Assessing the adequacy of private provision for retirement: a living standards perspective.

• Author: Hong, Bev

Abstract

Private provision for retirement in New Zealand is made on a voluntary basis without tax concessions or other direct concessions to encourage savings. It enables individuals to enhance their standard of living above that provided by New Zealand Superannuation and potentially maintain their living standards in retirement at the level experienced during their working lives. This report examines the adequacy of private income provision in retirement within the context of working-life asset accumulation and living standards outcomes. The report considers the living standards of the current cohort of older New Zealanders in terms of whether minimum adequate living standards have been achieved and whether pre-retirement living standards have been maintained in retirement. Income and other factors that contribute to the living standards experienced by older New Zealanders are also discussed. The outlook for future cohorts of older New Zealanders is then examined based on emerging trends for older New Zealanders and the factors found to contribute to variation in living standards.

INTRODUCTION

Preparation for Retirement

The living standards that people experience in their retirement are based on both the public provision of income and assistance through New Zealand Superannuation, subsidies and services (for example, health subsidies and public health services), and the private assets they have accumulated and related income from these assets. Some assets (such as rental properties and financial investments) can provide an income during retirement and other assets can contribute to retirement living standards by reducing the income required (for example, mortgage-free home ownership contributing to low accommodation costs). Retirement living standards will, therefore, be affected by private provision in the form of assets that offset living expenses (and the requirement for private income) as well as income-generating assets. For this reason, this report focuses on overall asset accumulation rather than solely on retirement income per se, because asset accumulation provides a stronger basis for assessing the adequacy of people's preparation for retirement.

People's asset accumulation for retirement needs to be considered within a life-cycle context. Circumstances, such as income levels and family commitments, change over people's lives, and attitudes towards saving for retirement and expectations about retirement may change as people get older and retirement age gets closer. The pattern of asset accumulation over the life cycle will vary between people. Generally, it is expected that people will have lumpy asset accumulation, with events such as personal partnerships and separations, children, inheritances, redundancies, business and economic upturns and downturns, and ill health, among other factors, producing fluctuations in asset accumulation over the working life.

A longitudinal approach is needed to achieve an authoritative understanding of people's saving behaviour over the life cycle and their preparation for retirement. This would help to provide information about levels of asset accumulation at different life stages and to assess whether these were considered sufficient for trajectories that resulted in at least adequate living standards in retirement. However, to date New Zealand research has involved "point in time" data, which are unable to inform us about the pattern of accumulation over an individual's life cycle.

"Point in time" research on the living standards of older New Zealanders in 2000 assessed the living standards of older New Zealanders and examined the factors that contributed to variation in living standards (Fergusson et al. 2001). This research was initiated by the Super 2000 Taskforce, (2) continued by the Ministry of Social Development (3) and conducted by Statistics New Zealand. A nation-wide survey was undertaken involving 3,060 face-to-face interviews with older New Zealanders living in private dwellings, and including a supplementary survey of 500 Maori aged 65-69 years. The living standards research programme also involved a nation-wide survey of 3,682 people aged 18-64 years in 2000. This survey enabled the living standards across different groups in the New Zealand population to be compared.

The research involved the use of a measure of living standards based on ownership restrictions, social participation restrictions, economising behaviour, prevalence of severe financial problems, and self-assessments. Further analysis of the survey data resulted in refinement of this measure with the creation of the Economic Living Standard Index (ELSI) by Jensen et al. (2002), which has enabled a comparison of groups across the total population of New Zealanders to be described and compared (Krishnan et al. 2002).

The findings from this research can provide us with information about how older people in New Zealand are currently faring and the contribution of income, assets and other factors to their living standards. This information can also be used to explore potential outcomes for future cohorts of older people in New Zealand in terms of income, asset accumulation, and other factors likely to have an impact on what those living standards will be.

Statistics New Zealand has begun a longitudinal Survey of Family Income and Employment (SoFIE), (4) which will provide life-cycle information about this issue in the future (Statistics New Zealand 2002b). A key objective of this survey is to determine patterns of saving for retirement and relate these to income dynamics and life-cycle stages. The survey will involve a starting sample of about 10,000 households (20,000 adult individuals) and is of the usually resident population in New Zealand living in private dwellings at the start of the survey. Interviewing for the first of eight planned interview waves began on 1 October 2002. First results are expected to be published about March 2004 and second-wave results in March 2005.

At this stage, living standards information is not included in the longitudinal data collection for SoFIE. It would be very useful for living standards questions to be included in future interview waves to measure changes in living standards over time. This would enable some analysis of the link between patterns of asset accumulation, achievement of minimum adequate levels of living standards and the maintenance of working-life living standards in retirement to be undertaken.

The analysis in this paper has been developed on the assumption that New Zealand Superannuation will be maintained in its current form, with age of eligibility remaining at 65 years and the payment rates being set according to the current formula. Reference is also made in various parts of this report to "pre-retirement" living standards. For many people, living standards during the later part of their working lives will be higher than during the earlier part. Pre-retirement living standards should be interpreted as relating to the later part of the working life (for example, from around age 50 to retirement).

Adequacy of Asset Accumulation and Income for Retirement

The vast majority of research into living standards is framed in terms of income and expenditure or consumption (Fergusson et al. 2001). Various ways of conceptualising "adequacy" have been proposed. They include (Scobie and Gibson 2003) thresholds based on:

* a proportion of an individual's pre-retirement income

* a proportion of the average pre-retirement incomes of the working-age population (relative measure)

* an income that enables people to sustain their pre-retirement level of consumption (a consumption smoothing approach)

* an income that permits people to have the same marginal utility of consumption over time.

Although research using income and expenditure is useful, it only provides information about people's access to resources. Inherent in this approach is the translation of income into the actual material circumstances of individuals. In particular, one of the issues that arises for analysis using pre- and post-retirement income and consumption is the different focus that pre-retirement expenditure may have in comparison with post-retirement needs. Work-related costs provide an obvious illustration, but many people will also have various other types of costs that are significant during their working years but less so after retirement. Examples are expenditure on bringing up and educating children and paying interest on home mortgages.

The development of the living standards measure by Fergusson et al. (2001) and more recently the ELSI by Jensen et al. (2002) provides a much more informative and direct approach for considering pre-retirement and post-retirement living standards.

ELSI combines information about whether people are able to afford "basic" items, "comfort or luxury" items, and self-assessments related to living standards. Items referred to as "basic" include a washing machine, heating for all main rooms, warm bedding, fresh fruits and vegetables, and doctor's visits. Items referred to as "comforts or luxuries" include overseas holidays or never having to cut back on shopping for clothes because of cost. This scale is able to measure deprivation because a low score indicates the lack of basics that the respondents want but are unable to have because of the cost, together with a paucity of "comforts or luxuries".

The scale has seven levels, with Level One indicating "very restricted" living standards and Level Seven indicating "very good" living standards. The first three ELSI levels (One, Two and Three) are characterised as indicating some degree of hardship and are labelled as representing "very restricted", "restricted" and "somewhat restricted" living standards respectively. People with living standards in these levels lack "basic" items, have few "comforts or luxuries" and have financial or accommodation problems. For the purposes of this...