The performance of the New Zealand economy: Savings and housing

Recent policy changes and looming pressures in New Zealand have the potential to significantly impact the living standards of those who will enter retirement in the coming decades. In particular, a voluntary subsidised savings scheme known as KiwiSaver was introduced in 2007. Population ageing will increase the costs associated with New Zealand Superannuation (NZS), a universal government-funded pension paid for out of general taxation. In addition, rapid house price growth has made home ownership difficult for many, yet home ownership is likely to improve the living standards of retirees. These developments raise a number of important policy questions, which this thesis addresses. A variety of empirical approaches are employed, ranging from descriptive analysis to the application of regression techniques, including those designed to address specific econometric problems such as sample selection bias and unobserved heterogeneity. Data is primarily sourced from longitudinal and cross-sectional surveys. However, when required this is supplemented with house price, life expectancy and administrative data.  Chapters 2 and 3 of the thesis provide an evaluation of the performance of KiwiSaver, a subsidised voluntary savings scheme aimed at increasing the retirement wealth of a target population. The first of these chapters uses data from a cross-sectional survey conducted in 2010 and designed specifically for the purpose of evaluating KiwiSaver. Four key dimensions of performance are assessed using a variety of empirical techniques. Results suggest that only one-third of contributions to KiwiSaver represent additional savings. Regression analysis, designed to account for sample selection bias due to survey routing, finds no relationship between KiwiSaver membership and expected retirement income outcomes. Measures of target effectiveness and leakage suggest that KiwiSaver has been only modestly successful in reaching its target population and that leakage to the non-target population was high, at 93%. Finally, the scheme’s possible effect on national saving was examined, accounting for its costs, membership projections, government behaviour and additional savings by members. KiwiSaver’s effect on net national saving appears limited at best.  Chapter 3 analysis the extent to which membership of KiwiSaver has been associated with greater accumulations of net worth. The chapter uses two linked sources of data, Statistics New Zealand’s longitudinal Survey of Family, Income and Employment (SoFIE) and administrative data from the Inland Revenue Department on KiwiSaver membership. These data cover the period 2002 to 2010. Two approaches are employed to measure KiwiSaver’s impact, difference-in-differences (where the outcomes of interest are changes in net worth) and various panel regression techniques. Results appear consistent with those of Chapter 2. That is, neither approach suggests KiwiSaver membership has been associated with any positive effect on the accumulation of net worth.  Chapter 4 examines the implications for national savings of three retirement income policy options designed to improve the fiscal sustainability of NZS. These options include lifting the age of eligibility for NZS by two years, lowering the rate of indexation of NZS payments and making private saving compulsory then using those accumulations to reduce NZS entitlements. A model is developed that employs population and longevity projections allowing estimation of the contributions that many overlapping age cohorts might make to national savings in response to policy change. Government contributions to national savings, resulting primarily from reduced NZS payments, are also considered. Results suggest that even seemingly modest changes to retirement income policies could lead to substantial cumulative changes in national savings by 2061. However, lifting the age of eligibility for NZS appears able to generate superior improvements in the government’s fiscal position compared to the other two policy options over the medium term.  Chapter 5 examines patterns of home ownership and housing affordability across groups and over time, as well as various factors associated with the likelihood of each. The analysis draws on two surveys, the Household Economic Survey (HES) and SoFIE, and covers a period when the median house price in New Zealand increased by over 50%. A model which may be suggestive of whether or not an individual or couple is likely to find home-ownership affordable is applied. This model incorporates information relating to four important influences on affordability, in particular, income, net worth, house prices, and the structure of mortgage contracts (including the interest rate and mortgage term). While housing affordability was high for some groups during at least part of the period of analysis, for other groups affordability was persistently low, such as for singles and those on relatively low incomes. However, for nearly all groups examined housing affordability declined substantially over the period.  The final analytical chapter of the thesis extends the analysis of Chapter 5 to examine the potential benefits to housing affordability of the introduction of price level adjusted mortgages (PLAMs). These require lower repayments during the early years of a mortgage and higher repayments during latter years as compared to conventional mortgages. The analysis uses SoFIE and the model of housing affordability from Chapter 5, but with one important difference, a price level adjusted mortgage is assumed under various rates of inflation. Results are then compared to those derived from the housing affordability model under the assumption of a conventional mortgage. Findings suggest that PLAMs could indeed significantly improve housing affordability for prospective homeowners if they were available.