Thursday, January 10, 2019

Productivity Commission finds super a bad deal. And yes, it comes out of wages

Brendan Coates, Grattan Institute

Want more to retire on?

In its long-awaited final report on the efficiency and competitiveness of Australia’s leaky superannuation system, Australia’s Productivity Commission provides a roadmap.

Weeding out scores of persistently underperforming funds, clamping down on unwanted multiple accounts and insurance policies, and letting workers choose funds from a simple list of top performers would give the typical worker entering the workforce today an extra A$533,000 in retirement.

Even Australians at present in their mid fifties would gain an extra A$79,000.

If this government or the next cares about the welfare of Australians rather than looking after the superannuation industry it’ll use the recommendations to drive retirement incomes higher.
So why the continued talk (from Labor) about lifting compulsory super contributions from the present 9.5% of salary to 12%, and then perhaps an unprecedented 15%?

It’s probably because (and Paul Keating, the former treasurer and prime minister who is the father of Australia’s compulsory superannuation system says this) they think the contributions don’t come from workers, but from employers.

To date, they’ve been dead wrong. And with workers’ bargaining power arguably weaker than in the past, there’s no reason whatsoever to think they’ll be right from here on.

Past super increases have come out of wages

Australia’s superannuation system requires employers to make the compulsory contributions on behalf of their workers. Right now that contribution is set at 9.5% of wages and is scheduled to increase incrementally to 12% by July 2025.

So, for workers, what’s not to like?

It’s that while employers hand over the cheque, workers pay for almost all of it via lower wages. Bill Shorten, then assistant treasurer, made this point in a speech in 2010:
Because it’s wages, not profits, that will fund super increases in the next few years. Wages are the seedbed of the whole operation. An increase in super is not, absolutely not, a tax on business. Essentially, both employers and employees would consider the Superannuation Guarantee increases to be a different way of receiving a wage increase.
The Henry Tax Review and other investigations have found this is exactly what happens. Increases in the compulsory super contributions have led to wages being lower than they otherwise would have been.

Even Paul Keating, speaking in 2007, made this point. Compulsory super contributions come out of wages, not from the pockets of employers:
The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost […] In other words, had employers not paid nine percentage points of wages, as superannuation contributions, they would have paid it in cash as wages.
This is more than mere theory. Compulsory super was designed to forestall wage rises. Concerned about a wages breakout in 1985, then Treasurer Paul Keating and ACTU President Bill Kelty struck a deal to defer wage rises in exchange for super contributions.

When the Super Guarantee climbed from 9% to 9.25% in 2013, the Fair Work Commission stated in its minimum wage decision of that year that the increase was “lower than it otherwise would have been in the absence of the super guarantee increase”.

The pay of 40% of Australian workers is based on an award or the National Minimum Wage and is therefore affected by the Commission’s decisions. For these people, there is no question: their wages are lower than they would’ve been if super hadn’t increased.

Where’s the evidence employers pay for super?

If wage rises came from the pockets of employers then we should see a spike in wages plus super when compulsory super was introduced, and again when it was increased. But there wasn’t one when compulsory super was introduced – a point Bill Shorten has made in the past.

When compulsory super was introduced via awards in 1986, workers’ total remuneration (excluding super) made up 63.3% of national income. By 2002, when the phase-in was complete, it made up 60.1%.

Out of the 26 countries for which the Organisation for Economic Co-operation and Development has data, Australia recorded the tenth largest slide in the labour share of national income during the period compulsory super contributions were ramped up.

Read more: The superannuation myth: why it's a mistake to increase contributions to 12% of earnings

Of course, changes in super aren’t the only thing that affects workers’ share of national income.
But the size of the fall in the labour share in Australia over the period when the super guarantee was increasing isn’t consistent with the idea that employers picked up the tab for super.

Would it be different this time?

Paul Keating argues that while in the past lifting compulsory super to 9.5% was paid for from wages, a future increase to 12% today would not be:
Workers are not getting real wage increases anywhere, and can’t get them. The Reserve Bank governor makes the point every week. So the award of an extra 2.5% of super to employees via the super guarantee will give them a share of productivity they will not get in the market – without any loss to their cash wages.
But such claims are difficult to square with concerns that workers’ weak bargaining power is one of the reasons current wage growth is so weak.. If employers don’t feel pressed to give wage rises, why would they feel pressed to absorb an increase in the compulsory Super Guarantee?

And while real wages (wages adjusted for inflation) haven’t grown particularly quickly, the dollar value of wages continues to grow: by 2.2% a year over the past five years. It would be easy for employers to simply reduce those increases to offset any increase in compulsory super – as they have in the past.

And no, more contributions won’t help workers

The Grattan Institute’s recent report, Money in Retirement, showed increasing the compulsory super would primarily benefit the top 20% of Australians. It would hurt the bottom half during working life a lot more than it helps them once retired.

Their higher super contributions would not improve their retirement outcomes: their extra super income would be largely offset by lower part-pensions. What’s more, the age pension is indexed to wages. If wages grew by less (as they would as compulsory super contributions were increased) pensions would grow by less too.

Lifting compulsory super would also cost the budget A$2 billion a year in extra tax breaks, largely for high-income earners, because it is lightly taxed.

That would mean higher taxes elsewhere, or fewer services.

For low-income Australians, increasing compulsory super contributions would be a thoroughly bad deal. It means giving up wage increases in return for no boost in their retirement incomes.

A government that wanted to boost the living standards of working Australians both now and in retirement would consider carefully all of the Productivity Commission’s suggestions including this one: an independent inquiry into the whole idea and effectiveness of Australia’s regime of compulsory contributions, to be completed ahead of any increase in the Superannuation Guarantee rate .

Read more: Why we should worry less about retirement - and leave super at 9.5% The Conversation

Brendan Coates, Fellow, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Wednesday, November 07, 2018

We've had enough. 9.5% super is just fine


It’s conventional wisdom that Australians don’t save enough for retirement. Most workers themselves think they won’t have enough to retire on, and their concerns are rising.

But the conventional wisdom is wrong.

Our new report, Money In Retirement: More Than Enough shows that most people who are actually retired feel more comfortable financially than the Australians younger than them who are still working.

Retirees of today tend to slow their spending as they age, tend to keep saving in retirement, and often leave an legacy almost as big as the nest egg they had on the day they retired.

Read more: The myth of the ageing 'crisis'

When surveyed today the retirees of the future might be worried about their retirement, but economic growth means they will almost certainly be on even higher incomes than retirees today.

These findings might seem surprising: they contradict the repeated messaging from the financial services industry that Australians won’t have enough for retirement.

But that industry’s claims are based on research that overlooks two important points.
Retirees spend less over time
Much of the research assumes that retirees need to save enough to enable their incomes to keep climbing throughout their retirement in line with general wage growth.

Implicitly, it assumes that a retiree needs to spend 25% more at age 90 than at age 70, after accounting for inflation.

But our analysis shows that retired Australians tend to spend less over time, even those who have money to spare.

Young retirees might chalk up frequent flyer points, but they do it less as they get older.

Spending tends to slow at around the age of 70, and falls rapidly after age 80, to just 84% of what was spent at retirement age.

Even the wealthiest retirees spend less as they age. At the other end of the scale, pensioners receive discounts on everything from car registration to rates.

Our research finds that retirees spend less over time on food, alcohol, tobacco, clothes, furnishings, transport and recreation.

They spend more on health care as they age, but Medicare largely shields them from the full costs. The modestly higher out-of-pocket costs they do pay are mainly due to rising premiums for private health insurance.

Not only do most retirees not draw down their savings throughout retirement, many add to them.

Even among pensioners, one recent study found that the median (typical) pensioner still had 90% of what he or she retired on after eight years.

Read more: Poor and rich retirees spend about the same

This means that calculations about the adequacy of retirement savings ought to be based on whether they are enough to maintain buying power (at best) rather increase it in line with wage growth.

Many prominent studies also ignore non-super savings, which are material, especially for wealthier households.

They lead to misguided calls for ever-higher super contributions in order to ensure reach the point where super alone is enough to provide an adequate retirement income, even though many households will have income from other sources.
Most will have enough super
Our modelling shows that people starting work today will have adequate retirement incomes: workers of all income levels will retire on incomes at least 70% of their pre-retirement earnings – the so-called replacement benchmark used by the Organisation for Economic Cooperation and Development and the Mercer Global Pension Index.

In fact the median (typical) worker can expect a retirement income of 91% of his or her pre-retirement income.

This means that many low-income Australians will actually get a pay rise on retirement.

Even workers in their 40s and 50s today – many of whom didn’t benefit from the present high rate of compulsory super contributions for their entire working lives – can expect a retirement income of about 70% of their pre-retirement incomes.
So compulsory super can stay at 9.5%
It means that that there is no obvious case to lift compulsory super contributions from 9.5% to 12% of salary as presently legislated.

Doing so might further boost retirement incomes (especially among those low and middle earners unable to compensate for the higher contributions by winding back other savings), but at the expense of providing lower incomes while working.

As the Henry Tax Review noted, higher compulsory super contributions are ultimately funded by lower wages than would have been the case, meaning lower living standards while in work.

As it happens, higher contributions would do little to change the retirement incomes of low and middle income Australians. Their extra superannuation income they provided would cut their age pension payments.

Read more: The superannuation myth: why it's a mistake to increase contributions to 12% of earnings

Higher compulsory contributions would also damage pensions in another way.

The age pension is indexed to wage growth which would be lower if employers diverted a steadily increasing proportion of their employee budget to super.

It means the most fervent opponents of a lift in compulsory super contributions from 9.5% to 12% ought be those people presently on the age pension.

The government ought to oppose it as well. Diverting more of what would have been wages to more lightly taxed super will strain its budget. Scrapping the proposed increase would save it an impressive A$2 billion a year.
We can find better ways to help retirees
Even if governments did feel it necessary to boost retirement incomes, lifting compulsory super contributions would be one of the worst ways to do it.

Loosening the age pension assets test taper could boost retirement incomes of around 20% of retirees, climbing to more than 70% over time. It would cost the Budget just A$750 million a year – less than half the cost to it of the proposed increase in compulsory super.

The real priority - by far the biggest bang for the buck in alleviating poverty in retirement - should be boosting Commonwealth rent assistance by 40%, providing an extra $1,410 a year for retired singles and $1,330 for retired couples.

Read more: Renters Beware: how the pension and super could leave you behind

Senior Australians who rent privately are much more likely to suffer financial stress than homeowners. And renting will become more widespread as younger generations on low incomes find themselves less able to afford homes.

Australians have been told for decades that they’re not saving enough for retirement. Such claims are inconsistent with the facts. Most of today’s workers can already expect a comfortable retirement. Forcing them and future workers to save more money for retirement that they’ll never spend is simply a recipe for larger bequests.The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Sunday, September 02, 2018

What the newspapers said about inequality. It's wrong

If you were going to reduce a 150-page Productivity Commission examination of trends in Australian inequality to a few words, it would be nice if they weren’t “ALP inequality claims sunk”, or “Progressive article of faith blown up” or “Labor inequality myths busted by commission”.

The editorial in the Australian Financial Review of August 30 says questions about whether inequality is increasing are “abstract”, taught in universities as “an article of faith”, and a “political truncheon”.

Here I should disclose that I teach courses covering inequality as well as undertaking research on the topic. Also, I was one of the external referees for this week’s Productivity Commission report.

It adds to a growing pile of high quality research on trends in income distribution in Australia, including a recent Australian Council of Social Service (ACOSS) and University of New South Wales study using data from the Australian Bureau of Statistics (ABS) that provides an in-depth analysis of income and wealth inequality in 2015-16 and an analysis of trends since 2000.

Also released at the end of July was the latest HILDA Statistical Report that analyses how things have changed over time for individuals between 2001 and 2016.

The Productivity Commission survey takes the deliberately ambitious approach of assessing a wider range of outcomes than income, including indicators of household consumption and wealth, their components, and changes over time and in response to events such as transitions to work, divorce and retirement.

Much of the reporting seems to have misread the messages the survey and the Chairman’s speech to the National Press Club were trying to emphasise. For example, the editorial in the Financial Review argues the Commission’s report shows “economic growth has made everyone in Australia in every income group better off”.

Well, no, it doesn’t.

The finding that every income group has benefited from income growth should not be interpreted as meaning every person in Australia is better off. The discussion of mobility in the report makes the point that the incomes of households and individuals fall as well as rise.

Put simply, not everyone – in fact very few (about 1%) – stay in exactly the same place. Table 5.1 (page 96) shows more than 40% of the Australian population were in a lower income group in 2016 than they had been in 2001, for reasons ranging from retirement to disability to unemployment to family breakdown.

Single adults on Newstart, although not the same people, have fallen down the income distribution over the past 25 years, from around the bottom 10% to the bottom 5%. As another example, someone who worked on a manufacturing production line until it was closed and then got a job as a sales assistant would be better paid than a sales assistant used to be but most certainly not better paid than they used to be. They would have little reason to believe the Financial Review.

And as the Commission was at pains to point out, the stabilisation and slight decline in overall inequality over the past decade is to a large extent the result of specific government decisions.

One of the most important was the one-off increase in age pensions by the Rudd government in 2009. The 2016 ACOSS report on poverty found the relative poverty rate (before housing costs) for people aged 65 and over fell from around 30% in 2007-08 to 11% in 2013-14, due to the “historic increase” in pension rates.

ABS income surveys show the average incomes of households headed by people aged 65 and over climbed by 16% in real terms between 2007-08 and 2015-16, while for the population as a whole the increase was about 3%. As a result, the average incomes of older households jumped from 69% to 78% of those of households generally.

While economic prosperity was needed to fund that increase, it didn’t automatically fund it. That needed deliberate government intervention.

In his speech releasing the report, Commission chairman Peter Harris specifically noted “growth alone is no guarantee against widening disparity between rich and poor”.

Some forms of poverty for children “have actually risen”.

The slide in inequality resulting from the increase in the age pension is likely to have disguised increases in inequality elsewhere.

According to the Bureau since the global financial crisis the number of workers who are underemployed – working part time and wanting more hours - has climbed from about 680,000 to 1.1 million; from 6.3% to 8.9% of the workforce.

And the ABS finds wage disparities have increased. The ratio of the earnings of a worker at the 90th percentile (earning more than 90% of workers) to the earnings of a worker at the tenth percentile grew from 7.75 times in 2008 to 8.24 times in 2016. This was due to widening wage differentials for both full-time and part-time workers and an increase in the proportion of part-time workers

We often hear about Australia as a “miracle economy” enjoying 27 years of economic growth. In fact, the Commission report (Figure 1.2 page 13) shows real net national disposable income per person – a better measure of individual economic well-being than GDP – actually fell in six out of the last 27 years.

The income survey data show an even more mixed record. The Our World in Data database shows that by 2003 the real income of the median Australian household was only about 5% higher in real terms than in 1989, while the second and third decile households – mainly headed by those on low wages and some on social security – were actually no better-off than in 1989, largely due to the effects of the early 1990s recession.

Virtually all of the increase in real disposable household incomes enjoyed since 1989 (or 1981 for that matter) came in one five-year period, between 2003 and 2008 during the first mining boom.

What is striking about Australia compared to other countries is that since the global financial crisis we have largely maintained the income lift from the boom.

Will we be blessed by another boom to pump up the figures? Or might we be less lucky?

Despite the way it’s been spun, the Commission’s main message is that in the decades ahead we will need both policies that generate economic growth and policies that ensure it’s well spread. One without the other could leave many of us worse off.
Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University
This article was originally published on The Conversation. Read the original article.
The Conversation


Sunday, August 26, 2018

For the fridge door: Every Morrison minister

Some odd promotions, if you ask me:



Saturday, July 28, 2018

Rate rise an even-money bet as inflation off the floor

At last, an end to the Reserve Bank’s two-year freeze on interest rates is in sight. But not this year, and not because of particularly high wage growth.

For the first time since rates were cut in August 2016, the BusinessDay Scope economic panel gives the RBA an even chance of lifting its cash rate by the end of the financial year. If it happens, it will come after a record 34 months of inaction. And only half of the panel thinks it will.

The bank’s cash rate has been steady since RBA governor Philip Lowe’s predecessor, Glenn Stevens, cut it to a record low of 1.5 per cent in his last meeting before handing over. In public comments, Lowe has said the next move will most likely be up, but it will depend on inflation and wage growth, which he expects to improve only gradually.

Inflation has been at or below the bottom of the bank’s 2 to 3 per cent target band since 2014. Over the year ahead, the BusinessDay panel expects it to climb to a barely respectable 2.2 per cent, with wage growth hitting 2.3 per cent for the first time since 2015. It would mean next to no growth in real wages and produce inflation still below the middle of the target band, but it could allow the RBA to justify a rate rise if it was able to point to forecasts of continuing improvements.

The BusinessDay Scope survey is Australia's longest running, comprising forecasts from 26 leading economists from the diverse fields of financial markets, industry groups, consultants, unions and academia. Over 40 years, its aggregate forecasts have usually been more accurate than those of any of its individual members. For the past 20 years, an average of its forecasts weighted for previous success has proved to be more accurate than those of the Treasury.





The panel expects modest economic growth of 2.8 per cent in 2018-19, a touch below the Treasury’s forecast of 3 per cent. Four of the panellists, Tim Reardon, Michael Blythe, Paul Bloxham and Neville Norman, expect as much as 3.2 per cent. Only one, the perennial pessimist Steve Keen, expects a dive in growth to 1 per cent.

They are optimistic about Chinese growth, US growth and world economic growth during 2018, expecting 6.7, 2.8 and 3.8 per cent respectively. But, like Treasury and international organisations including the IMF and OECD, their optimism doesn’t extend far ahead. The IMF and OECD expect world growth to turn down as the US scrambles to fund the Trump tax cuts, and they are concerned about the ability of Chinese authorities to deleverage its economy and successfully complete the transition from one driven by manufacturing to consumption.

Asked to weigh up these uncertainties and put a probability on a recession in Australia within the next two years, our panellists come up with an average answer of 21 per cent. It is a jump from the average answer of 15 per cent produced by the panel in January, suggesting it shares the concerns of international organisations. Only two of the panellists assigned a negligible probability to a recession within the next two years: the Melbourne Institute’s Guay Lim and JP Morgan’s Sally Auld.



Living standards

The panellists expect another very strong year of nominal GDP growth at 4.2 per cent on the back of high iron ore and natural gas exports and further profit growth. But they again expect the best measure of living standards, real net disposable income per capita, to grow only weakly, climbing 1 per cent.

The span of forecasts is wide because it is a difficult one to measure. At times it has gone backwards. Paul Dales and Renee Fry-McKibbin are the most optimistic, expecting 2.3 and 2.2 per cent. Westpac’s Bill Evans is the most pessimistic, expecting living standards to go backwards 0.3 per cent. Evans is a former BusinessDay forecaster of the year.

The panel expects much weaker growth in household spending than Treasury: 2.3 per cent instead of 3 per cent.


The panel expects the next decline in mining business investment to be only 4.4 per cent, the smallest in six years, suggesting the unwinding of the mining investment boom may be near complete. It expects non-mining investment to climb a further 4.6 per cent.

It expects housing investment to slip 1.1 per cent; a less bleak assessment than Treasury, which expects a slide of 4 per cent. Reardon of the Housing Industry Association is less bleak still, expecting growth of 0.5 per cent.


The Australian dollar will be pretty much where it is now in a year’s time in the view of the panel, at 74 US cents, but, excluding the outliers, the forecasts range from a low of 69 US cents (Stephen Koukoulas) to a high of 80 US cents (Blythe), a wider range than is usual.

Prices and wages

On balance, the panel expects a further decline in Sydney house prices of 3.9 per cent (on top of the past year’s 4.2 per cent) and a decline in Melbourne prices of 2.2 per cent. But the range of forecasts is wide, from a further decline of 12 per cent in Sydney (by Stephen Anthony, a former forecaster of the year) to a recovery of 1.5 per cent (by Bill Mitchell, also a former forecaster of the year). In Melbourne, the forecasts range from a recovery of 3.5 per cent (by Melbourne-based Norman) to a plunge of 8 per cent (by Melbourne-based Anthony).

The central inflation forecast of 2.2 per cent masks a range as wide as 1 per cent to 2.7 per cent. Five of our panel expect inflation above the middle of the RBA’s target band: Jeanine Dixon, Blythe, Saul Eslake, Sarah Hunter and Bloxham.

The "trimmed mean" of wage growth forecasts (leaving out an extreme high and an extreme low) ranges from 1.9 to 2.9 per cent, suggesting an improvement on the present 2.1 per cent. The panel is united in saying that until there is a lift in wage growth, there won’t be a lift in interest rates.


All but three of our panel expect no move in the cash rate in the rest of 2018. The exceptions are Mardi Dungey and Norman, who expect an early move to 1.75 per cent, and Koukoulas, who expects a cut to 1.25 per cent.

Koukoulas expects the bank to abandon its "glass half full" view of the economy when it realises that high employment growth and a historically low unemployment rate (forecast by the panel to be 5.4 per cent) are cloaking a slack labour market unable to produce much higher wage growth. Sliding house prices are likely to undermine household spending, holding back inflation.

By mid next year, 23 of our 26-person panel expect rates to climb, four of them more than once.

CBA's Blythe adds the caveat that if the royal commission prompts banks to impose tougher credit conditions, the RBA mightn’t need to lift rates until 2020, or might even need to cut them.

Su-Lin Ong of RBC Capital Markets says that at 1.5 per cent, the cash rate is a long way below the RBA’s estimate that the neutral rate is 3.5 per cent. But she says the labour market will need to surprise on the upside for the bank to be confident enough about the outlook for wages and inflation to move.

The panellists average forecast to three decimal places is for a cash rate of 1.625 per cent by June 2019, exactly halfway between the present 1.5 per cent and an increase to 1.75 per cent. It’s an even-money bet.

In The Age and Sydney Morning Herald


2017-18 was like our forecasters, good in parts

The financial year 2017-18 stumped our panel, along with the official forecasters in Treasury and the Reserve Bank.

Economic growth was stronger than expected, as was US growth, world growth and (importantly for the budget) nominal GDP growth. A year ago the BusinessDay panel predicted a budget deficit of $35 billion for 2017-18. The Treasury predicted $29 billion. It looks as if we will get $18 billion, the lowest budget deficit since the financial crisis and enough to put a surplus in sight.

They are developments that would been easy enough to forecast if you assumed a high iron ore price, as some of our panel did. But it would have been almost impossible to forecast what came with them. The best measure of living standards, eal net disposable income per capita, barely grew, climbing by just 0.9 per cent on the latest figures; only half of what the panel predicted. Barely growing living standards sat oddly alongside strong growth in national income and taxabjul 21, 2015 le profits, implying that while companies and governments did well out of stronger export growth, ordinary households didn’t, at least not so far.

Only Saul Eslake got living standards right, but, like most of the panel, he failed to foresee the size of the surge in national income.

It kept the Australian dollar higher than expected and pushed the Australian share market much higher than expected. Alone among his colleagues, the Commonwealth Bank’s Michael Blythe got the ASX 200 almost exactly right, picking 6200 by June 30, a remarkable jump of 8.4 per cent. Like most of the panelists, Blythe successfully picked another year of Reserve Bank inaction right, predicting a 1.5 per cent cash rate all year.

But he failed to predict the long-awaited surge in non-mining investment. When it finally happened, jumping 10 per cent in a year in which mining investment sank a further 11 per cent, only one of our panel got it right; Margaret McKenzie of the ACTU who picked a fall in mining investment of 5 per cent alongside a jump in non-mining investment of 10 per cent. Richard Yetsenga of the ANZ Bank and Alan Oster of NAB were the next closest.

The sharp divergence in house prices also took the panel by surprise. The latest annual figures show Sydney down 4.2 per cent and Melbourne up 2.2 per cent. None of our panel expected Melbourne to hold up while Sydney slumped, and only two expected Sydney to slump at all: Stephen Koukoulas and Steve Keen.

This year, as in other difficult to forecast years, there’s no award to forecaster of the year. Like 2017-18 itself, our panel was good in parts.

In The Age and Sydney Morning Herald

Thursday, June 21, 2018

Never mind the tax, it's wages that are making us glum

Why do they keep going on and on about tax when they must know it’s not our real concern? Because the sudden dive in wage growth – the thing that is really worrying us – is beyond their control.

As recently as 2012, just six years ago, wages were growing like they usually had, at a touch under 4 per cent per year. The rapid dive meant that by June 2014, two years later, they were growing at 2.4 per cent, the lowest rate since the last recession, and a good deal less than the lows plumbed during the global financial crisis.

Another two years later they were growing at just 2 per cent; even less than in the early 1990s recession, and on the face of it, the least since the Great Depression in the 1930s.

Yet we weren’t in a depression, or even in recession. And we kept buying houses and other things as if wage growth would recover. It needs to recover to make those home loans and car loans manageable.

Banks and finance companies have formulas they use to decide how much to lend. Unchanged since the days when workers could expect solid wage rises, they are based on income and the size of a deposit. Difficult to manage at first, home loans became easier to repay as the borrower’s income climbed, meaning many were paid off early. But not now, not unless wage growth picks up.

Banks are advancing 30-year mortgages to 50-year-olds. Without faster wage growth, a lot of those borrowers will remain mortgaged into retirement, and have much of their pension eaten up in payments, a fate their parents escaped.

Reserve Bank governor Philip Lowe touched on the phenomenon in a speech last week. His bank has even coined a name for it: mortgage tilt. Whereas required payments as a proportion of income used to tilt down over time, now they are more horizontal, meaning a long horizon of fairly constant payments. Unless interest rates climb, in which case payments will climb, which would be even worse.

And he pointed to something else. He said low wage growth was “diminishing our sense of shared prosperity”. When I first visited Japan in the late 1980s the locals seemed optimistic and proud to be part of something big. When I next visited in the late 1990s after a decade of near zero wage growth, their faces and stories were glum, even though by international standards they were prosperous and had jobs. Glum Australians feeling they are not part of the Australian project can derail the project, as we have seen in Britain and the United States.

Why should wage growth have dropped so suddenly, when the unemployment rate is little different to what it was back when it was high?

The first thing to note is that we are not alone. It’s been a shift throughout the developed world, with Japan getting in early. Improved communications have made competition from cheaper workers overseas a potent threat. Also, unions no longer have the bargaining power that they used to.

In the words of Andy Haldane, chief economist at the Bank of England: “There is power in numbers. A workforce that is more easily divided than in the past may find itself more easily conquered.” As recently as 1990, 40 per cent of the Australian workforce was in a union. Now it’s 14.5 per cent.

Unions no longer have the unfettered right to enter workplaces, or the right to demand special clauses in awards that benefit only their members. Strikes are illegal in most circumstances, and require notice and hard-to-organise ballots in others. The Fair Work Commission can no longer intervene to resolve disputes without the consent of the employer.

And although employment is strong, people are losing their jobs. Telstra is letting go of 8000, many in its Melbourne headquarters. The National Australia Bank is shedding 2000 each year for the next three years. The NSW public service will lose as many as 11,800 jobs as a result of efficiency measures in this week’s state budget. Few workers, in any of those organisations, are going to feel game to make themselves expensive.

The way Dr Lowe sees it, a small number of Australian firms are investing massively in the technology needed to do things more cheaply. A much greater number are not, and are having to fight off brutal price competition. The only way they can do it is to hold the line against wage increases, even at the cost of missing out on good staff.

Added to this might be what US economist Paul Krugman calls the scarring effect of the global financial crisis. He says employers discovered during the crisis that they couldn’t cut wages, even though they needed to. It wasn’t socially acceptable. It taught them that “extended periods in which you would cut wages if you could are a lot more likely than they used to believe”.

So they’re keeping wage costs low, in preparation for the next crisis. It’s an awful response, with political as well as economic implications.

Government forecasts notwithstanding, it is hard to see anything changing for quite some time. Glum is starting to look like the new normal.

In The Age and Sydney Morning Herald

Monday, June 18, 2018

Work to barely pay for returning mothers, inquiry told

The third and final stage of the government's proposed income tax cuts would overwhelmingly benefit men, late evidence presented to the Senate inquiry shows.

The inquiry will report on Monday that calculations prepared by the Parliamentary Budget Office show 1.894 million men would benefit from the final flattening of the tax scales and only 767,000 women.

The third stage lifts the threshold for the top rate from $120,000 to $200,000 and removes the 37 per cent rate, producing a flat marginal rate of 32.5 per cent between $41,001 to $200,000.

The PBO has previously told the inquiry the final stage would deliver $30.35 billion to men over four years and $11.25 billion to women.

It finds that the impact of the first two stages is much more even.

In a second piece of late evidence requested by the committee, Melbourne University tax expert Miranda Stewart reports that the effective marginal tax rate facing women considering returning to work after having children would remain as high as 95 per cent even after all three stages of the tax cuts and the changes to child care benefits due to begin on July 1.

Effective marginal rates include tax, the Medicare levy, lost family benefits and the cost of the childcare needed to return to work after government subsidies.

On July 1 the two existing childcare subsidies will be rolled into one providing a means tested subsidy of up to $11.77 per hour at an extra cost to the budget of $4 billion over four years.

Professor Stewart said at the moment the effective marginal tax rate for a second earner with two young children paying for childcare at that rate was 65 per cent when returning to work one day a week, 85 per cent on the second day, 95 per cent on the third day and 140 per cent and 160 per cent on days four and five, meaning those families lost income when mothers moved from working part time to full time.

"It was extraordinary that second earners went back to work full time at all," she said. "The reality has been that a proportion of women do go back to work, and the family is essentially bearing the net cost, unless they can use grandparents or friends for care or a cheaper option such as family day care.

The combination of the new childcare system and the first wave of the promised tax cuts would bring down the effective marginal rates to 45 per cent for day one, 65 per cent for day two, 90 per cent for day three, 95 per cent for day four and 90 per cent for day five.

"It means the returning mother will still only be able to keep $10 out of every $100 earned on day three, $5 on day four, and $10 out on day five," Professor Stewart said.

"It will certainly be worthwhile for a second earner, usually a mother, returning to work with young children to go back two days a week; however, for her to work three, four or five days a week would produce a negligible financial benefit."

A separate report to be released by the Australia Institute on Monday finds that since the tax changes that accompanied the introduction of the goods and services tax in 2000-01, most taxpayers have had all of so-called bracket creep returned in periodic tax cuts, whether bracket creep is calculated with reference to the consumer price index or the wage price index.

In real terms, high earners on $200,000 were up to $10,000 per year better off, low to middle earners on $40,000 up to $2000 better off, and middle earners on $70,000 only a few hundred dollars a year better off.

In The Age and Sydney Morning Herald

Thursday, June 14, 2018

Pink vs blue tax: the case for taxing women lightly

If women were to be taxed differently to men, it wouldn’t be the first time.

Treasurer Scott Morrison says the idea is absurd.

“You don’t fill out pink forms and blue forms on your tax return. It doesn’t look at what your gender is any more than it looks at whether you are left-handed or right-handed,” he said last week.

He even said, wrongly, that Labor has been suggesting it.

But such a move has happened before.

In Britain right up until 1971, wives weren’t usually taxed on their income; their husbands were. A wife’s income was deemed to be “stated and accounted for by her husband”. It wasn’t until 1950 that wives ceased to be classified for tax purposes as incapacitated along with “infants, lunatics, idiots and the insane”.

South Australia broke ranks early, in 1884, taxing married women as individuals and giving them the right to own property. By the time the Commonwealth introduced national income tax in 1915, all the states had fallen into line.

What possible modern-day reason could there be for taxing women differently to men, as mentioned by Melbourne University tax expert Miranda Stewart in evidence to the Senate last week?

Morrison himself provided a clue while ridiculing the idea. He said the Tax Act was designed “to treat people’s income the same, and so you pay tax according to what you earn”.

But we don’t. Someone who earns $1000 from wages pays twice as much as someone who earns $1000 by making a capital gain selling an asset. Income from capital gains is taxed more lightly in accordance with what’s known as optimal taxation theory. It suggests taxing heavily things that tax is unlikely to stop, such as work, and taxing more lightly things that tax is more likely to stop, such as the movement of capital. It’s the basis of the argument for a lower company tax rate as well as a lower capital gains tax rate.

The concession isn’t “fair”, but it’s efficient.

As would be the logical extension, which is to tax female wages more lightly than male wages. Male work turns out to barely react to after-tax pay. Most men will continue to work full-time regardless of what happens to what they take home, regardless of how much they grumble.

Some will work a bit less if their take-home pay falls, because they are offered less of a reward. Others will work a bit more in order to get back the income they lost. On balance the “price elasticity” of their labour is close to zero.

Women are different. Most European and American estimates put the price elasticity of their labour between 0.4 and 1, meaning a 10 per cent boost in their take-home pay will lift their hours of work by between 4 per cent and 10 per cent.

The most efficient way to tax labour would be to heavily tax generally unresponsive male work and more lightly tax generally highly responsive female work, depending on elasticities. Economists Alberto Alesina from Harvard University and Andrea Ichino from the University of Bologna in Italy believe women should be taxed at no more than 80 per cent of male rates in the US, at no more than 68 per cent in Italy and no more than 91 per cent in Norway.

And there’s another argument for discriminating on the basis of gender. It’s that, for most of us, gender is innate. We won’t change it. Tax theorists say that, ideally, we should be taxed on our underlying ability to earn an income rather than the income itself. Otherwise some of us with ability will avoid tax by avoiding earning an income. Although the ability to earn is hard to measure, markers for it are easy to measure, such as height.

In a half tongue-in-cheek paper entitled The Optimal Taxation of Height, Harvard economists Gregory Mankiw and Matthew Weinzierl note that someone who is 183 centimetres tall can expect to earn $US5500 ($7300) more per year than someone 165 centimetres tall. They say tall people should pay several thousands more in tax than short people on the same income. It’s a way of getting at their earning capacity, as would be a higher tax on the earnings of men.

And there’s yet another practical reason to tax women more lightly. The withdrawal of family benefits and the imposition of childcare costs as mothers return to work mean some face extraordinarily high “effective” marginal tax rates of up to 90 per cent. If ever there were people who ought to be affected by high tax rates, it’s returning mothers.

But here’s what’s odd. Australian mothers are hardy. When the Productivity Commission recommended a new, simpler and more generous formula for childcare support along the lines of the one introduced in this year’s budget, it found it would boost employment by just 15,000 full-time worker equivalents in a workforce at present growing by hundreds of thousands per year. More than mothers in the United States, Germany and Britain, Australian mothers seem undaunted by tax rates. The case for treating them gently is strong in theory, weak in practice.

In The Age and Sydney Morning Herald

Thursday, June 07, 2018

The case for destroying default super in order to save it

So toxic has much of Australia’s superannuation industry become that some at the very top of the government think the Productivity Commission hasn’t gone far enough.

The commission wants to unpick the link between super funds and jobs, meaning everyone would need only one fund for life that they could choose from a dropdown menu of the top 10 (or pick another fund if they want to, or set up their own).

It can be thought of as a way of saving the house, chopping away some of the rotten wood. The alternative, being seriously considered by ministers including Financial Services Minister Kelly O’Dwyer, would be more like burning it down. It would be to set up a single government-run default scheme to which everyone would belong for life, until they decided otherwise.

If it were well run there would be little room for funds run by the scandal-plagued banks and AMP, and less room for industry funds.

The national default scheme would operate like the government-run Future Fund, which invests billions to fund payouts from now-closed public service superannuation schemes.

It might even outsource some of its work to the fund. But it would be much bigger; perhaps as big as $1 trillion, and eventually several trillion, compared to the Future Fund’s $141 billion.

Like the age pension, its payouts would be provided by the government and funded by tax. But, unlike the pension, the contributions wouldn’t be called a tax, just as super contributions aren’t called tax at the moment. And what’s paid out would depend on what was paid in, meaning the highest earners would get the most, unlike the pension, which is meant to be the other way around.

(Going further and abolishing government-mandated superannuation altogether and just paying everyone the pension would be the next logical step, and would easily pay for itself given the cost of the super tax concessions, but as far as I know I am one of the few people suggesting it, and I am fairly sure no one in government is.)

Lying behind the idea is the realisation that the bank-owned funds are far worse than the headline figures presented by the Productivity Commission suggest, and that the banking royal commission is about to make this clear.

What is already well known is that the bank-owned funds perform poorly. Over the past decade the largely bank-owned "for profit" funds have produced annual returns of 4.9 per cent compared with the industry funds' 6.8 per cent and the Future Fund’s 8.5 per cent. Over a lifetime this would mean a typical retail fund paid out less than half as much as a typical industry fund.

The banks have got people into their poorly performing funds by paying their staff commissions, by paying advisers commissions and by buttering up employers with offers of good banking terms.

But those extra costs don’t come anywhere near explaining their poor performance. The commission’s intriguingly named 'Technical Supplement 4: Investment Performance Methodology and Analysis" provides hints. It says retail funds produce annual returns 0.9 per cent worse than would be expected given their asset allocation strategies, and industry funds produce returns 0.2 per cent better given their strategies.

But they are different strategies. As a matter of policy the retail funds have adopted approaches that give less weight than the industry funds (or the Future Fund) to the asset classes that have been shown to perform the best over the long term: things such as toll roads and well-tenanted buildings.

It’s partly because of cost. Being for-profit funds, and charging (hefty) administration fees, they don’t want to use up those fees on the cost of inspecting and directly investing in buildings. It’s cheaper to buy a share index, and cheaper still to buy government bonds.

If your own institution is selling them at a good price for it, so much the better. And shares are more liquid than buildings, which means bits of them can be easily sold and re-bought; something that’s needed if you are offering thousands of different investment options for people to switch into and out of, each time earning you a fee.

It’s got to the point where some in the Coalition believe it is no longer possible to defend the bank-owned funds. They’re saying that if the industry funds are better because they’ve generally got more scale and take the job seriously, a single national default fund would be better still. As Peter Costello, the chair of the Future Fund and Australia’s longest serving treasurer, puts it, “one default fund could make large allocations and use market power to drive down costs”. There’s one in Canada, and in Britain.

The counterargument, put by Productivity Commissioner Karen Chester, is that a government-run fund would acquire an implicit government guarantee which could make it overly cautious, reluctant to lose money. And she says 27 years of compulsory super has given us something worth salvaging: a modicum of interest in what happens to our money.

It’s far from certain that what she is proposing will get the government’s nod. So bad are the ongoing revelations about the funds that Costello is in there with a chance.

In The Age and Sydney Morning Herald

Saturday, June 02, 2018

Portrait of a sick system is chance to put things right

We’re apathetic about super, until we’re not.

On Tuesday phone lines to Australia’s biggest bank-run super funds buckled under a deluge of calls from customers wanting to close multiple accounts. Traffic to the Australian Securities and Investments Commission’s website for consolidating your super jumped 500 per cent.

And in at least one school, Year 12 students were shown two videos; one produced by the Productivity Commission depicting super funds as pigs, and the other prepared by this newspaper, making the point that multiple and poorly chosen accounts can cost members in excess of $400,000 over their working lives.

Asked to check in on their own accounts as homework, some discovered they already had more than one. They had been working casually, flipping burgers and selling clothes. Each new account furnished them with a new insurance policy, which sounds like a bonus until you realise they were getting insured more than once against death and losing their income. They were aged 16 and 17.

Every additional insurance policy, whether junk or not, costs $85,000 over a working life, according to the Productivity Commission report that set off the avalanche of calls. (In reality many wouldn’t cost that much, because they would drain inactive accounts first.) That super funds have knowingly allowed multiple insurance policies to accumulate in the accounts of people too young to benefit is one of a number of scandals uncovered in the report.

The commission’s suggested solutions to the problems of multiple and unsuitable insurance policies are simple: funds would be prevented from foisting them on anyone aged under 25 without their consent; inactive accounts would have their policies stopped. People with inactive accounts are almost certain to have another active account with insurance or no income to insure.

Treasurer Scott Morrison commissioned the inquiry a year ago, at a time when he was still implacably opposed to a banking royal commission. Its head, Producitity Commission deputy chair Karen Chester, refers to it as the “not-so-royal commission”.

Morrison wanted it to examine the costs, fees and net returns of super funds, the role of insurance premiums in eroding member balances, and the antiquated way in which people are pushed into default funds that are tied to jobs, not people. The lines between the two commissions will blur in the coming weeks, as the banking royal commission itself turns its attention to super.

Tuesday’s report is a draft. The Productivity Commission can’t be certain when it will deliver the final report partly because the banking royal commission is taking up so much of bank executives’ time that it would be unfair to ask them to deal with the super report until the banking inquiry is out of the way. But the commission is keen to hear from the rest of us immediately.

On Friday it added a new ‘Brief Comments’ section to its website. Ordinary Australians will be able to upload up to 200 words without the need to make a formal submission. Their names won’t be published but, if they agree, their comments will be. When Chester did this before in an earlier superannuation inquiry, she was able to put the lived experience of Australians to fund representatives in public hearings and get them to concede that things weren’t as rosy as they had been suggesting.

Their investment performance is disheartening. Super funds are made up of asset classes; things such as property, shares, international shares and government bonds, assembled in certain proportions.

By examining the average performance of each of the underlying asset classes and assembling them in the same proportions as each of the regulated funds - in what it thinks is a world first - the commission has been able to compare what the fund’s performance would have been if no special skill had been added with the results they actually delivered over more than a decade, taking account of fees and tax.

Shockingly, it found that the 228 funds taken together (accounting for 93 per cent of all accounts and 61 per cent of all superannuation assets) did worse than if the managers had just set the proportions and then done nothing. Their attempts to pick stocks consistently cost their members money. Without putting too fine a point on it, their members would have been better off paying them to do nothing.

The retail funds, mostly run by the banks, are the worst. Instead of producing the 6 per cent per year they would have if they had just set their asset allocation and sacked their stock pickers, they produced 5 per cent. (Stock pickers in the union and employer-controlled industry funds did add value, but not much, boosting annual returns by 0.2 percentage points.)

The commission says it’s at a loss to understand how the retail stock pickers can be so bad. On the face of it it would take a rare and perverse skill to consistently produce worse results than leaving things alone. Keen readers of the Productivity Commission website will find a clue in one of the submissions, from Kevin Liu and Elizabeth Ooi at the School of Risk and Actuarial Studies at the University of NSW.

Despite their complaints about how the directors of industry funds aren’t independent (most are employer and union representatives), most of the directors of retail funds aren’t independent either. Four out of five are affiliated to the bank or larger entity that owns the fund, often by working for another part of it.

Liu and Ooi find that the more affiliated directors a retail fund had, the worse it performed. And the more related-party service providers it used, the worse it performed. The effect was “both statistically and economically significant, and consistent across different measures of investment performance”. The implication is that affiliated directors put the interests of the bank or larger entity first, perhaps by loading up super funds with products it wanted to shift.

Looked at this way, the superior performance of the industry funds isn’t so much the result of superior skill as it is the result of doing a job well in a straightforward way without a conflict of interest.

It’s also the result of scale. Many of the retail funds are deliberately small. There are around 40,000 of them, a number so big as to almost certainly be designed to confuse and beguile the customer rather than help. It’s no accident that Australia’s biggest industry fund, AustralianSuper, is always one of the top performers.

But some of the industry funds are also small, and are shockers when it comes to performance, sitting alongside the worst of the bank-run funds. Appallingly, new employees and people switching jobs continue to get funneled into them because of the provisions of industrial awards. For as long as that happens their directors will be tempted to keep them open, pocketing board fees for running an organisation that stays subscale but open as the trickle of members leaving is replaced by a stream coming in.

It’s why the commission wants super to follow the person, not the job, with every new labour market entrant (and everyone changing jobs) presented with a list of the top 10 funds and invited to pick and stick for as long as they like, without accumulating multiples. Labor and the Coalition have cautiously welcomed the idea.

It is competing with another model, proposed by Future Fund chair Peter Costello, in which the government would run the only default fund, freezing the top 10 out. It says a lot about how bad the performance of the bank-owned funds has been that some in the Coalition are prepared to countenance it - and also a lot about how much they despise the top-performing union and employer-controlled industry funds.

Australia’s superannuation system is 25 years old. The pool of super savings has climbed to $2.6 trillion. By 2030 it’ll be $5 trillion. It’s important to get it right.

In The Age and Sydney Morning Herald

Thursday, May 31, 2018

The appalling truth about our 'world-class' super

Here’s how you can tell the Productivity Commission was spot-on in its assessment of the superannuation system.

Not a single part of the industry, not one, has explicitly endorsed its key recommendation.

That’s because it is intended to help us: users of superannuation who depend on the industry.

We entrust it with an extraordinary $2.6 trillion (for reference, Australia’s entire gross domestic product, everything we produce and earn in a year, is $1.8 trillion). And the sum keeps growing as we put ever more into super each year through compulsory contributions, which are set to climb to 12 per cent of our salaries.

Yet it treats us with contempt. It has known for decades about the cost to us (and benefits to it) of multiple accounts. The commission says over a working life the extra admin and insurance charges can amount to an entire year’s pay. Yet behind the scenes its representatives have been lobbying Financial Services Minister Kelly O’Dwyer against attempts to stamp them out.

Australia has an astounding 29 million super accounts and only 20 million adults and teenagers aged 15 or more. One in three of our accounts are unwanted multiples.

The insurance fees are particularly egregious. One in four of us with insurance through superannuation don’t know we’ve got it and are unlikely to claim. Those of us with multiple policies can only claim on one of them for things such as income protection because that’s all the law allows, making the others useless. More absurdly, premiums for policies that include income protection continue to be deducted from the accounts of people who are out of work, denuding thier accounts by forcing them to pay to protect income they don’t have.

Many of us (those without specific provisions in our awards or industrial agreements) have had the freedom to choose what fund we want to be in since 2005. But the odds have been stacked against us. Banks have been paying their employees bonuses to switch us into expensive and poorly performing products.

They’ve been paying our financial advisors commissions to do the same thing, and providing attractive banking terms to employers prepared to do the same thing. Those of us who try and examine the market for ourselves are presented with a deliberately large and bewildering array of more than 40,000 individual products. The commission says the more complex the product, the lower the return the fund selling it is able to offer because the less likely we are to understand it.

So badly do the bank-owned funds perform that, taken together, they deliver their members a return around one sixth lower than would "plain vanilla" funds offering the same mix of asset classes and facing the same costs and taxes – an achievement that’s almost impossible to explain, although very large fees and using some of the funds as dumping grounds for poorly performing products might form part of the explanation.

In order to find out whether the funds themselves knew why they performed so badly the commission sent out to a survey, with reminder letters, to the 208 that service most of the population. Only 114 responded. Among those that didn’t respond were the Defence Force Superannuation Scheme and the AMP Eligible Rollover Fund. One attempted to game the survey by providing its name and address (so that it wouldn’t be included in the list of non-responders) and leaving all of the other fields blank, a performance the commission described as “contumelious” – a word that means showing an utter disregard for someone else’s work.

An impressive 81 per cent of the responders said they undertook performance attribution analysis, which means they knew why they were performing as they were. But only five (that’s right, only five of those funds) were able to outline what their analysis said. The rest were either not telling the truth about about whether they undertook analysis or were trying to hide what it showed.

Some of the industry funds performed poorly too. Some are funds into which people are forced to put their money by industrial awards. So bad are they compared to better funds the commission says over a lifetime the difference could amount to $635,000, or nine years' pay.

And yet neither Industry Super, the Institute of Superannuation Trustees or the Association of Superannuation Funds has explicitly backed the Commission’s key recommendation, and neither has the Financial Services Council, although it has come the closest.

The Productivity Commission wants all Australians joining the workforce to be presented with a drop-down menu of 10 best performing funds and asked to pick one. They would be perfectly free to pick from a broader list, or even to pick a fund that wasn’t on a list. And they could stay in that fund regardless of who employed them. An independent panel would refresh the menu every four years meaning funds would compete to stay on it. Financial planners would have to show clients the list as well. Denied an inflow of conscripted or deluded new members, the bad funds would close.

Yet their representatives oppose it. They have “expressed caution”, they say our system is “world class”, they say the Productivity Commission is “badly misguided”.

I reckon it’s got their number.

In The Age and Sydney Morning Herald

Monday, May 28, 2018

The PC's fix for our multibillion super 'mess'

The biggest shakeup in the history of Australia’s $2.6 trillion superannuation system would see new workers able to choose an approved high-performing fund for life, saving as much as $407,000 by avoiding underperforming funds and multiple accounts.

A landmark Productivity Commission review has found that almost one third of default super accounts are chronic underperformers, actually costing members more than if they had invested in the underlying assets themselves and paid management fees. Another third, some 10 million, are unintended multiple accounts whose extra fees and duplicate insurance policies cost members $2.6 billion per year despite decades of government programs aimed at encouraging members to consolidate accounts.

“The government’s efforts are about sweeping up some of the mess. We want to do that as well, but we also want to stop the mess reoccurring,” said inquiry chairman and Productivity Commission deputy chief Karen Chester.

The Commission finds that “absurdly,” many accounts are tied to jobs rather than members, forcing Australians to accumulate accounts as they switch jobs unless they make active decisions to merge them.

Some of the insurance policies they accumulate are “zombies” unusable because of rules that prevent people claiming more than one income protection payout.

It wants all new workforce entrants to be shown a dropdown menu of up to 10 "best in show" top performing funds when they apply for a tax file number. The 10 would be chosen by an independent panel every four years. Employees would be free to choose a fund not in the top 10 or to make no choice, in which case they would be randomly assigned to one of the 10 best performers.

Laboratory experiments conducted for the Commission showed that 95 per cent of people presented with the drop down menu made a choice, either for one of the top 10 or for another fund they knew about, or for a self-managed fund.


The changes would remove the power of the unions, employers and the Fair Work Commission to assign default funds through industrial awards and enterprise bargains.

Indicative calculations by the Productivity Commission suggest that the “overwhelming majority” of the top 10  would be employer and union-controlled industry funds, as they perform much better than bank-owned retail funds.

But industry funds are also well represented among the 26 worst performing default funds, accounting for 10 over the past decade, compared to the for-profit sector’s 12.

Asked to identify the worst performing default funds, Ms Chester said that wasn’t the point of the report. “If we were to name funds it could make things worse by sparking a run on those funds,” she said. The Commission’s draft recommendations would ease bad performers out of the system gradually.


Almost half a million people join the workforce every year, accounting for $1 billion of super contributions in that year alone, meaning the changes would deprive poorly performing funds of new members, encouraging the trustees to consider whether they wanted to remain in business. Each of the one in seven workers who change jobs every year would also be shown the list of the top 10 and invited to change or consolidate their accounts.

Financial planners would also be encouraged to recommend funds from the top 10 list or to to show reasons why they hadn’t under a rule known as ‘if not, why not?’

Ms Chester said that of all the inquiries she and her fellow commissioner Angela McRae had worked on, this set of recommendations produced the “best bang for buck”.

“It could be worth 3.9 billion per year. I don’t think you can overstate the impact.” she said.

The Commission believes its analysis of Australia’s superannuation system is a world-first. “As far as we know, nobody in Australia nor anybody internationally has previously assessed the performance of a superannuation or a pension plan system,” Ms Chester said. “One of the reasons it is hard is that there are more than 40,000 super products, a number that makes it hard for consumers to make decisions.”

“We took the stated asset allocation of each MySuper fund and compared its performance to that of the underlying assets, making allowance for fees. It gave us a measure of whether the fund managers added or subtracted value. Astonishing, around a third consistently subtracted value. All were default funds.”

The Commission wants the list of MySuper approved products scaled back by up to one third and the poor performers removed. “The limbo bar has to be significantly heightened,” Ms Chester said, adding that she was not aware of any funds that had ever applied for MySuper authorisation that had failed to get it.

Only 114 of the 208 funds surveyed by the Commission responded, and only 5 were able to detail their net investment returns by asset class.

“I don't think you can overstate our professional disappointment with the content of the responses to the questions that really mattered,” Ms Chester said. “It constrained in doing our analysis. We will be writing to all those who haven’t properly responded on Tuesday morning asking them to complete their homework so that we can complete our analysis.”

Financial Services Minister Kelly O’Dwyer backed the Commission saying the funds that had not properly responded were showing “contempt for the Australian people.

“This is a government mandated system. They are thumbing their noses at millions of Australians, she said.

The Commission had backed the government’s determination to end multiple insurance policies, consolidate super accounts and reunite members with their lost super.

Its ideas were clever and would need to be carefully considered by the government. The Commission’s report is a draft and will be followed by a final report with firm recommendations by December.

In The Age and Sydney Morning Herald

Thursday, May 24, 2018

How Turnbull can back down on company tax, 'obviously'

How do you walk away from something to which you’ve committed your soul? You say things have changed, “obviously”.

It’s how marriages end in divorce, how deputies abandon their prime ministers and how Labor treasurer Wayne Swan quietly but spectacularly abandoned his absolute commitment to a budget surplus in late 2012.

He had been holding the line for half a decade, promising in his first budget “the largest surplus as a share of GDP in nearly a decade”, and then in his second, after the surplus evaporated during the financial crisis, “hard choices that chart the course back to surplus”.

In his third it was a “return to surplus in three years' time, three years ahead of schedule, and ahead of every major advanced economy”.

In his fourth it was an upgraded surplus, “back in the black by 2012‑13, on time, as promised”.

And then in his fifth, an even grander pledge: “Madam Deputy Speaker, the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies.

“This budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time. The deficit years of the global recession are behind us, the surplus years are here.”

Along the way he contorted language to avoid even conceding the possibility that he would never deliver a surplus.

“Let me hear in plain English that the budget is within a hair’s breadth of going into deficit,” the ABC’s Kerry O’Brien asked him as the financial crisis gathered pace. “It seems silly to me that anybody would bother to argue that proposition. Will you accept going into deficit, if you have to, to maintain appropriate stimulus of the economy under the threat of recession and high unemployment?”

Swan: “Kerry, it would be silly to speculate along the lines of your question.”

O’Brien: “Why?”

Swan: “Because I've made it clear. We are projecting modest growth and modest surpluses, but if the situation were to deteriorate significantly it would have an impact on our surpluses and it may well be the case that we could end up in the area that you're speculating about.

O’Brien: “Well, say it. In deficit.”

Swan: “I am not going to say it because we're projecting modest surpluses.”

Incredibly, in October 2012, a year before Labor lost office and four months into the financial year that was meant to deliver the continually forecast surplus, the mid-year budget update still penciled one in, albeit assisted by fancy accounting tricks. It was “absolutely appropriate to stick with our surplus objective”, Swan told reporters.

Until December 20, days before Christmas, at which point Swan opened a press conference expressing dismay that the October tax receipts had been well below forecasts.

“Obviously, dramatically lower tax revenue now makes it unlikely that there will be a surplus in 2012-13,” he intoned, as if he had been caught unawares. “A sledgehammer hit our revenues.”

I’ve retold that story to make it clear that even the most unlikely backdowns are easy for politicians, even after repeated declarations of undying fidelity.

All through the on-again off-again negotiations with senators over the company tax cuts, Malcolm Turnbull has maintained that he is “absolutely” committed to the remaining $35.6 billion, and, if necessary, will take them to the next election.

“The Prime Minister did not leave any wiggle room at all,” said his chief negotiator, Mathias Cormann, in February at an earlier time when it looked as if hope had been lost. “We are completely and utterly committed to our business tax cuts. They were very necessary at the last election, we took them to the last election. They will be even more important by the time of the next election. If the Senate were not to pass these very important business tax cuts, yes, we will fight for them at the next election.”

No wiggle room.

Until a moment of zen on Tuesday after Pauline Hanson had what is probably her fourth change of heart.

“We might not ever get to that point,” Cormann said when asked if the company tax cuts might ever get through the Senate. He repeated, for emphasis: “It might well be that we won’t ever get there.”

Cormann insists that he wasn’t paving the way for a last-minute backdown, but if it happened, just before the election, the lines would be delivered without shame, as were Swan’s when the economy and his government headed south. Things would have changed, “obviously”. Cormann would have $35.6 billion more to offer in real tax cuts - income tax cuts - to people who vote.

And probably much more. The Coalition won’t reveal the updated 10-year budget cost of its company tax cuts because it doesn’t want Labor to know how much it will have to offer that it can’t.

Like Labor, it could promise to revisit its company tax cuts later, when the budget and the Senate permitted.

It’d be acknowledging reality, shamefacedly, and promising more to voters now, rather than years down the track when the small and uncertain impact of uncertain company tax cuts worked its way through the system.

In The Age and Sydney Morning Herald