Monday, August 31, 2020

Australia's top economists oppose the next increases in compulsory super: new poll

The five consecutive hikes in compulsory super contributions due to start next July should be deferred or abandoned in the view of the overwhelming majority of the leading Australian economists surveyed by the Economic Society of Australia and The Conversation.

Two thirds – 29 of the 44 surveyed – want the increases deferred or abandoned. Only 13 think they should proceed as planned.

An even larger majority, including some economists who want the increases to proceed, believe they will hit wage growth. Several are concerned they will hit employment.

Compulsory superannuation contributions are paid by employers.

But ahead of the most recent increase in compulsory super, from 9% of salaries to 9.5% in 2013 and 2014, the then Labor superannuation minister Bill Shorten said the increase would cost employers nothing because it would be taken from wage rises.


“A portion of what would have been employees’ increases will go into compulsory savings,” he said.

That conventional wisdom has since been challenged in work funded by the superannuation industry and has been examined extensively in the retirement income review at present with the government.

The two most recent increases in compulsory superannuation in 2013 and 2014 were small by design – 0.25% of salary each.

The next five increases, originally due to due to begin in 2015 but postponed to start in July 2021, are much bigger – 0.5% of salary each – at a time when wage growth is much smaller.

In 2012 Shorten was expecting wage increases of 3-4% and “assuming that a quarter of a per cent of that 3% to 4% may well go into your compulsory savings”.

Wage growth has since slipped to 1.8%, the lowest on record. If the best part of 0.5% is taken out of that each year for the next five years it is unlikely to climb.


Wage growth has slipped to 1.8%

Wage Price Index annual growth, public and private, all industries, seasonally adjusted. ABS 6345.0

The 44 members of the Economic Society’s 57-member panel who responded include Australia’s preeminent experts in the fields of microeconomics, macroeconomics economic modelling, labour markets and public policy.

Among them are former and current government advisers and a former head of the Australian Fair Pay Commission and member of the Reserve Bank board and a former member of the Fair Work Commission’s minimum wage panel.


Read more: 5 questions about superannuation the government's new inquiry will need to ask


Each was asked whether the legislated increases in compulsory super contributions should proceed as planned, be deferred or be abandoned.

Only 13 of the 44 thought the increases should proceed as planned. 29 thought they should be deferred or abandoned, nine of them preferring they be abandoned altogether.


Charts showing that of 44 economists asked

Those who thought they should be deferred argued that now is “not a time to encourage saving”. In the current circumstances we should be “far more worried about spending power today than in the golden years of present-day workers”.

Economist Saul Eslake said he had changed his mind. The latest evidence (which will be updated in the retirement income review) suggests that the current 9.5% so-called super guarantee will be enough to provide most people with an adequate income in retirement .

“In saying that I acknowledge that there is still a significant problem with regard to the adequacy of superannuation savings for women relative to men, but I don’t see how raising the super rate for everyone to 12% solves that problem,” he said.

“Not a time to encourage saving”

Economic modeller Janine Dixon said it was not clear that the optimal contribution was 12% rather than 9.5%. The increase would force some households into greater debt. While this would pose a risk to economic stability at any time, Australia could “not afford to let the household sector weaken further at present”.

Economist Geoffrey Kingston said anyone who felt 9.5% was not enough remained “free to make voluntary contributions”.

Among those believing the increases should proceed as planned were two former politicians, Labor’s Craig Emerson and former Liberal leader John Hewson.

Emerson said 9.5% was “considered inadequate by the burgeoning retiree population”. Without an increase, that population “would successfully demand increased pension levels from the Commonwealth”.

Opponents more confident

Hewson said compulsory super had become a fundamental part of an effective retirement incomes strategy and, COVID and economic collapse notwithstanding, we should “finish the job”.

Sue Richardson, a former member of the Fair Work Commission’s wage panel, believed any deferral might lead to another deferral and be “hard to recoup”.

The economists were asked to rate their confidence in their responses on a scale of 1 to 10.

Unweighted for confidence, 20.5% of those surveyed wanted to abandon the increases altogether. When weighted for confidence, that proportion climbed to 21.6%. The proportion that wanted the increases either deferred or abandoned climbed to 67.1%


Weighted responses to the question,

Asked whether the increases were likely to be largely paid for via slower wage growth than otherwise, 30 of the 44 economists agreed. Only eight disagreed.

Economist Nigel Stapledon said this “should not be controversial”.

Private sector economist Michael Knox said: “unless one lives in an unreal world, increases in superannuation guarantees are funded by employers out of the total wage the worker might otherwise receive”.

Super and wages come from the same pool

Several enterprise bargains explicitly make a trade-off between wages and superannuation, providing for wage increases that will be 0.5 points higher should compulsory super contributions not climb by 0.5 points.

Economist Alison Booth said if employers weren’t able to trim wage rises to pay for the scheduled increases in super contributions, they might “attempt to adjust on other margins”.

In a recession, when workers lack bargaining strength, “employers could coerce them to accept other adjustments to their contracts”.


Responses from 44 economists to the proposition:

Two of the eight economists who disagreed with the proposition that the increases in compulsory super would come at the expense of wages thought that employers wouldn’t grant wage rises anyway. Increases in super contributions might be one way for employees to get something.

A concern among both those who agreed and disagreed was that if the increase didn’t come at the expense of wages, it would push up the cost of hiring and come at the expense of jobs.

“Inflation is very likely to be very, very low and wages to be sticky,” said government advisor Matthew Butlin.

A drag on jobs if not wages

“Higher superannuation payments in an environment where wages are unlikely to rise and cannot fall will raise real labour costs and reduce the incentive to employ.”

Economic modeller Janine Dixon said that while over time the increase in contributions would probably come from wages, the immediate impact would be to increase the cost of hiring, “which is an unacceptably large risk in the present climate”.

When adjusted for confidence, the proportion of those surveyed expecting the increases to largely paid for via slower wage growth climbed from 68.2% to 71%. The proportion disagreeing fell from 18.2% to 17.8%.


Weighted responses to the proposition:


Individual responses

The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

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

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Friday, August 07, 2020

No snapback: Reserve Bank no longer confident of quick bounce out of recession

The good news in the Reserve Bank’s latest quarterly set of forecasts is that the recession won’t be as steep as it thought last time.

The bad news is it now expects ultra-weak economic growth to drag on and on, pushing out the recovery and meaning Australia won’t return to the path it was on for years if not the end of the decade.

Its so-called baseline scenario, which is for the worst recession in 70 years, relies on a number of things going right:

the heightened restrictions in Victoria are in place for the announced six weeks and then gradually lifted. In other parts of the country, restrictions continue to be gradually lifted or are only tightened modestly for a limited time, although restrictions on international departures and arrivals are assumed to stay in place until mid 2021

Whereas three months ago in its May update the Reserve Bank expected economic activity to collapse 8% in the year to June 2020 and then bounce back 7% over the following year, it now believes it collapsed a lesser 6% but will claw back only 4% in the year to come.

The direct impact of locked doors and shut shops was smaller than it expected, but the ongoing impacts are “likely to be larger”.

It’ll depend on households

What economic growth there is will be driven by household spending. Business investment, once a key economic driver, won’t be back to anything like where it was until well into 2023.

Business after business has been telling the bank’s liaison officers they have deferred or cancelled planned spending to preserve cash.

In usual times, household spending accounts for 60% of gross domestic product.


Read more: The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it


The Reserve Bank believes household spending fell 11% by the middle of the year and will start to edge back up, but it warns that household incomes are expected to slide and unemployment grow as government winds back JobKeeper and JobSeeker:

The JobKeeper program ensures that many more workers remain attached to their job than otherwise. However, it is expected some workers will be retrenched once they are no longer eligible for the subsidy in late 2020 and early 2021. Moreover, the reinstatement of job search requirements for the JobSeeker program outside of Victoria in the September quarter and the lifting of restrictions will result in more people looking for jobs

It will have been heartened by the Prime Minister’s recent decision to make the wind-back of JobKeeper less steep.

The bank says that the way businesses and households adjust to a lower income in the months ahead will be “an important determinant of the outlook over the rest of the forecast period”.

Reserve Bank of Australia

It expects employment to fall further over the rest of the year, as job losses from restrictions in Victoria and the tightening of JobKeeper more than offset a continued recovery in jobs elsewhere.

One in ten of the businesses it has contacted through its liaison program report wage cuts, most of them targeted towards senior management, but some implemented broadly.


Read more: The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it


The proportion reporting wage cuts is “significantly higher” than during the global financial crisis.

By the end of next year the bank expects the published unemployment rate to be somewhere between 11% and 7%.

The forecast range is an indication of how uncertain it is about what will happen.

Reserve Bank of Australia

The bank’s forecasts for recession and recovery have a similarly wide range.

On one hand GDP might not be back to where it was until the middle of the decade, and not back to where it would have been until the start of the following decade.

On the other, it might have made up its losses by the end of next year.

Reserve Bank of Australia

The bank’s central “baseline” forecast points to a worse recession than any since World War II and the Great Depression.

Reserve Bank of Australia

Its upside scenario assumes quick progress in controlling the virus, improving consumer confidence as a result, a quick end to the outbreak in Victoria and no further major outbreaks.

The downside scenario assumes rolling outbreaks and rolling lockdowns along with a widespread resurgence in infections worldwide.

Risks a plenty…

It says if households conclude that low income growth will be more persistent than previously expected, they might “permanently adjust their spending” leaving the economy weaker for longer.

The uncertainty could lower firms’ risk appetite, prodding them to pay down debt and increase cash buffers rather than invest even when conditions recover.


Read more: It really is different for young people: it's harder to climb the jobs ladder


A sustained period of lower investment, combined with “scarring” as people unemployed or underemployed find themselves unable to improve their position could “damage the economy’s productive potential”.

…little harm in spending

The bank says there’s little more it can do. It has considered negative interest rates, and believes they would be of no real help.

It’ll be up to the government to support the economy with spending. Where needed the bank will buy government bonds with money it creates in order to keep borrowing costs low.

To make the point that government shouldn’t be afraid of borrowing, it includes a graph of government debt since Federation.

Reserve Bank of Australia

Its point is that as a proportion of the economy the government has borrowed and spent much much more in the past.

To the extent that it is needed to make households feel able to spend and businesses able to invest, it is worth it.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

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

Read more >>