what they thought they needed and took an average of the answers.

The report found:

"On average, people thought about another $300 a week above the current level of New Zealand Superannuation would be needed for a single person to live comfortably and another $330 a week above NZ Super levels for a couple to live comfortably."

This is not a scientific result.

The only way to work out how much New Zealanders are saving and whether that is 'enough' would be a full, longitudinal study of household wealth, coupled with individuals' expected future savings, retirement ages and retirement income objectives.

Asking people what they think about the amounts they might need from retirement in ten, 20 or 30 years is no better than asking them whether they should eat less, exercise more or spend more time with their families.

Unless respondents to a survey have a clear understanding of the trade-offs needed for a retirement saving programme (how much spending they need to give up today) answers to questions on what they think they might like from age 65 have no context.

The figure also ignores previous New Zealand evidence.

Read also:

Tamsyn Parker: How much is enough?
Peter Neilson: Why you need a $350k retirement nest egg
Malcolm Menzies: Everyone's nest egg will be different

Past reports have shown that most New Zealanders have been making appropriate saving decisions about their retirement income needs.

The evidence could be better and more recent but it is the best we have.

On that basis, we do not need a compulsory savings scheme as suggested by Labour.

Given the natural propensity of individuals to set their own objectives and timetables, even if compulsory KiwiSaver successfully captures the memberships and mandated contributions, the rules cannot prevent members changing their other behaviour to compensate.

Australia provides good examples of this.

First, Australians seem to arrive at retirement with greater debt, having effectively 'pre-spent' their retirement savings.

According to a report on superannuation and retirement put together for CPA Australia in the eight years to 2012, retirement savings among 50 to 64 year-olds grew 48 per cent, other financial assets by 3 per cent and real estate assets by 58 per cent.

But property debt increased 123 per cent and other debt by 43 per cent.

By ages 60-64, debt was 42 per cent of retirement saving balances.

See the full report here.

Australians also seem to retire early to collect their compulsory saving accounts and spend those before the means-tested age pension starts.

The OECD estimates that Australia's 'effective retirement age' in 2009 was 64.8 (males) and 62.9 (females).

By contrast, New Zealand's was 67.1 (males) and 65.0 (females).

The Australian Bureau of Statistics reported in December 2013 that the "...average age at retirement for recent retirees (those who have retired in the last five years) was 61.5 years."

Governments cannot control offsetting financial behaviour.

If they want compulsion to increase self-provision for retirement, we should expect evidence that it is in fact happening.

A 2006 household wealth comparison between Australia and New Zealand shows that Australians had higher proportions of household wealth in retirement saving accounts (19.1% in Australia and about 4 per cent in New Zealand) but much less in 'business investment' (7.6 per cent in Australia and 22.2 per cent in New Zealand).

Across all households, Australians had 'financial assets' that were 50.5 per cent of all net household wealth.

Despite very different public policy settings in New Zealand, financial assets were 49.4 per cent of total net assets, not materially different from Australia, even before KiwiSaver started.

The FSC argues for a "more equitable level" of taxation on investment earnings in KiwiSaver.

According to the FSC financial savings should be taxed on a basis that is more equivalent to residential investment properties.

The international evidence seems clear, however, that tax breaks for retirement savings do not lift savings and that's not their only difficulty - they are also complex, distortionary, inequitable and regressive while imposing deadweight costs on the economy and reducing savers' flexibility.

But the most significant difficulty is that they seem not to work.

If residential investment properties are under-taxed, that can be fixed.

It does not justify 'compensatory' reductions to other tax rules.

New Zealanders save for retirement in all kinds of ways, including through KiwiSaver.

If more money ends up in KiwiSaver, the managers of KiwiSaver schemes will obviously be better off so we should expect the FSC to favour Labour's proposals for a compulsory KiwiSaver.

The FSC acknowledges that fund managers will be better off but suggests that the "benefits to savers from this are far greater than any proportionate rise in fee income for fund managers."

That is disingenuous.

If we assume that New Zealanders are already saving enough then a compulsory KiwiSaver will benefit fund managers at New Zealanders' expense if they are saving, for example, by reducing debt, building a business or in other 'non-financial' ways.

Again, the evidence from overseas suggests that compulsory schemes are necessarily good for fund managers and it is not hard to see why.

As the Commission for Financial Literacy and Retirement Income suggests, the average retiree needs nothing like $350,000 to augment New Zealand Superannuation.

Some will need more but most will need less; some a lot less.

However, it would be nice to see some impeccable data to support that.

That is a gap in New Zealand's retirement income landscape and needs fixing, along with some needed help in running those savings down reliably.

Michael Littlewood is co-director of the Retirement Policy and Research Centre based at the University of Auckland.

- NZ Herald

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