Veritas propter investigationem [Truth through research]
TitlePensions, Savings and Housing: A Life-cycle Framework with Policy Simulations (2014)
AuthorsJohn Creedy
 Norman Gemmell
 Grant Scobie
InstitutionNew Zealand Treasury
TopicsLife-cycle model
 Public policy
 Saving issues
CountryNew Zealand
Date Published2014
Date posted on PR17 Feb 2015
Creedy, J Gemmell, N Scobie, G, (2014). Pensions, Savings and Housing: A Life-cycle Framework with Policy Simulations (2014) New Zealand Treasury,

PensionReforms’ summary and comments

Tax and other public policies directly affect the decisions that people make about their financial arrangements and it must be recognised that this is a two-way street.


“Households make decisions about consumption, saving, housing and retirement income.  These are highly interrelated and are influenced by the tax and expenditure policies of the government, while the latter are affected in turn by individuals' behaviour.”


The report examines decisions that individuals make about retirement savings, house-purchase debt “…and consumption plans in the presence of both income and consumption taxes.”  It looks at decisions made over working lifetimes and that have implications for post-retirement housing and consumption decisions.


The report describes a model that is designed “…to explore household savings behaviour over the life cycle.”  And it mimics the New Zealand economy and “mirror[s] key features”, including the fact that saving for retirement attracts only very modest tax concessions for one particular vehicle – KiwiSaver; also that there is a Universal, Tier 1 pension ‘New Zealand Superannuation’.


“The model is based on a representative household that chooses its optimal level of consumption, saving, retirement income and housing subject to its budget constraint.  In addition a key feature of the model is the explicit treatment of taxation and expenditure and the constraints imposed by the government's budget balance.  The financial sector enters through the role of the interest rate and a mortgage loan-to-value ratio.”


The report analyses the responses of savings, consumption, housing to changes in tax rates, pension and savings policies.


“In general the responses are typically modest.  For example, a rise in the income tax rate of 1.5 percentage points reduces both financial saving and total household saving rates by 0.7 percentage points and implies a 1% fall in house prices.”


The report looks in particular at interest income because there are currently only very limited tax breaks for saving, including retirement saving:

“The model was adjusted to eliminate all tax on interest income.  In the first instance financial savings and total savings rise by 17% and 8% respectively.  The household saving rate (expressed as a proportion of disposable income) rises by 1.4 percentage points.  This is accompanied by a significant shift toward consumption in retirement and lower consumption of housing services, leading to a fall in house prices of some 2.5%.  The loss of tax revenue involves a reduction of 1.7% in the public non-pension expenditure.  However, as the extra savings over the working life are drawn down in retirement there is no net effect on aggregate household saving from such a policy.”


PensionReforms notes that the findings underline an important point.  Someone’s tax concession is another’s tax cost in the presence of a balanced government budget.  If a concession is given then, as the report notes, its impact will obviously be tempered by policies that are required to restore a balanced budget.


Some suggest that the expected fiscal pressures of an ageing population would be eased if citizens were forced to save for their retirement and to offset those by reducing the state’s Tier 1 pension (in the Chilean mode):

“With a 10% decline in the ratio of workers to pensioners, this would involve a compulsory contribution rate of 6.5% accompanied by a 22% reduction in the universal pension. Consumption throughout the lifetime would be lower and voluntary savings would decline.”


PensionReforms notes the limitations of models such as the report uses and that the report itself also acknowledges: they are static exercises built on broad assumptions, for example, that policy changes take immediate effect; also that “… as the results are for a representative household they are silent on the distributional consequences of policy changes.”


Despite the limitations of this approach, the report suggests “…the model provides a rigorous and internally consistent framework for assessing the direction and magnitude of key responses in saving, consumption, housing and pensions to potential changes in a range of tax and retirement income policies.”


PensionReforms agrees that governments are relatively impotent if they intervene to ‘improve’ the savings behaviour of individuals.  It would be better if governments concentrated on the things that only governments can do: reduce or eliminate poverty in old age, level the tax and regulatory playing fields, gather and disseminate impeccable data and help citizens to understand the things that matter to individual saving decisions.  Everything else should be left to individuals, employers and financial service providers.  (File size 659 KB;  51 pp) 719