Sections 9 (tax incentives) and 10 (compulsory private savings) might suggest that governments are relatively powerless when trying to directly affect individual behaviour with respect to retirement incomes. That is far from the case. We suggest that, when governments think about public policy issues associated with retirement incomes, they should focus on things they have a unique capacity to influence. We suggest there are five main ‘capacities’:
11.1 Reducing poverty in old age: Only governments can directly reduce or even eliminate poverty in old age through public policy interventions. Only they have the power to tax and re-distribute. Collecting tax from everyone today and spending that on pensions for the current old is an example. A government cannot rely on private markets to satisfy this basic objective of public policy, or even ‘force’ private compliance with strategies that attempt to achieve that objective. Section 6 above summarises the issues New Zealand needs to discuss with respect to the design of NZS.
11.2 Taxation: Investment vehicles with similar characteristics should be taxed similarly. What they are called or the legislation under which they operate should not be relevant to their tax liability, nor to the tax liability of those who use them. Section 17 below (Income tax and saving vehicles) looks at this.
11.3 Codes of conduct: Next, only governments can regulate to enforce codes of private (and public) conduct. For example, in a retirement saving context:
There should be minimum reporting standards so that investors are told about their investments in a complete, comparable, accessible and timely manner. Again, there must be consistent treatment across different investment classes. Section 18 below (disclosure requirements) discusses this.
Investment offerings to the public need regulating to ensure investors and experts know what they need to know. Similar offerings should be regulated similarly. There is more on these issues below in section 19 (Regulation).
11.4 Impeccable, accessible data: Next, only governments can demand access to data that are relevant to behaviour and issues connected with financial preparation for retirement and with the living standards of the old. The government must collect, produce and disseminate impeccable, deep, accessible information on population trends, saving and investment behaviour, labour force participation rates and poverty issues associated with ageing.
Section 12 (Housing and home-ownership) below discusses the problems with Census data on home-ownership.
Section 15 (Households’ financial position) discusses a crucial information gap – the absence of a proper longitudinal study of households’ financial behaviour.
11.5 Information and education: Lastly, a government can help citizens understand the issues through information and education programmes. For private provision, these should cover both the saving (‘accumulation’) and spending (‘decumulation’) periods of individuals’ financial lives. The programmes can be part of a school-based curriculum, work-based initiatives and public campaigns[2]. League tables of comparable investment performance data[3]and analysis of why the results were what they were also ‘best buy’ consumer comparisons should all be part of those. Citizens are more likely to believe information from a disinterested party, like the government, than from financial service providers. To build confidence, the government should openly review the retirement income framework on a regular basis, covering both public and private provision. Such reviews will depend on the data described in paragraph 11.3. We have more to say on the current review process in section 21 below.
Section 20 (Information and education) below looks at aspects of this central-government role.
Governments have other, more general responsibilities that affect retirement incomes: for example, selling price-indexed bonds or following policies that keep inflation low so that savers can be more confident of earning after-tax, real returns during the long deferral periods involved with private provision for retirement.
With specific regard to retirement income policies, governments that use the five tools outlined above will build a policy framework to support citizens’ decisions about whether they need to save more for retirement, when they should do that and finally, help them answer the ‘when?’, ‘how?’ and ‘how much?’ questions. Those are not questions for governments to answer; only individuals, perhaps with their employer’s direct help, can do that. Section 13 below looks at the role of occupational saving schemes.
The suggested framework will also help build and maintain public confidence in the government’s strategy. That confidence must survive over decades as citizens make saving and investment decisions and eventually draw down their savings in retirement.
Any deeper government involvement must make assumptions about what individuals ‘need’. It also makes a retirement income framework more complex and so builds barriers to understanding. That increases the risks of policy failure. For example, the line between saving and greater retirement income security should be clear and direct. Savers need to be confident they will be better off if they decide to save[4]. They must trust the information they use in their decisions and be confident that the ways they choose to administer those savings are what they say they are and do what they say they do.
A word about ‘behavioural economics’: Governments should stay away from policies that derive from so-called ‘behavioural economics’[5]. The central idea is that someone else knows better than, for example, the saver what might be in the saver’s best interests. Savers need a ‘nudge’ in the direction of decisions that are ‘clearly’ in the saver’s best interests. In that particular case, that ‘someone else’ thinks that consumption should be deferred to a retirement age and the amount set aside should be invested this way rather than that[6]. The evidence shows that people undoubtedly make mistakes about whether to save and how to save. So, the argument suggests that the environment should be structured to protect people from themselves. That doesn’t necessarily resolve things:
“...while consumers suffer from information asymmetries, so of course do proxy decision makers – in fact, their information deficits are likely to be worse than that of consumers, leading to greater error in decision-making.”[7]
‘Behavioural economics’ is a seemingly seductive concept, one that might be appropriate for providers of goods and services or even to help understand what is happening ‘out there’. However, we think it has no place in public policy issues associated with retirement saving. Issues such as the mix between immediate and deferred consumption should be a matter for individuals to decide. Not everyone needs to save for retirement; on the other hand, they may need to save for retirement but not now. Others may never retire so the concept of requiring them to put part of their income aside for retirement is at odds with their particular preferences.
Governments may help financial service providers understand the implications of choices (through research and information/education programmes) but it is a step too far to presume that anyone knows better than individuals what they should do with their own money; or better than employers how much, how and when they should pay their employees.
If help is needed, it should be directed at individuals who are faced with the saving decisions, not at financial service providers that can look after themselves.
Terms of reference for 2019 Review
There was no mention in the Terms of Reference for the Retirement Commissioner’s 2019 Review of the issues associated with the fundamental roles of the government in policies associated with retirement incomes.
We do not, therefore, expect the 2019 Review to address this issue. However, at some stage the following questions will need to be addressed.
Questions New Zealand needs to discuss on retirement income policy settings:
Should the government concentrate on things that only governments can do?
If ‘yes’, are there any other things that only governments can do (in addition to the five key areas described above) and that might contribute to the setting and maintenance of retirement income policies?
If governments should focus on other things, what might those be? What specifically would those add to the setting of public policy on retirement incomes? What might be the direct and indirect costs of those and can those costs, if any, be justified?
[1]This section is based on a submission by Michael Littlewood for the Retirement Commissioner’s 2016 Review: Ageing populations, retirement incomes and public policy: the four ‘first principles’ of policy-making - A submission to the Commission for Financial Capability (accessible here).
[2]Financial literacy programmes can be part of this: see, for example Financial Literacy and Retirement Planning: New Evidence from the Rand American Life Panel (2007), Annamaria Lusardi and Olivia Mitchell, Michigan Retirement Research Center (accessible here). Such programmes have much wider potential uses than helping people understand their retirement planning needs.
[3]For example, investors should have ready access to net, real returns across all comparable offerings on a regular, say, monthly basis over the last 5, 10, 15 and 20 years as well as for the current year. Similar comparisons of fees would also be informative. A public agency will be the most effective source of that data and the collection and comparisons should be subject to regular, public review.
[4]One major difficulty with income and asset tests of the Tier 1 pension (as in Australia and in most countries with a Tier 2 scheme) is that savers must necessarily doubt whether they will receive any of the Tier 1 pension. That doubt directly affects decisions about private provision for retirement and may lead to ‘over-saving’ and a misallocation of a country’s resources.
[5]See Behavioural economics: a brief introduction to the saving literature, Andrew Coleman (2010) accessible here. This gives “a very brief introduction to a vast literature”.
[6]This is the underlying premise of the design of KiwiSaver that was based on a deeply flawed 2004 report from the Savings Product Working Group, A Future for Work-based Savings in New Zealand (accessible here). It was flawed, because its recommendations were unsupported by any evidence of under-saving by New Zealanders and, in fact, ignored what evidence there was. We have more to say on this in section 14 below (KiwiSaver in the new environment).
[7]Chris Field in Having One’s Cake And Eating It Too – An Analysis Of Behavioural Economics From A Consumer Policy Perspective (2007) Australian Productivity Commission, accessible here (chapter in Behavioural Economics and Public Policy).