Retirement savings — who’s right?

13/06/2012 § 2 Comments

ANZ is getting some press for the results of its new Retirement Savings Confidence Barometer. They have found that Kiwis aren’t saving ‘enough’ for retirement. The headline findings were:

[M]ost want at least an extra $100 a week above NZ Superannuation to live on, but about half of savers were not confident they could get there.

I’m a little leery of the research to begin with. Let’s see, a bank has done some research finding that people need to buy more of its services. Nope, nothing suspicious here. In other news, shampoo companies say that two-thirds of Kiwis have dirty hair.

Then there’s the strange logic underlying the research. On the one hand, we are supposed to believe that people are not clever enough to plan for their retirement. On the other hand, we take at face value these same people’s estimates of how much money they are going to need in 30 or 40 years. Yeah, okay, the research is all couched in terms of how ‘confident’ people are that they are saving enough. It seems to me that there are two ways to solve this problem. The bank’s solution is to have people save more money. Another solution is to shore up people’s confidence.

Why would we want to do that? It turns out that most people are saving ‘adequately’ for retirement. At least, that’s what Treasury thinks.

In this 2007 paper, Treasury used a life cycle model and the SOFIE dataset to model savings adequacy. They do note that ‘adequacy’ is a matter of opinion:

Reasonable people may hold a range of views on both matters – there is no single ‘right’ answer.

They nevertheless go on to make some estimates based on pre-retirement income and the principle of consumption smoothing. The key results are in Table 3, Proportions of the population who appear to be saving inadequately for retirement (p. 12). From the text:

Our baseline estimates suggest that around one third of the population are not saving enough for retirement (see Table 3). In the variation case (described in Section 4.2) the proportion of ‘problem savers’ falls to below 20%. For the group approaching retirement, only 9% of non-partnered individuals and 13% of couples need to increase their saving rates in order to smooth out consumption between now and retirement. This finding is well in line with international evidence. For example, Scholz et al (2006), who use more sophisticated methods, also find that over 80% of Americans are preparing sufficiently for retirement.

What, wait, the vast majority of people are saving adequately? People are being sensible? And this is ‘well in line with international evidence’? Maybe that little tidbit should be included in the next article on savings adequacy and retirement anxiety.

Treasury research — better than Xanax.

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§ 2 Responses to Retirement savings — who’s right?

  • WH says:

    Aside from the excellent points about savings adequacy made in the Treasury paper, the other interesting point that I noted from a presentation done at the same time, was that retirement was bad for your life expectancy (in particular for males). Staying in work seemed to result in longer life expectancy, this may have been because people who are able to stay in work have better health engage in less risky occupations etc, but with an assumption of increasing marginal utility for each extra year/moth/day of life (built into health models) I’m willing to take simple correlation in this instance to
    invest in myself (human capital improvement) to increase the option value of a potential longer life. There may even be a gain to the economy through increased labour force participation (that depends on assumptions that the work I do has a net productive value).

  • Bill says:

    I have seen bits and pieces on male life expectancy and retirement. It is a bit concerning that guys can’t just let go and relax without dying earlier. There is, as you note, the issue of sample selection bias because those who continue working are likely to be in less physically demanding jobs. Still, it doesn’t seem right that if you keep working you get both more income and more years of life.

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