Download Population structure and financial savings

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
-
2006
X
XXXX
XXX
XX
XXX
Personal compulsory savings, externally
invested, tax subsidy, no pension
Compulsory savings.
With tax incentives
2003
X
XXXX
X
X
X
Fund to invest budget surplus in equities until baby
boom demands reach peak. Continuity in mix
Strong public surpluses from
now on, job growth
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
Market reduces defined
benefit pensions, defined
benefit schemes grow
1977 1987
X
XXXX
XX
X
XXX
New Zealand Superannuation, to all from
PAYE, taxed only, linked to wages
Retirement pensions funded
by cutting benefits to others
1976 1977
XXXX
XX
XX
XX
XX
19741976
XXXX
XX
XXXX
XXX
XXXX
Compulsory contribution to retirement
scheme
Inflation eroded
personal saving
1938-74
XXXX
XX
XX
XXX
XXXX
Age benefit consistent for first 26 years
1972 Royal Commission
considered NZ served well
Income
tested
benefit
Universal
Flat rate
Pension
(taxed)
Support
Affordable
Public
Job
Housing Investment
Pensions
Return to past system as transition to NZS
UK – NZ Comparisons
UK
NZ
Benefit 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
Characteristics
1. No coherence in long run path
2. Despite continual change, sometimes reversals, NZ system is still
simple.
3. Generates risk of continuing tinkering
4. No accepted framework for understanding long term drivers of
change, across cohorts
Population impact
1.
2.
3.
4.
5.
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)
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 fabric
3. 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 bonus
1. 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 pension
4. 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 pensions
9. Uncertainty 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 cycle
COHORT LIFE
EXPECTANCY
Estimated Life Expectancy
at key stages
of life cycle
Health events
Participation
Parents Family arrangements
Parents Education
Home ownership
Partner history
Lifestyle
Household stability
Structural shifts in jobs
Migration
Lifestyle/ diet
Gender equity
Relevance of education
Parents Wealth accumulation
Birth family stability
Health / disability
Income of birth family
Infancy
Education
Housing/Family
Development
Lifestyle
provision
Retirement
BIRTH TO DEATH EXPERIENCES
BIRTH TO DEATH
EXPERIENCES
COHORT INCOME DISTRIBUTION BY AGE
Life
Expectancy
Health events
Participation
Retirement
Lifestyle
provision
Stages of
life cycle
Home ownership
Partner history
Lifestyle
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
Insufficient
Sufficient
High
Working life income
Working life income leads to consumption
below that of retirement
Working life income Enables retirement
Consumption to exceed that from
public pension (BASE 1000)
Working life income Sufficient to
avoid dependence on public pension
Income
1990
2005
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
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
Continued use of debt financing
Middle
group
Healthier lifestyles
Non-financial saving
strong emigration
Poor job start
House inflation/ house subsidy
Extended labour market
Non-financial saving
Comprehensive targeting of public programmes
Lowest
group
Occupational Hazards
Loss of unskilled jobs/ wear-out before age 65
Compulsory savings
Continued use of debt financing
Health gradient effect
Healthier lifestyles
Single parent families/ child poverty
House Price Rise
Poor job start
House inflation/ house subsidy
Extended labour market
1990
2005
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Income
1990
2005
Top
third
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Healthier lifestyles
House inflation
House inflation/ house subsidy
Savings tax subsidy
strong emigration
Extended labour market
Redistribution
presumed in
retirement
pensions
Family aggregation
Healthier lifestyles
Middle
third
Non-financial saving
strong emigration
Poor job start
House inflation/ house subsidy
Extended labour market
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
Lowest
third
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
Poor job start
House inflation/ house subsidy
Extended labour market
1990
2005
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Income
1990
2005
Top
third
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Healthier lifestyles
House inflation
House inflation/ house subsidy
Savings tax subsidy
strong emigration
Extended labour market
Effective
Redistribution
from
compulsory
savings
Family aggregation
Healthier lifestyles
Middle
third
Non-financial saving
strong emigration
Poor job start
House inflation/ house subsidy
Extended labour market
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
Lowest
third
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
Poor job start
House inflation/ house subsidy
Extended labour market
1990
2005
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Income
1990
2005
Top
third
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Healthier lifestyles
House inflation
House inflation/ house subsidy
Savings tax subsidy
Within
cohort
transfers
strong emigration
Extended labour market
Family aggregation
Healthier lifestyles
Middle
third
Non-financial saving
strong emigration
Poor job start
House inflation/ house subsidy
Extended labour market
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
Lowest
third
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
Poor job start
House inflation/ house subsidy
Extended labour market
1990
2005
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Income
1990
2005
Top
third
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Healthier lifestyles
House inflation
House inflation/ house subsidy
Savings tax subsidy
Labour market flexibility
Equality/ diversity
Women
strong emigration
Extended labour market
- Post war
Family aggregation
Schools
Free university education
Skills
Universal benefits
Health
Housing
Healthier lifestyles
Middle
third
Mobility drivers
-Current
Non-financial saving
strong emigration
Poor job start
House inflation/ house subsidy
Extended labour market
Non-financial saving
Loss of unskilled jobs/ wear-out before age 65
Lowest
third
Compulsory savings
Healthier lifestyles
Health gradient effect
Single parent families/ child poverty
House Price Rise
Poor job start
House inflation/ house subsidy
Extended labour market
1990
2005
19751990
19601975
19451960
19301945
19101930
Cohorts, by birth year
Cohorts born after 1960 - influences on income
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.
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