Essays on retirement wellbeing in New Zealand

Abstract

The thesis is motivated by the unique retirement provision system in New Zealand (NZ). NZ has a low replacement rate from its public pension provision, New Zealand Superannuation (OECD, 2015), lack of a public mandatory contributory retirement savings scheme, a voluntary retirement savings system with limited power to accumulate wealth and lacking annuitisation options (KiwiSaver) and a taxation system that favours investment in housing. The nature of the system limits retirees’ capacity to accumulate wealth for retirement and puts considerable pressure on them to manage their wealth but not outlive their wealth. Despite the concerns, there is limited research on the investigation of the financial wellbeing of New Zealand retirees.

This thesis consists of three essays which contribute to closing this gap in the literature. The first essay reports on the impact of housing on the financial adequacy of NZ retirees using panel data from the Survey of Family, Income and Employment (SoFIE) for the period 2002–2009. The essay examines the differential effect of housing liquidation options, rent imputation and asset liquidity on financial adequacy. The essay finds that Māori, renters and individuals living in multi-dwelling occupancies have much lower levels of financial adequacy. Individuals of Pākehā or Asian ethnicity, homeowners and those living alone benefit more from imputed rent derived through home ownership.

The second essay examines the effects of holding asset class liquidity, specifically housing and liquid wealth on optimal consumption and housing options. By using an analytic tool of the Life-Cycle model, the essay presents findings for optimal consumption and housing that incorporate uncertainty over a person’s health, income and their time of death, and the probability of health, income and house price shocks. By applying two sets of probability matrices, the study reports that housing liquidation options change when there is persistent bad health probability. Persistent health probability causes a divergence of utility between Renting, Sell/Buy and Stay scenarios. Renting is the most flexible option when it comes to dealing with health shocks, although it may not be the optimal choice. Sell/Buy is an optimal choice for many different scenarios, but is also the most prone to utility drops in the event of a bad health shock.

The third essay investigates the financial literacy of older New Zealanders and the relationship between financial literacy and decision-making. The study finds that the level of financial literacy in New Zealand is high. Subjects who are younger, of Māori or Pacific Islands ethnicity, female, have lower educational attainment, lower incomes and high family responsibility have significantly lower levels of financial literacy, and this potentially leaves them more vulnerable to financial mistakes (Calvet et al., 2009; Stolper and Walter, 2017). The study also finds that higher financial literacy has a significant correlation with better debt position and higher risk tolerance. The results show that higher financial literacy has a strong positive effect on choosing KiwiSaver and that having more worrying levels of debt is the main driving factor behind choosing to pay off debt, regardless of financial literacy levels.

This thesis contributes to the literature on retirement wellbeing, in general, and particularly in New Zealand. The findings on financial adequacy, optimal consumption and housing choices, financial literacy and role of financial literacy in spending decisions can better inform retirement decision-making. The essays in the thesis provide motivation for future research in the relevant area of wellbeing in retirement.