Tuesday, December 02, 2008

Why not simply cut super contributions?

It's an idea that's occurred to Nicholas Gruen:

"There are the two arms of macroeconomic policy in the economics textbooks – monetary and fiscal. And there’s a third... an economic institution we’ve built gives us a third front to fight on – compulsory super.

Right now employers must contribute nine percent of employees’ wages into their employees super helping to increase their self provision while addressing Australia’s one major, enduring economic weakness – our over-reliance on foreign borrowing. But right now, when we desperately need more consumption and investment to keep the economy ticking over it makes no sense.

So we should reduce compulsory super in the short term – and reaffirm previous intentions to increase it in the long term. Legislation could be passed to reduce compulsory super contributions by (say) a third of the current nine percent. For those employees who didn’t opt out and maintain their contributions, their employers would be required to pay any reduced employee payments into their normal wages...

Good stuff! Gruen continues below the fold:

Those who hadn’t opted out would have more cash to spend so they could do their bit to keep the economy moving. And get this. Because wages are taxed more heavily than super contributions, it would improve the budget bottom line.

Of course for a country running large foreign deficits, more consumption is only benign if it’s temporary (just as deficits are only good if they’re temporary). So temporary cuts to the compulsory rate should be accompanied by pre-commitment to restoring compulsory contributions not just to where they are now but to higher levels as was once government policy.

We should legislate for regular annual increases in contributions of (say) one percent to commence about a year after the initial reduction in rates. To make the point that there’s no magic pudding, those increased payments should be shared equally between workers and employers.

I’d also give governments discretion to accelerate the increases, because there might be good opportunities to lift the compulsory rate faster than the pre-committed schedule – most particularly the next time we’re breaking to stop a runaway economy (let’s hope it’s not too far away).

Being unpopular, the power won’t be used lightly. But why would it ever be used? Because when the authorities are slowing the economy, all the medicine in the cabinet tastes terrible. Higher taxes, lower benefits and spending or higher interest rates – take your pick. And voters will more readily accept belt tightening if it’s palpably for their own good – in this case, for their own retirement. Had we increased employees’ contributions to compulsory super in the late 1980s we could have avoided 20 percent interest rates and perhaps that recession we had to have. (This isn’t just hindsight – I’ve got the newspaper columns from the time to prove it).

Contributions should rise to at least 12 percent to fund retirement. By then I’d hope we’d reformed tax concessions on super to make them fairer – right now the flat 15 percent tax is great for the wealthy but barely concessional if that for lower income earners.

Singapore’s compulsory savings vehicle – their Central Provident Fund – offers a useful model, providing we cherry pick rather than copy slavishly. They’ve had absurdly high contributions recently – around 40 percent. We should aim for perhaps half that rate, and as the funds swell above the twelve to fifteen percent that’s needed for retirement we should broaden the uses one can put the money to as one can in Singapore – particularly housing, education and possibly health needs.

And as we’re contemplating how to get from here to that place I’d call ‘Singapore light’, we should go on using the super system as a macro-economic swing instrument of last resort. Just like Singapore did, increasing contributions in the 1970s to fight inflation and reducing them sharply in the mid 1980s and again in 1999 to fight recession."

An added bonus is that it wouldn't enlarge "the deficit". No-one, not even the government, would be worse off!  

Is that why they call Nick's firm Lateral Economics?