Housing in the Household Portfolio and Implications for Retirement Saving: Some Initial Finding from SOFIE

Transcription

1 Housing in the Household Potfolio and Imlications fo Retiement Saving: Some Initial Finding fom SOFIE Gant Scobie, Tinh Le and John Gibson N EW ZEALAND T REASURY W ORKING P APER 07/04 M ARCH 2007

2 NZ TREASURY WORKING PAPER 07/04 Housing in the Household Potfolio and Imlications fo Retiement Saving: Some Initial Finding fom SOFIE MONTH/ YEAR Mach 2007 AUTHORS Gant Scobie The Teasuy PO Box 3724 Wellington 6140 New Zealand Telehone Fax Tinh Le The Teasuy PO Box 3724 Wellington 6140 New Zealand Telehone Fax John Gibson Deatment of Economics Univesity of Waikato Pivate Bag 3105 Hamilton 3240 New Zealand Telehone Fax ACKNOWLEDGEMENTS An ealie daft of this ae was esented at a woksho held at the Reseve Bank of New Zealand, Wellington, 14 Novembe Fo thei helful comments and suggestions, we would like to thank the woksho aticiants and ou colleagues Stehen Glove and Pete Wilson. We gatefully acknowledge the eseach assistance of Wei Zhang. Thanks ae also due to Mak Athu, Tendayi Nyangoni, Johanna Pebble, Diane Ramsay, Nick Teadgold and John Ufold of Statistics New Zealand fo thei suot with the data. NZ TREASURY New Zealand Teasuy PO Box 3724 Wellington 6008 NEW ZEALAND infomation@teasuy.govt.nz Telehone Website

3 DISCLAIMER The views, oinions, findings, and conclusions o ecommendations exessed in this Woking Pae ae stictly those of the autho(s). They do not necessaily eflect the views of the New Zealand Teasuy. The Teasuy takes no esonsibility fo any eos o omissions in, o fo the coectness of, the infomation contained in these woking aes. The ae is esented not as olicy, but with a view to infom and stimulate wide debate. Access to the data used in this study was ovided by Statistics New Zealand in a secue envionment designed to give effect to the confidentiality ovisions of the Statistics Act The esults in this study and any eos contained theein ae those of the authos, not Statistics New Zealand.

4 Abstact Housing is an imotant secto of the economy. It has widesead imlications fo investment, banking, saving and emloyment. Home owneshi has been linked to building social caital and a sense of community. Futhemoe housing equity is a significant element of etiement accumulation fo many New Zealandes. The Teasuy maintains a ogamme of wok elated to housing, saving, wealth accumulation and etiement. The esults of this contibute to Teasuy's ole in oviding advice to the Ministe and at the same time infoming a wide gou of extenal stakeholdes. This ae uses unit ecod data fom a new anel suvey (SOFIE) to study housing wealth in household otfolios. It then estimates the ates of saving that would be needed to smooth consumtion between e- and ost-etiement. Finally it exloes the effect of some home equity withdawal on the equied saving ates. The main findings of this study ae: 60% of households ae ecoded as owning a home; Almost half of home-owning households have no motgage debt; One in six households own esidential investment oety; One in twelve households own a ental oety; Pattens of oety owneshi in New Zealand ae simila to those in selected comaato counties; Housing eesents a majo shae of household wealth, and this shae has isen in line with the incease in house ices; The comosition of household otfolios is comaable to othe selected counties excet fo the USA ; Emiical esults indicate that even if households lanned to daw down half of housing equity to suot etiement income, the imact on the saving ate needed to smooth consumtion would be modest. JEL CLASSIFICATION KEYWORDS D31 -Pesonal Income and Wealth Distibution D91 - Intetemoal Consume Choice: Life Cycle Models and Saving J26 -Retiement R21 -Housing Demand Consumtion smoothing, home equity, household otfolio, household wealth, housing, life cycle, etiement, savings WP 07/04 Housing and Imlications fo Retiement Saving i

5 Table of Contents 1 Intoduction Data Housing in the household otfolio Home owneshi Owneshi of investment oety Geaing Net equity Household otfolio comosition Saving fo etiement - the model Geneal assumtions A model of joint detemination of saving and elacement ates Secific assumtions Saving fo etiement - esults Baseline esults Potential contibution of home equity Summay and conclusions...15 Refeences...17 Aendices...18 A Data...18 B Deivation of the model of joint detemination of saving and elacement ates...20 C Additional tables...23 List of Tables Table 1 Home owneshi: by age...2 Table 2 Owneshi of investment oety: by tye...4 Table 3 Geaing atios fo oety-owning households...5 Table 4 Net equity in oety as a shae of total net woth...6 Table 5 Shae of housing wealth in total wealth...6 Table 6 Household otfolio comosition...7 Table 7 Pescibed saving ates at vaious ecentiles...11 Table 8 Median escibed saving ates, consumtion elacement ates and etiement consumtion...12 Table 9 Effect of home equity withdawal on escibed saving ates...15 Aendix Table 1 Home owneshi: by income quintile...23 Aendix Table 2 Owneshi of ental oety: by age...23 Aendix Table 3 Owneshi of ental oety: by income quintile...23 Aendix Table 4 Geaing atios fo oety-owning households: by age...24 Aendix Table 5 Comosition of net wealth fo coules...24 Aendix Table 6 Motgage holdings...24 WP 07/04 Housing and Imlications fo Retiement Saving ii

6 List of Figues Figue 1 Home owneshi by age: New Zealand in comaison with Austalia and USA...3 Figue 2 Home owneshi by age: an intenational comaison...3 Figue 3 Owneshi of investment oety by age: New Zealand in comaison with Austalia and USA...5 Figue 4 A life cycle model of income, savings and consumtion...8 Figue 5 A model of joint detemination of saving and elacement ates...10 Figue 6 Median escibed saving ates by wealth and income quintiles...13 WP 07/04 Housing and Imlications fo Retiement Saving iii

7 Housing in the Household Potfolio and Imlications fo Retiement Saving: Some Initial Finding fom SOFIE 1 Intoduction Housing is an imotant secto of the economy. As such thee ae imlications fo aggegate investment, inteest ates, inflation and economic cycles. At the household level, thee ae issues of owneshi, access, affodability and wealth accumulation. This ae addesses two questions. Fist, what is the atten of oety owneshi and investment among New Zealand households? Second, what ole might housing equity lay in etiement income and what would that imly fo etiement saving? The fist issue is addessed in Section 3, which esents ecent esults fom the Suvey of Family, Income and Emloyment (SOFIE). It coves owneshi attens, geaing, net equity and comosition of household otfolios. Comaisons ae also made with esults fom the Household Savings Suvey (HSS) and with intenational evidence. The second question is examined in Sections 4 and 5. This analysis is based on a model of etiement saving and ovides a famewok to exloe imlications of housing equity fo etiement saving. 2 Data The imay data souce in this study is SOFIE, a anel suvey which stated in Octobe 2002 and is intended to un annually fo eight yeas. SOFIE collects data on levels, souces and changes in income fo New Zealand individuals and families. It also eots on majo influences on income, such as emloyment and education exeiences, household and family status and changes, demogahic factos and health status. The suvey coves 26,339 individuals of 10,244 households, eesenting 3,771,864 eole. 1 1 SOFIE s taget oulation is odinay esidents who live in ivate dwellings. Excluded fom the suvey samle ae shot-tem oveseas visitos (intending to stay fo less than 12 months), non-nz dilomats and dilomatic staff and thei deendants, membes of non-nz amed foces stationed in NZ and thei deendants, and esidents of offshoe islands othe than Waiheke Island (Statistics New Zealand, 2006). A descition of the HSS is ovided in Aendix A.1. Diffeences between SOFIE and HSS data ae outlined in Aendix A.2. WP 07/04 Housing and Imlications fo Retiement Saving 1

8 The data on assets and liabilities used in this study come fom Wave 2, which an fom 1 Octobe 2003 to 30 Setembe Most of the analysis in this ae etains to the household level. 2 The household's age is that of the `head' membe, defined as the eson who eans the highest income in the household. The analysis in 3 excludes ages 17 and below. In Section 5 we focus only on ages because eole in this age ange ae old enough to stat thinking seiously about eaing fo etiement. 3 3 Housing in the household otfolio This section uses data fom SOFIE to analyse evidence on home owneshi and investment oety. Some comaisons ae made with HSS esults (fom Van Zijll de Jong and Scobie, 2006) and intenational data dawn fom the Luxemboug Wealth Study Home owneshi Table 1 summaises the atten of home owneshi by age of the household head. The owneshi ate ises steadily with age and shows no tendency to decline amongst those ove 65 yeas old. Home owneshi ates also ise with income, yet the vaiation acoss income levels is fa less onounced than acoss age gous (Aendix Table 1). Table 1 Home owneshi: by age Age Owneshi ate Shae in total ownes Total Note: Enties ae ecentages. Fo most age gous the ates deived fom the HSS and SOFIE ae vey comaable (Figue 1). An excetion occus in the two younge gous. These gas ae mainly due to the diffeence in the suvey design. Secifically, the eoted HSS data efe to coules, while the SOFIE data ae based on households. As households include single occuants, who ae less likely to own a home, the SOFIE ates ae edictably lowe than those deived fom the HSS A household may have moe than one family. It is moe challenging to aly the model to younge ages as the futhe one is fom etiement, the moe imecise ojections of etiement wealth, income and consumtion become. Available fom WP 07/04 Housing and Imlications fo Retiement Saving 2

9 Figue 1 Home owneshi by age: New Zealand in comaison with Austalia and USA Note: New Zealand HSS data efe to coules, while othe data etain to households. Comaed with Austalia and the United States (USA), the owneshi ates in New Zealand ae lowe fo most age gous, but only maginally. Figue 2 futhe undescoes the fact that the New Zealand ates ae not makedly out of line with intenational evidence, though tend to be at the lowe end, excet in the case of the oldest age gou. Figue 2 Home owneshi by age: an intenational comaison Souces: New Zealand data ae fom SOFIE, while data fo the othe counties come fom the Luxemboug Wealth Study (2001). WP 07/04 Housing and Imlications fo Retiement Saving 3

10 Institutional and economic diffeences can influence attens of home owneshi. Banks et al (2002) obseve that home owneshi ates ae highe in the UK than in the USA, esecially at younge ages. The authos offe two easons fo this henomenon. Fist, the ental maket tends to oeate moe efficiently in the USA. Second, housing ices have histoically been much moe volatile in the UK. Theefoe, young home buyes who lan to ugade as thei income and family exand face geate ice isk in the UK. One aoach to self-insuing against house ice volatility is to maintain a lage ootion of household wealth in housing equity. We believe that the issue of ice volatility and its otential imact on home owneshi eesents a otentially fuitful aea fo futhe wok on the New Zealand housing maket. 3.2 Owneshi of investment oety Table 2 shows that one in six New Zealand households have some fom of investment oety, while aound 8% eot owneshi of ental oety. The owneshi ate of ental oety inceases with age, at aound 12% in the e-etiement age gous (Aendix Table2). Amongst the highest income quintile, almost one in five own a ental oety (Aendix Table 3). Table 2 Owneshi of investment oety: by tye Investment tye Owneshi ate (%) Mean value Median value Holiday homes in NZ , ,300 Rental oety in NZ , ,000 Othe oety in NZ , ,100 Timeshaes in NZ ,100 5,000 Oveseas oety , ,000 Any investment oety , ,000 Note: Values of oety have been adjusted fo the household's shae when a oety is owned by multile households. An intenational comaison of the owneshi atten is ovided in Figue 3. The high ates obseved in the HSS data ae again mostly attibutable to the diffeence in the samling design. With the excetion of the unde-25 gou, the ates of owneshi of investment oety amongst New Zealand households ae lagely simila to those ecoded fo Austalia. The ates in the USA ae tyically lowe, eflecting the highe ootion of financial assets in investment otfolios of US households. WP 07/04 Housing and Imlications fo Retiement Saving 4

11 Figue 3 Owneshi of investment oety by age: New Zealand in comaison with Austalia and USA Note: New Zealand HSS data efe to coules, while othe data etain to households. 3.3 Geaing Geaing is defined as the atio of motgage debt to goss value of oety holdings. As exlained in Aendix A.2, SOFIE data do not beak down the total value of motgages into vaious tyes of oety. As a consequence, we ae only able to esent the geaing atio fo the aggegate holding of oety. As evident fom Table 3, close to one half of oety-owning households have no motgage debt and about half of those with motgage debt have a geaing atio of unde 50%. Geaing atios decline with age and the `tyical' households above 55 own thei oety outight, as indicated by the medians in Aendix Table 4. Table 3 Geaing atios fo oety-owning households Level of geaing Poulation shae (%) Total WP 07/04 Housing and Imlications fo Retiement Saving 5

12 3.4 Net equity In this section, we examine the elationshi between net equity in oety and total net woth. 5 Acoss the oulation, the median shae of oety equity in total net woth is 56%, wheeas among oety ownes, tyically ove 80% of total net woth is held in esidential oety (Table 4). Table 4 Net equity in oety as a shae of total net woth Age All households Poety ownes only Total Note: Enties in ae medians of atio of net equity in oety to total net woth. A fine beakdown of net equity is given in Aendix Table 5 fo coules in the eetiement age gous. This table contains the aveage value of net wealth fo each of the majo categoies: housing, ension, New Zealand Sueannuation (NZS) and othe. This last categoy includes all othe foms of net equity, including household assets, financial assets and investment in oety othe than the owne-occuied house. The value of NZS is comuted as the esent value of the futue exected steams of ayments assuming that the cuent olicy aametes ae etained. We calculate the shae of housing in the aveage household otfolio as the atio of mean housing wealth to mean total wealth. On aveage, housing accounts fo 38% in total net woth (Table 5). This atio falls to one quate when NZS is added to the wealth otfolio. These estimates seve to emhasise the imotant ole that NZS lays in the total wealth of New Zealand households, aticulaly among the lowest quintile of the wealth distibution. Table 5 Shae of housing wealth in total wealth Wealth quintile Coules aged Coules aged Incl. NZS Excl. NZS Incl. NZS Excl. NZS Total Note: Enties ae atios of mean housing wealth to mean total wealth eoted in Aendix Table 5. 5 Again, because SOFIE does not ovide a beakdown of motgage liability, the esults esented hee efe to all oeties. WP 07/04 Housing and Imlications fo Retiement Saving 6

13 3.5 Household otfolio comosition We can again daw on the Luxemboug Wealth Study to make coss-county comaisons of the comosition of household wealth. As eoted in Table 6, between 2001 and 2004 thee was a ise in the shae of oety assets in total investment assets of New Zealand households, eflecting inceases in house ices ove this eiod. 6 But even with this ise, the comosition of household otfolios in New Zealand is not damatically diffeent fom those in the selected comaato counties. The USA emeges as an outlie, with households investing elatively moe in financial instuments than in eal estate. Table 6 Household otfolio comosition Canada a Finland a Italy a Sweden a USA a NZ b NZ c NZ d Financial assets e Deosit accounts f Mutual funds f Stocks f Bonds f }28 Real estate assets e Pincial esidence f Investment oety f Total debt e Home motgage f Souces: Note: [a] Luxemboug Wealth Study, these estimates ae taken fom the eliminay `beta' vesion, see [b,c] HSS [d] SOFIE Enties ae ecentages [e] Shae of total investment assets [f] Shae of coesonding investment asset class [b] Coules [c] Non-atneed individuals. All othe data efe to households. 6 Table 6 coves investment assets, both eal estate and financial, but ignoes othe household assets such as vehicles, collectibles, fams and business and ension schemes. WP 07/04 Housing and Imlications fo Retiement Saving 7

14 4 Saving fo etiement - the model To model adequacy of etiement saving, we adot a famewok of joint detemination of saving and elacement ates. This famewok seeks to smooth consumtion thoughout the life cycle. 4.1 Geneal assumtions Fo simlicity, we ignoe uncetainty. Secifically, this assumtion means that an individual will etie at a cetain age as lanned; does not engage in the wok foce afte etiement; knows exactly what thei income until etiement will be; can accuately oject the ate of etun on investments; has a known life exectancy at the age of etiement; knows the amount of NZS that they will eceive; lans and executes whateve bequests they wish to make; has no unexected changes in health status that would affect income o exenditues; and assumes tax ates and othe olicies emain unchanged. 7 In the absence of uncetainty, the life cycle saving and consumtion attens can be illustated as in Figue 4. The household chooses a level of consumtion that can be financed fom income ove the woking life, and then fom savings duing etiement. This imlies (ignoing inteest fo the moment) that savings ae equal to consumtion needs in etiement. Figue 4 A life cycle model of income, savings and consumtion Souce: Adated fom Mooe and Mitchell (1997). 7 Uncetainty, including such souces as sickness, disability, emloyment, eanings, inheitances and life exectancy, can best be intoduced using mico-simulation models. See, fo examle, Statistics Canada (2004). WP 07/04 Housing and Imlications fo Retiement Saving 8

15 This simle life cycle atten can be modified to allow fo uncetainty. As shown by Mooe and Mitchell (1997), when life exectancy is uncetain, consumtion will tend to ise until etiement and fall subsequently, athe than emaining unifom thoughout (see Figue 4b). Howeve, the basic atten of eanings and savings befoe etiement and wealth decumulation thoughout etiement to finance consumtion is left unalteed. In the face of uncetainty, some ecautionay savings may be accumulated, which, if not needed, may lead to bequests. Convesely, if accumulated savings ove inadequate due to unfoeseen events, some souce of assistance income in etiement would be equied. Abstacting fom uncetainty has the advantage of significantly simlifying the analysis. Clealy, the esults can not be inteeted as alying to a aticula individual whose incomes, exenditues, etuns on assets and life exectancy ae all subject to shocks. Howeve, when these shocks ae both unanticiated and distibuted equally among both ositive and negative changes, the outcomes illustated hee can be inteeted as exected values fo any given oulation gou. 4.2 A model of joint detemination of saving and elacement ates This aoach 8 calculates jointly the saving and income elacement ates fo each eson o coule. A comlete deivation of the model is given in Scobie et al (2005, Aendix C) and einted in Aendix B, while a gahical illustation is esented in Figue 5. At the cuent time a eson/coule has a net woth W a as measued by SOFIE. This wealth is ojected to gow to W by the time they each a e-detemined etiement age. In ode to have a given level of consumtion in etiement they would need to have accumulated a stock of wealth equivalent to W. Pat of thei etiement income is ovided by NZS and the stock of wealth equivalent to the NZS income is incooated in W and W. The diffeence between the equied wealth W and the ojected wealth W is the shotfall that would need to be accumulated between now and etiement. This additional amount, in the absence of inheitances o unanticiated evaluation in asset values, would need to be built u though savings. These flows ae deicted in Figue 5b. The aoach assumes that some fixed shae of e-etiement income will be saved ( s = S/ Y ) and the elacement ate is given by the atio of goss income in etiement to goss income e-etiement ( R = Y / Y ). Unde the New Zealand income tax system of TTE, 9 etiement taxes T ae zeo, so consumtion is equal to income in etiement. Clealy, some values of etiement income could imly a substantial shotfall in etiement wealth, which might in tun equie unealistic o infeasible levels of savings befoe etiement. It is fo this eason that the saving and elacement ates ae jointly detemined. 8 9 The aoach adoted follows that of Mooe and Mitchell (1997). TTE efes to a system whee the savings ae made fom afte-tax income, the etuns ae taxed and the withdawals ae exemt. It diffes fom those systems which exemt savings o eanings fom taxation and tax withdawals (TET, ETT o EET). WP 07/04 Housing and Imlications fo Retiement Saving 9

16 Figue 5 A model of joint detemination of saving and elacement ates 4.3 Secific assumtions The etiement age is set at 65. We aly an afte-tax, eal ate of etun of 2% e yea fo all comounding and discounting. We oject e-etiement income fom its cuent level using an annual gowth ate of 1%, chosen to aoximate the aveage ate of labou oductivity and eal wage gowth in the economy. Pe-etiement tax ates ae based on this e-etiement income Y. NZS ayments ae assumed to gow at 1% annually in eal tems, matching the gowth in aveage eal wages. 10 Bequests involve only the cuent equity in the incial esidence. The model fo coules is comlicated by the fact that the two atnes of each coule may neithe etie no die at the same time. The etiement hase fo coules is assumed to stat when the olde atne eaches 65 (the younge atne will continue eaning an income, which may affect the value of NZS eceived by the etied atne). We futhe ostulate that afte one atne dies, the suviving atne will have a consumtion level equivalent to 60% of the coule's level. We comute life exectancies fom motality ates ojected by Statistics New Zealand. These ojections take into account edicted changes in health status based on `medium' assumtions aound fetility, motality and migation. We assume that Pacific Islandes have the same motality ates as Maoi and that motality ates ae the same fo all othe ethnic gous. As such, we ae able to calculate life exectancies at etiement fo each gende, boad ethnic gou and yea of etiement. 10 This gowth ate is athe consevative. Teasuy s (2006) Long-tem Fiscal Model uses a gowth ate of 1.5% fo aveage labou oductivity and eal wages. Benefits ae also assumed to gow at that ate. WP 07/04 Housing and Imlications fo Retiement Saving 10

17 5 Saving fo etiement - esults The model in Section 4.2 escibes saving ates as a shae of goss income. These figues may not be immediately intuitive, hence fo the emiical esults we will eot afte-tax saving ates. To assess the level of consumtion smoothing, we also comute a consumtion elacement ate as the atio of e-etiement consumtion to ostetiement consumtion. Some households ae escibed a negative saving ate. Liteally, this means that these households should eithe daw down thei cuent wealth befoe etiement o boow against thei NZS income to sulement thei cuent consumtion, which is hadly feasible in actice. We suggest that negative escibed saving ates be inteeted as no futhe saving being needed to sustain thei consumtion levels in etiement, given the household's cuent wealth. 11 Even without exta savings, these households would aleady be able to affod highe consumtion in etiement than thei esent level. 5.1 Baseline esults Table 7 contains the ate at which households need to save until age 65 so that they could enjoy a level of consumtion in etiement simila to what they had befoe etiement. The median equied saving ate is highe fo households aged 45-54, but the distibution is fa moe uneven among olde households. While 49% of non-atneed eole aged ae escibed a negative saving ate, 10% would need to set aside ove 40% of thei afte-tax income fo etiement. The `tyical' non-atneed individual aged has a escibed saving ate of 14%, but at the 90th ecentile this ate only ises to 34%. Table 7 Pescibed saving ates at vaious ecentiles Non-atneed individuals Pecentile 10th 25th 50th 75th 90th Ages Ages Coules Ages Ages Note: Enties ae ecentages. Saving ates hee ae exessed as a ootion of afte-tax income. 11 We have set negative escibed saving ates to zeo to eclude liteal inteetation. WP 07/04 Housing and Imlications fo Retiement Saving 11

18 The escibed saving ates ae consideably highe fo coules than fo non-atneed individuals (Table 8). Thee ae at least thee easons fo this. Fist, the etiement eiod fo coules is longe; it extends fom when the olde atne eties until when the last atne dies. Second, coules ean moe than twice as much as non-atneed eole (eflecting the henomenon of assotative mating), so they have a highe e caita consumtion level to sustain. Thid, ou model does not account fo economies of household size in consumtion, but NZS does - it ays coules only 54% moe than the ate fo individuals. 12 Table 8 Median escibed saving ates, consumtion elacement ates and etiement consumtion Wealth quintile Ages Ages s at R c C s at R c C Non-atneed individuals , , , , , , , , , ,500 Total , ,800 Coules , , , , , , , , , ,700 Total , ,700 Note: s at = escibed afte-tax saving ate, s at and R c ae ecentages. R c consumtion elacement ate, C etiement consumtion. Enties fo Acoss the wealth distibution, thee is little vaiation in median escibed saving ates fo the lowest fou quintiles. Fo non-atneed individuals aged 45-54, fo examle, the median escibed saving ate anges fom 11% fo quintile 1 to 21% fo quintile 2, while it is almost zeo fo the 20% wealthiest eole. These saving ates will enable them to attain a etiement consumtion level of aound 80% as much as thei e-etiement level. Nonatneed individuals aged will exect to have median etiement consumtion of $23,100, comaed with $15,800 fo those neaing etiement. Fo coules, the coesonding diffeence between the two cohots is 34%. The escibed saving ate ises with income level (Figue 6). While the 20% lowest eanes should save no moe fo etiement, the `tyical' household in the to income quintile will need to save a thid of thei afte-tax income to smooth consumtion ove the life cycle. 12 In 2003, NZS afte-tax ayment was $12,756 fo non-atneed individuals (who live alone) and $19,624 fo coules. WP 07/04 Housing and Imlications fo Retiement Saving 12

19 Figue 6 Median escibed saving ates by wealth and income quintiles (a) Non-atneed individuals aged (b) Coules aged Note: Saving ates hee ae exessed as a ootion of afte-tax income. Ou model escibes no futhe saving fo 25% of coules and 41% of non-atneed individuals aged These households eithe ae eaning too little o hold significant wealth. 13 Indeed, 27% of non-atneed individuals and 9% of coules in ou samle eoted income that was below the cuent NZS ayment; additional saving is not justified fo these eole as NZS would aleady ovide them moe consumtion than they can cuently affod. Likewise, no moe saving is necessay if the household has accumulated sufficient wealth to sustain thei e-etiement consumtion levels. 13 These esults ae cuent as at Novembe An enhanced modelling aoach (Le et al, 2007) suggests that these esults ae vey consevative and ossibly undestate the shae of oulation who ae escibed a negative saving ate. WP 07/04 Housing and Imlications fo Retiement Saving 13

20 We must stess that we do not advise against saving. These esults just mean that no moe saving fo etiement is equied fo those households if they ae to etie at 65, given ou assumtions in Section4. It may still be advisable that they save fo things othe than etiement, fo a diffeent objective than consumtion smoothing, fo ealy etiement, moe bequests, o simly as a buffe against uncetainties about health, life exectancy and so on. Ou escibed saving ates aea high, as they ae based on consevative assumtions. Fist, we assume e-etiement consumtion will be sustained thoughout etiement. Yet emiical evidence often suggests that ivate consumtion sending declines with age (Gibson and Scobie, 2001). Second, the level of wealth in ivate ension schemes eoted in SOFIE has been undeestimated due to some technical oblems with the questionnaie. In a subsequent ae (Le et al, 2007) we will examine if actual household saving is in line with the equied level. 5.2 Potential contibution of home equity Ageing oulation and longe life exectancies have led to an extensive debate on mechanisms fo funding etiement income. Fom the ivate esective, discussion centes on the need fo moe aggessive saving ates befoe etiement, acceting a lowe level of etiement consumtion o extending the eiod of labou-foce aticiation. As a significant at of wealth fo many households is the incial esidence, eleasing equity fom the home has featued inceasingly in debates about etiement income otions. 14 Home equity can be eleased e-etiement though equity withdawal fo moe liquid foms of investment. Afte etiement, home equity can be feed u by `downsizing' o by evese equity motgages. In this ae, we do not ente into the secifics of the actual mechanisms. Rathe, we exloe the extent to which using some otion of home equity could augment etiement income and so decease the level of equied savings. Section 5.1 assumes that the cuent equity in the owne-occuied house is etained fo bequests. Fo this analysis we assume that motgages on the incial esidence will have been aid off by the time the household eties. Accodingly, at the time of etiement the household's home equity will be equal to thei shae in the goss value of the house. 15 Thei wealth in the `othe' categoy will be commensuately educed by the outstanding value of the home motgage. In fact, the vast majoity of etiees own thei home fee and clea. As eoted in Aendix Table 6, 59% of all oety ownes have a motgage liability, comaed with only 8% among those olde than 64. The latte ate is even lowe (7%) when oety investos ae excluded. The aveage motgage debt is also consideably lowe among the olde eole. Table 9 shows the extent to which home equity withdawal affects the equied saving ate. The elative imact is simila acoss the distibution. If the house is to be etained and bequeathed, the median escibed afte-tax saving ate fo coules aged is 23%. This ate dos to 22% when 10% of home equity is withdawn, and to 15% when half of housing wealth is to be eleased. At the 90th ecentile, the escibed saving ate falls fom 49% to 47% and 43% esectively. By constuction, lowe escibed saving ates mean highe elacement ates and highe etiement consumtion. That is, by conveting housing wealth into income in etiement, households ae able to achieve bette consumtion smoothing ove the life cycle and thus to enjoy highe consumtion in etiement See Davey (2005) fo a ecent New Zealand esective. Some houses may not be wholly owned by an individual o a coule. WP 07/04 Housing and Imlications fo Retiement Saving 14

21 Table 9 Effect of home equity withdawal on escibed saving ates Ages Ages Pecentile 25th 50th 75th 90th 25th 50th 75th 90th Non-atneed individuals Retain the house Withdaw 10% of home equity Withdaw 30% of home equity Withdaw 50% of home equity Coules Retain the house Withdaw 10% of home equity Withdaw 30% of home equity Withdaw 50% of home equity Note: See Table 7, age 11. The effect of home equity withdawal aeas modest; it is only noticeable when households halve the size of thei home. Howeve, thee ae significant tansaction costs in eleasing home equity which we have ignoed. These costs would futhe educe the otential ole of home equity to alleviate the essue on saving. While housing wealth may well eesent a buffe fo some households facing uncetain income and exenditues in etiement, 16 this analysis suggests that evese equity motgages o downsizing' has a limited ole in easing the need fo saving. 6 Summay and conclusions Data fom SOFIE ovide a comehensive ictue of oety owneshi and investment. Sixty ecent of all households ae home ownes. The ate of owneshi ises shaly with age until 45 yeas, and then shows modeate inceases among olde households. Nealy 80% of households headed by a eson olde than 75 own the house in which they live. This owneshi atten esembles that evailing in othe counties. Oveall, one in six households have some fom of investment oety; nealy half of these own a ental oety. As the owneshi ate dos dastically afte age 65, ental oety ovides a vey mino souce of income fo households in etiement. Aaently, investment in ental oety is often liquidated once the household head eaches 65. The atten of owneshi of investment oety in New Zealand geneally matches that obseved in Austalia and the USA. What ole does housing lay in the wealth otfolio? Accoding to the aggegate data fo the household secto, the shae of housing wealth in total wealth was 73% in Decembe An altenative measue can be deived fom SOFIE data using the median atio of net equity in oety to total net woth. This measue indicates that fo a `tyical' household, oety eesents ove half of total net woth. This shae inceases to ove 80% when the oulation is esticted to households who eot owneshi of oety Fo an examle of the use of home equity as a buffe against unexected income shocks, see Hust and Staffod (2004). See htt:// WP 07/04 Housing and Imlications fo Retiement Saving 15

22 Close to one half of oety-owning households ae outight ownes, while among motgage debtos, about one half have debt unde 50% of the oety value. In addessing the ole of home equity in etiement income we adot a life cycle model of consumtion smoothing. We find that even if half of housing equity is conveted to etiement income, the eduction in the escibed saving ate is still modest. The osect of evese equity motgages may well lay a ecautionay ole in that housing equity eesents a stoe of value that could be dawn on to meet unanticiated exenditues (such as health and extended life exectancy). Howeve, the esults given in this ae suggest that it should not be viewed as a substitute fo `adequate' levels of etiement saving. WP 07/04 Housing and Imlications fo Retiement Saving 16

23 Refeences Banks, J., Blundell, R., and Smith, J. P. (2002). Wealth otfolios in the UK and the US. Discussion Pae 02-03, Univesity College London, London. Davey, J. (2005). The osects and otential fo home equity elease in New Zealand. htt:// Office of Retiement Commissione, Wellington. Gibson, J. and Scobie, G. (2001). A cohot analysis of household income, consumtion and saving. New Zealand Economic Paes, 35(2): Hust, E. and Staffod, F. (2004). Home is whee the equity is: Motgage efinancing and household consumtion. Jounal of Money, Cedit & Banking, 36(6): Le, T., Scobie, G., and Gibson, J. (2007). Ae kiwis saving enough fo etiement? Peliminay evidence fom SOFIE. Woking Pae (fothcoming), New Zealand Teasuy, Wellington. Mooe, J. F. and Mitchell, O. S. (1997). Pojected etiement wealth and savings adequacy in the health and etiement study. Woking Pae 6240, National Bueau of Economic Reseach. Scobie, G. M., Gibson, J. K., and Le, T. V. T. (2005). Household Wealth in New Zealand. Institute of Policy Studies, Wellington. Statistics Canada (2004). Micosimulation models. htt:// Statistics New Zealand (2006). Infomation about the Suvey of Family, Income and Emloyment (SOFIE). htt://www2.stats.govt.nz/domino/extenal/omni/omni.nsf/ oututs/suvey+of+family,+income+and+emloyment+(sofie). The Teasuy (2006). New Zealand s long-tem fiscal osition. Van Zijll de Jong, M. and Scobie, G. M. (2006). Housing: An analysis of owneshi and investment based on the Household Savings Suvey. Woking Pae 06/07, New Zealand Teasuy, Wellington. WP 07/04 Housing and Imlications fo Retiement Saving 17

24 Aendices A Data A.1 Household Savings Suvey The 2001 Household Savings Suvey coveed those ove 18 yeas of age living in ivate dwellings and usually esident in New Zealand. Peole living in non-ivate dwellings such as institutions, motels, est homes o hostels wee excluded, so wee those on offshoe islands (excet Waiheke Island). Fo the coe samle 6,600 households wee aoached. One eson fom those qualifying in the household was chosen at andom, and infomation was collected fom and about that individual. If they had a atne, infomation was collected fo the coule, i.e., whee the esondent and thei atne wee living in the same household the coule was inteviewed as a single unit. In ode to imove the accuacy of estimates fo Māoi, a booste samle was used. The esonse ate was 74% and the final samle includes 5,374 households (2,392 non-atneed individuals and 2,982 coules). In total, a oulation of 930,900 non-atneed individuals and 1,711,800 individuals in coules, o a total of 2,642,700 eole, ae coveed. 18 The suvey esults, when aoiately weighted, eesent about 98% of the esident adult oulation. A.2 Diffeences between HSS and SOFIE data Statistical unit HSS The non-atneed individual o the coule Poety Non-atneed individuals/coules wee asked fo the dolla value of thei shae in a oety. SOFIE The individual and the household. SOFIE ovides no infomation on whom a eson is atneed with, but we can infe this fom eole's ole in thei family nucleus and fom atneed individuals into coules accodingly. The coule's income o wealth is made u of the income/wealth of both atnes while the age of the coule efes to the age of the olde atne. Individuals wee asked fo the total value of each oety and the numbe of othe eole who also own that oety. We assume equal owneshi shaes among ownes. 18 Although the suvey is entitled a household suvey, it does not etain stictly to households e se. Rathe, it coves nonatneed individuals and coules. WP 07/04 Housing and Imlications fo Retiement Saving 18

25 Motgages HSS Motgages wee collected fo each oety. SOFIE Thee is only one figue which efes to the total value of all motgages, but no infomation on the numbe of motgages o which oety the motgages ae fo. We assume that the total motgage value is slit between owneoccuied and othe esidential oety such that the geaing atio is equal between the two classes of oety. 19 Household items No data We ignoe household items in the calculation of wealth, as these assets deeciate ove time and they can not easily be liquidated. These assets ae also valued inconsistently acoss individuals. 20 Pension schemes Values wee ovided by the Govenment Actuay and ae consistent with the Reseve Bank's aggegate data. Due to eos in the questionnaie, thee is evidence that the aticiation ates in ension schemes and eoted values of schemes ae makedly lowe than indicated by othe souces. 21 The eos ae comlex and we have been unable to emedy them. We take the data as is, acknowledging that these eos undestate net woth by 2% on aveage and thus ende ou esults consevative.' We acknowledge that investment oeties ae nomally moe highly geaed (fo tax benefits), so such division of motgages would tend to ovestate boowing fo owne-occuied oeties. The methods that wee used to evaluate household items include: 1) Insued value fo elacement (59.4%); 2) Insued value not fo elacement (6.3%); 3) Amount that would be eceived if sold (13%); 4) Amount that was aid (8.1%); 5) Othe method of estimation (11.7%); 6) Don t know; 7) Refused; and 8) Missing. Infomal communications and unublished notes fom staff of Statistics New Zealand. WP 07/04 Housing and Imlications fo Retiement Saving 19

26 B Deivation of the model of joint detemination of saving and elacement ates The famewok outlined in this aendix is dawn fom Mooe and Mitchell (1997). They ague that it is necessay to develo a model which allows the elacement ate and the e-etiement saving ate to be jointly detemined. The easons fo this ae twofold. Fistly, in view of a household's actual and ojected income and assets, the saving ate needed to achieve some e-secified elacement ate may be infeasible. Secondly, the elacement ate deends in at on the ate of taxation in etiement, which in tun deends on the level of etiement income, itself a deteminant of the elacement ate. Only when the tax ates in etiement wee e-detemined would this second issue be avoided. The stating oint is the condition that eal consumtion (i.e., income net of taxes and saving) be equal befoe and afte etiement, as given by: Y T S = Y T (1) whee: Y = e-etiement goss income; T = e-etiement taxes; S = savings; Y = etiement goss income; T = etiement taxes. Next define s = e-etiement saving ate = ( S / Y ) and R = elacement ate = Y / ) ( Y so that substituting these definitions in (1) and dividing by Y gives: 1 ( T / Y ) s = R ( T / Y ) (2) Now let T = t Y and T = ty whee t and t ae the e- and ost-etiement ootional tax ates, so that: s = (1 t ) (1 t R (3) ) Equation (3) defines a set of combinations of s and R which satisfy the condition secified in (1). By fist finding a value fo R, we can then solve fo the coesonding value of s that satisfies (3). WP 07/04 Housing and Imlications fo Retiement Saving 20

27 The etiement income flow ( Y ) can be conveted to a lum sum at etiement by alying an annuity facto (α ). 22 This exesses the steam of etiement income in tems of a stock in wealth at the time of etiement. In othe wods, wee a eson to have accumulated this amount they would be able to eceive a lifetime annuity of Y. Denoting the `equied' wealth needed to geneate Y as W, then: W α Y = α[(1 s) Y T + T ] (4) = The amount of saving needed to each this equied level of etiement income deend on: the existing stock of net wealth W the exected etuns on investment futue income tax ates. We define W as the ojected level of wealth, so that the shotfall is: W will W W = α [(1 s) Y T + T ] W (5) We ae now in a osition to deive the ate of saving needed to each the equied level of wealth. This ate is the shae of e-tax income the household would need to save in ode to have the level of income Y in etiement. The amount accumulated by etiement would then be: whee: T T t T t t T t W W = sya (1+ g) (1+ ) = sya (1+ g) (1+ ) = syaz (6) t=1 t=1 Y = actual income in yea t = 1, L, T ; a T = numbe of yeas fom the eson's cuent age until the e-detemined age of etiement; g = annual gowth ate of income; = afte-tax eal ate of etun on savings; Z = T t T t (1+ g) (1+ ) t=1. 22 The annuity facto is given by aid and is defined in equation (6). [(1 + + n n ) 1]/ (1 ), whee n is the numbe of yeas fo which the annuity is to be WP 07/04 Housing and Imlications fo Retiement Saving 21

28 Using (5) and (6) we can solve fo the saving ate: α( Y T + T ) W s = Z Y[ α + ] T (1+ g) (7) whee Y ) T = Ya (1+ g. Now dividing by Y gives: W αtr + α(1 t ) Y s = Z α + T (1+ g) (8) It is agued that in the context of the New Zealand system of income tax, ivate etiement saving is made fom afte-tax e-etiement income Y T, and the eanings on the investments ae taxed. Howeve, once those accumulated funds ae withdawn (in this case to uchase an annuity), thee is no futhe taxation on the income eceived in etiement. Futhemoe, NZS ayments ae eceived net of tax. Hence unde this system, T = 0. With this simlification the saving ate is no longe deendent on the elacement ate: W α(1 t ) Y s = Z α + T (1+ g) (9) and fom (3), the elacement ate can be deived as: R = 1 t s (10) WP 07/04 Housing and Imlications fo Retiement Saving 22

29 C Additional tables Aendix Table 1 Home owneshi: by income quintile Income quintile Owneshi ate Shae in total ownes Total Note: See Table 1, age 2. Aendix Table 2 Owneshi of ental oety: by age Age Owneshi ate (%) Mean value Median value , , , , , , , , , , , , , ,600 Total , ,000 Note: See Table 2, age 4. Aendix Table 3 Owneshi of ental oety: by income quintile Income quintile Owneshi ate (%) Mean value Median value , , , , , , , , , ,100 Total , ,000 Note: See Table 2, age 4. WP 07/04 Housing and Imlications fo Retiement Saving 23

30 Aendix Table 4 Geaing atios fo oety-owning households: by age Age Mean Median Total Aendix Table 5 Comosition of net wealth fo coules Wealth quintile Housing Pension NZS Othe Total Ages ,500 1, ,100-1, , ,300 8, ,600 50, , ,500 17, , , , ,600 27, , , , ,900 35, ,400 1,197,800 2,035,700 Total 210,600 18, , , ,100 Ages ,400 3, ,600 20, , ,600 10, ,300 79, , ,100 20, , , , ,700 28, , , , ,600 39, ,300 1,264,200 2,094,600 Total 226,200 20, , , ,300 Note: Enties ae mean values. Housing wealth is net equity in the incial esidence, while othe oeties ae included in othe' wealth. Aendix Table 6 Motgage holdings Shae of oulation with motgage debt (%) Aveage value of motgage ($) Poety ownes aged ,900 Poety ownes aged ,200 Home ownes aged 65+ who do not ,600 hold investment oety WP 07/04 Housing and Imlications fo Retiement Saving 24