Monday, February 25, 2008

Tuesday Column: Please, please, don't put it into super

Who'd want to be Wayne Swan? Besieged by suggestions about how to draw up the budget, half of them say “put it into superannuation”.

Got a problem with promised tax cuts that will only feed inflation and push up interest rates? Put the money into super instead.

That's what the former Reserve Bank Governor Bernie Fraser is saying (and being one of the fathers of Australia's system of compulsory superannuation as well as the face an industry advertising campaign he knows a thing or two about the topic).

Other economists suggest giving Australians the option of taking their tax cuts as superannuation – which can't do much harm, but is not likely to do much good either. The people who accept the option would most likely be those who either weren't planning to spend the tax cut anyway or who have the resources to move funds around and spend money from a different bucket to compensate.

Got a problem with an ever-growing surplus that needs to be parked somewhere once the Future Fund and its kindred mini-funds get full up? Put that into super.

According to the Australian Financial Review, handing out the surplus as superannuation contributions is an idea being seriously considered in the upper echelons of the Treasury...

We're told it would boost national savings, avoid inflationary tax cuts, cut reliance on the pension and infuriate the Coalition by genuinely locking away the surplus where it couldn’t get at it.

Oh, and it would boost even further what is easily the most subsidised, protected, and essentially unproductive industry (although it is productive at lobbying) in Australian history.

Back in the days before compulsion the superannuation industry was worth $60 billion. It's now worth $1 trillion, about as much as Australia's entire annual GDP, and is set to climb even higher, mainly as a result of compulsory contributions. Australia’s motor car industry never dreamed of such a scam.

And it would never have asked for such tax concessions.

Presently costing $26 billion, and ballooning at the rate of an extra $2 billion each year, the annual cost of the tax incentives offered to encourage people to put extra money into super dwarfs that of actual government programs. By way of comparison the Commonwealth government spends $16.6 billion on education. The entire ACT government spends less than $3 billion on all of its services rolled in together.

What’s wrong with further feeding the ever-growing superannuation monster, as just about everyone who has Wayne Swan’s ear seems to be suggesting?

Super is already big enough.

Perhaps not for you, right now, but by 2050 every retired Australian will have locked away 9 per cent of their salary in super contributions for their entire working lives.

Will that be enough? A good deal more than enough, according to calculations performed by the Parliamentary Library. It says that under current arrangements, before retirement an Australian on $50,000 can expect to take home $39,140 after tax. Post retirement that will jump to $50,013.

That’s correct. Under present arrangements Australians who make compulsory superannuation contributions throughout their working lives will get a pay rise when they retire. For a worker on $50,000 it will be a pay rise of 28 per cent. For a worker on a lower salary it’ll be higher.

Even Australians earning $100,000 will get a pay rise of 15 per cent on retirement. Only from a salary of $200,000 will the present compulsory super arrangements deliver a pay cut. At that level a retired worker will get “just” $123,324 a year, compared to $124,791 after tax while working.

We do Australians no favours by withholding their income until they no longer need as much of it.

It is while working that we need our incomes the most. We have to buy houses, educate, feed, clothe and house children, buy work clothes and drive a car or take public transport into work each day.

Locking even more money away in superannuation as a gaggle of Wayne Swan’s would-be advisors are now suggesting isn’t smart for most Australian workers, and for low-income earners who need money now, it’s positively cruel.

The Australian Association of Superannuation Funds won’t have you believe this. Its has prepared its own estimates of what a retiree needs in order to lead a life with “enjoyment, comfort, style, holiday travel and health insurance cover”.

It has catered for an economy overseas trip every five years and up to ten domestic trips each year “to visit family, friends or holiday”.

As Dr Richard Denniss has noted in the Australian Journal of Political Economy, comfort in retirement appears to require “Gold frequent flyer status”.

The super supporters respond by arguing that things will be different in 40 years time. As Australians get older there will be “too many consumers and too few producers”. The hairdressers, aged care nurses and so on that are working will be more expensive.

It’s true. But the other sad truth is that universal extra superannuation will do little to change that.

Economists call this faulty line of thinking the “fallacy of composition”.

We see it in the stands at the football. If one person takes along a fruit box to stand on, they get a better view. But if everyone does it, no-one gets a better view.

An individual putting a lot of money in super will have a better chance of buying the services of scarce workers in the year 2050. No doubt. But if everyone does it, they will not.

Extra superannuation can’t do much at all to change the shape of Australia in 2050. It can’t summon up workers who won’t exist.

And in any event there’s scant evidence that Australians as a whole don’t save enough.

Professors Ian McDonald and Ross Guest from the University of Melbourne and Griffith University pose this question: Do Australians save enough to allow future generations to enjoy increased living standards?

Their answer is that for the last 100 years or longer we have.

On current projections the living standards of Australians in 2050 will be almost double what they are today, so long as climate change doesn’t wreck things.

The government does need to take money out of the economy on a temporary basis at the moment in order to tame inflation.

But it doesn’t need to lock it away in super where we won’t be able get it when we need it, whatever the Treasurer’s new friends are telling him.


Anonymous said...

What should he do, Peter? Lock it away in a 'future fund' that isn't super, perhaps? Guarantee to spend it on education when inflation gets back into the comfort zone?


Peter said...

Dear Kymbos,

Thanks for asking.

Norway, Australia and Canada are the three countries that has been blessed with explosions in their terms of trade.

Noway handles it very very well.

I describe the Norwegian Petroleum Fund here. It invests offshore on behalf of the government until the day the stimulus is needed at home.


Anonymous said...

Your analysis ignores the political dimension of the new Government though, Peter. That is the need to give the tax cuts which was part of the price of winning the election since that was the response to Howard on day one of the campaign.
secondly, it needs to get inflation within the range acceptable to the RBA. and keep it in that range
Thirdly, it needs to get interest rates below the level that the coalition had them and keep them there.

Peter said...

I agree that the tax cuts will come. I doubt whether they will be offered as superannuation contributions. Too much like Keating's L.A.W broken promise.

The government will try to mitigate the inflationary impact of the tax cuts with VERY big cuts in spending. Just wait.

As the AFR article indicates they are interested, down the track, in pouring some of the resulting big surplus into super.

Bad idea, I reckon. But then I guess you can tell that's what I think.

I reckon it would make us an international laughing stock.

The country that was keener on helping working families after they retired than when they were actually working.

derrida derider said...

Its refreshing to see some commonsense on super, which really is a scam that gets far more sympathy from Treasury economists than it deserves. And a long career tells me that Treasury has a quite remarkable way of moulding the conventional economic wisdom in Oz into its line du jour.

I don't believe the case for huge government savings is as strong as the government believes. But if you must do it, "putting it into super" is about the worst possible way of trying to.

Anonymous said...

But I still fail to see how they are going to overide the taunt that 'rates will always be lower under a Liberal Government.' Surely Labor can't live with that thrown in their face each election

Put another way.

What has Labor to do to turn interest rates around without inflation getting out of the 2 to 3 percent target?

Graeme said...

I agree with some of the other comments that arguing why you don't like more in super does not answer the fundamental. I think the WORST outcome would be to put it 100% into people's hands, so it goes on more plasmas/cars etc.
I think X% going to super is better than that worst case.
However, I do think that cutting government spending is the BEST way to offset whatever does go into people's hands.
Surpluses aren't bad to have for when the economy really needs stimulation.
And if you want to more fairly spread the interest rate burden, the Feds should do a deal with the banks direct (on behalf of average mortgage holders, but not passing the money through their hands) to offset a portion of the increase, up to a max exposure of $250k loan, to max of 1% co-contribution for this next 12 months only, paid for out of GST on new house sales! In other words, you're saying home buyers are slugged hard (esp GST and stamp duty as both up-front taxes) and the state is a part-owner of their property, due to ad-valoram taxes each year (rates)... so you are just helping out to balance the load slightly by softening the blow this once only, due to surplus...

Anonymous said...

Stick it in the future fund - they're down $700mil and they've just started. Please, send it off to money heaven, where it will be available for the future (lol).

".... a pay rise of $128 per cent." What ? Since when is a ratio expressed in dollars ?
What do you really mean ?

“Gold frequent flyer status” - oh no, we mustn't expect to visit our children flung to the four corners of the earth thanks to economic rationalism.
Visiting family has huge psychological benefits, or would these people rather an even bigger future health budget burden ? (Oh, wait thst's what the Future Fund was for. Emphasis on was.)

Whose money are we talking about here ? You make it sound as if it belongs to the government. It rightfully belongs in the economy from whence it came. Why not give it back ? Because the government knows best how to spend that which real economic actors have worked to produce ? Please continue to overlook the fact that if the money is surplus to requirement, then it shouldn't have been collected in the first place.

" long as climate change doesn’t wreck things..."
Again with the climate change - where's your proof ? Huh ? Start investigating - start by looking up the definition of fraud. Make your stand - are you one of the hynotists or one of the hynotized ?

Peter said...

Thanks. Fixed.

I agree with you that visiting a family has huge psychological benefits. It is a pity that many financially stretched Australians can't afford to do it while they are working because the government locks away 9 per cent of their income in super until after they retire.

I agree with you about the role of government, at least in so far as super is concerned.

The nine percent of our income that the government confiscates and then locks away in super is money we should have access to.

We earned it.

Anonymous said...

[a different anonymous]

"Please continue to overlook the fact that if the money is surplus to requirement, then it shouldn't have been collected in the first place."

A budget surplus is not surplus to requirement. It is a necessity in good economic times, which we are currently experiencing. If this was an average time economically, the budget would be in deficit. That is why we need cutbacks on spending/tax cuts.


Post a Comment