Sunday, November 29, 2020

Top economists want JobSeeker boosted by $100+ per week

Once about as high as the pension, the JobSeeker (Newstart) unemployment payment has fallen shockingly low compared to living standards.

It’s now only two thirds of the pension, just 40% of the full-time minimum wage and half way below the poverty line.

JobSeeker has fallen relative to other payments because while the pension and wages have climbed faster than prices, JobSeeker (previously called Newstart) has increased only in line with prices since 1991.

In an apparent acknowledgement that JobSeeker had fallen too low, the government roughly doubled it during the coronavirus crisis, introducing a supplement to enable people to “meet the costs of their groceries and other bills”.

But that supplement is being wound down, from A$225 per week to $125 on September 25, and again to $75 on January 1, before expiring on March 31.

After March, the single rate of JobSeeker (including the $4.40 per week energy allowance) will drop back to about $287.25 per week.


JobSeeker vs age pension

Source: Ben Phillips ANU, Services Australia

Ahead of a decision about any permanent increase expected early next year, The Conversation and the Economic Society of Australia asked 45 of Australia’s leading economists where they thought JobSeeker should settle.

Only four think it should revert to $287.25 per week.

All but eight want a substantial increase. More than half (24 out of 45) want an increase of at least $100 per week.


Economic Society of Australia/The Conversation, CC BY-ND

The results suggest the economists would be dissatisfied with a decision to merely increase JobSeeker by $75 per week in line with the supplement that is due to expire at the end of March.

The 45 members of the 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, a former member of the Reserve Bank board and a former member of the Fair Work Commission’s minimum wage panel.


Read more: Top economists back boosts to JobSeeker and social housing over tax cuts in pre-budget poll


Many want an increase of about $150 a week to bring JobSeeker close to the age pension and 50% of median income.

Curtin University’s Harry Bloch asked (rhetorically) whether unemployed people had “lower needs than those on the aged pension”.

Labour market specialist Sue Richardson said keeping payments so low that people lost dignity and hope and suffered material deprivation hurt not only the people who were unemployed, but also the thousands of children who grew up in their households.

A scant incentive to shirk

She knew of no evidence that suggested a low rate of JobSeeker increased the likelihood of an unemployed person getting a job.

Jeff Borland said even if JobSeeker was increased by $125 per week, those on it would still earn less than all but 1% of full-time adult workers and would face plenty of remaining financial incentives to get paid work.

In research to be published in The Conversation on Monday he examines a real-life experiment: the temporary near-doubling on JobSeeker between March and September, and finds it played no role in creating unfilled vacancies.


Read more: New finding: boosting JobSeeker wouldn't keep Australians away from paid work


Emeritus Professor Margaret Nowak said JobSeeker had been driven to the point where it denied unemployed Australians the shelter, food and transport they needed to find work.

Former Liberal party leader John Hewson described the failure to adjust JobSeeker for three decades as “immoral”, and a national disgrace driven by “little more than prejudice”.

Going forward, there was overwhelming agreement among those surveyed that once JobSeeker was restored to an acceptable level, it should be linked to wages (in line with the pension) rather than increase with prices as before.


Economic Society of Australia/The Conversation, CC BY-ND

Two thirds of those surveyed want JobSeeker increase in line with wages, and of those who do not, several want the pension to increase more slowly in order to ensure the two move in sync.

Gigi Foster and Geoffrey Kingston propose a half-way house – increases in both the pension and JobSeeker halfway between increases in the consumer price index and wages.

Wages determine living standards

Others suggest practical measures to make JobSeeker better at getting Australians into jobs. Beth Webster suggests reducing the rate at which JobSeeker cuts out with hours worked to encourage part-time workers to take on more hours.

Tony Makin suggests a relocation allowance to help people take on jobs distant from their current place of residence.


Read more: 'If JobSeeker was cut, the unemployed would be picking fruit'? Why that's not true


None of the economists surveyed expressed concern about the budgetary cost of restoring the relative position of JobSeeker, estimated by the Parliamentary Budget Office to be $4.8 billion per year for an increase of $95 per week.

Several expressed a desire to put the issue behind them, increasing JobSeeker to a reasonable proportion of the pension or median wage and leaving it there so that, in the words of Saul Eslake, “this issue never arises again”.


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, November 20, 2020

Retirement review finds problems more super won’t solve

It would be a waste if the Friday’s mammoth Retirement Incomes Review was remembered only for its finding that increases in employers compulsory superannuation contributions come at the expense of wages.

That has long been assumed, and is what was intended when compulsory super was set up.

Compulsory super contributions are set to increase in five annual steps of 0.5% of salary between 2021 and 2025.

These are much bigger increases than the earlier two of 0.25% in 2012 and 2013.

And the wage rises they will be taken from will be much lower. The latest figures released on Wednesday point to shockingly low annual wage growth of 1.4%.

Should each of the scheduled increases in employers compulsory super knock 0.4 points off wage growth (which is what the review expects) annual wage growth would sink from 1.4% to 1%.


Read more: Workers bear 71% to 100% of the cost of increases in compulsory super


Private sector wage would sink from 1.2% to 0.8%, in the absence of something to push it back up.

Because inflation will almost certainly be higher than 1%, it means the buying power of wages would go backwards, all for the sake of a better life in retirement.

The review presents the finding starkly. Lifting compulsory super contributions from 9.5% of salary to 12% will cut working-life incomes by about 2%.

And for what? It’s a question the review spends a lot of time examining.

Most retirees have enough

The review dispenses with the argument that the goal of a retirement income system should be “aspirational”, or to provide people with higher income in retirement than they had in their working lives.

It finds that for retirees presently aged 65-74 the replacement rates for middle to higher income earners are generally adequate.

Many lower-income earners get more per year in retirement than they got while working.

If the increases in compulsory super proceed as planned, this will extend to the bottom 60% of the income distribution.

They’ll enjoy a higher standard of living in retirement than while working (and will enjoy a lower standard of living while working than they would have).

Most retirees die with most of what they had when they retired, leaving it as a bequest. They are reluctant to “eat into” their super and other savings because of concerns about possible future health and aged care costs, and concerns about outliving savings.

The review quite reasonably sees this as a betrayal of the purpose of government-supported super, saying

superannuation savings are supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation

It’s the pension that matters

The pension does what super cannot. It provides a buffer for retirees whose income and savings fall due to market volatility, and for those who outlive their savings. 71% of people of age pension age get it or a similar payment. More than 60% of them get the full pension.

If there’s one key message of the review, it is this: it is the pension rather than super that matters for maintaining living standards in retirement, which is what the review was asked to consider.

It is also cost-effective compared to the growing budgetary cost of the super tax concessions.


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


The age pension costs 2.5% of GDP and is set to fall to 2.3% of GDP over the next 40 years as the super system matures and tighter means tests bite.

Treasury modelling prepared for the review shows that if more money is directed into super and away from wages as scheduled, the annual budgetary cost of the super tax concessions will exceed the cost of the pension by 2050.

There’s a real retirement income problem

A substantial proportion of Australians, about 30%, are financially worse off in retirement than while working, and they are people neither super nor the pension can help.

Mostly they are older Australians who have lost their jobs and cannot get new ones before they before eligible for the age pension or become old enough to get access to their super. Often they’ve left the workforce due to ill health or to care for others and are forced to rely on JobSeeker, which is well below the poverty line.


Read more: Forget more compulsory super: here are 5 ways to actually boost retirement incomes


It’s much worse if they rent privately. About one quarter of retirees who rent privately are in financial stress, so much so that the review finds even a 40% increase in the maximum Commonwealth Rent Assistance payment wouldn’t be enough to get them a decent standard of living in retirement.

No recommendations, but findings aplenty

The review was not asked to produce recommendations. Instead, while noting that much of the system works well, it has pointed to things that need urgent attention.

It finds that pouring a greater proportion of each pay packet into the hands of super funds is not the sort of attention needed, and in the present unusual circumstances could cost jobs as employers who can’t take the extra cost out of wages take it out of headcount.

The government will make a decision about whether to proceed with the legislated increase in compulsory super in its May budget, just before the first of the five increases due in July.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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Tuesday, November 03, 2020

5 ways the Reserve Bank is batting for us like never before

The most important of the five measures the Reserve Bank announced on Tuesday is the one that won’t whirr into place for a very long time.

Others start immediately. On Thursday the bank will wade into the market and start buying up bonds issued by Australian governments.

It’ll buy Commonwealth government bonds with five to seven years left to run on Mondays, Commonwealth bonds with seven to ten years left to run on Thursdays, and bonds issued by state governments on Wednesdays.

It’ll spend about A$5 billion a week, every week for six months until it has unloaded $100 billion.

1. $5 billion per week, week in, week out

As before, when it did this on a more limited scale, it won’t be buying the bonds from the governments that issued them, but from third parties such as super funds and investment managers.

What’s (very) different is that it will be forcing a particular sum of money into their hands.

Its earlier bond buying program (which will continue) spent only as much as was needed to achieve an interest rate target.

The new program will spend a particular sum of created money (the Reserve Bank creates it out of nothing) every week for six months, whatever happens to rates.


Read more: The government has just sold $15 billion of 31-year bonds. But what actually is a bond?


It’ll be true “quantitative easing”, in that it’s the quantity of money that will matter, not the price.

Once in the hands of investors who would really rather own bonds, they’ll have to do something with it, such as investing in a business that employs people. That’s the theory.

As well, with bonds harder to find in Australia, fewer foreigners will move money here to buy them propping up the Australian dollar. That should allow the Australian dollar to fall, making local businesses more competitive against those from overseas. That’s the other part of the theory.

2. Cash rate near zero

And that’s just one of five measures Reserve Bank Governor Philip Lowe announced on Tuesday.

The once-watched cash rate which is the interest rate on unsecured overnight loans between banks, was cut to 0.25% in March amid hope that 0.25% was so low it wouldn’t need to be cut further.

Within days the actual cash rate at which banks transact business had fallen a good deal lower because, at 0.25%, many more of them wanted to lend than borrow.


Target cash rate versus actual

Reserve Bank of Australia

When it settled at about 0.14% the Reserve Bank didn’t bother to intervene to push it back up.

The new target of 0.10% will give banks almost no return for lending to each other and make borrowing from each other almost costless.

The separate rate for cash on deposit with the Reserve Bank will fall from 0.10% to as good as zero, 0.01%


Read more: More than a rate cut: behind the Reserve Bank's three point plan


If the cuts were passed on in full to bank customers they would cut the standard variable mortgage rate from around 3.2% to 3%.

The rate on new mortgages would slide from 2.7% to 2.5%. The rates on customer’s deposits, already near zero, would fall further.

3. Bond rate to 0.10%

The Reserve Bank had been targeting a three-year bond rate of 0.25%, buying as many bonds as were needed to keep it there. It’ll cut that target to 0.10% in line with its cut in the cash rate, buying as many bonds as are needed to get and keep the rate at 0.10%.

Three-year bonds are used to fund fixed three-year mortgages and personal and business loans. All will become even cheaper.

This bond-buying program, which will target the rate, is completely separate from, and additional to, the $5 billion per week the bank will spend buying longer-term bonds week in, week out.

4. Near-free loans to banks

Since March the government has been advancing money to private banks for three years for just 0.25%.

The more they expand their lending to business (and especially to small and medium sized business) the more it will it will advance them in accordance with a formula.

The formula won’t change but the rate will. From Thursday new loans under the program will be offered to banks for just 0.10%.

5. A commitment with teeth

Until now, the bank has been fuzzy about the circumstances in which it will eventually change course and start pushing rates back up.

Its commitment was weaker than it sounded

the board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band

Whether or not “progress is being made” is subjective.

The commitment allowed the bank to assert that progress was being made and reverse course at its convenience.

Whether or not the bank was “confident” that inflation would be sustainably within its target band was even more subjective.

One word, big change

On Tuesday, Governor Philip Lowe ditched the fuzziness and replaced it with something measurable.

The board will not increase the cash rate until “actual inflation” is sustainably within the 2% to 3% target range.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.”

So prepared is the bank to bat for Australia that it won’t stop until there’s a “tight labour market”.

And it has used the word “actual”.

No longer will the bank need to merely see “progress towards” an inflation rate of 2% to 3%. It will have to be faced with an “actual” inflation rate of 2% to 3%.

Low rates for a long, long time

Australia’s inflation rate hasn’t been sustainably between 2% and 3% for more than half a decade, and it is likely to be at least that long again until it gets back there, if ever.

Governor Lowe said the bank’s forecasts, to be published this Friday, will put the inflation rate at 1%. It’ll put wage growth at the lowest on record, less than 2%.

By tying the future of the cash rate to an actual inflation rate rather than a feeling about the inflation rate, Governor Lowe is tying the bank to a cash rate of close to zero for as far anyone can see.

It means that not only will it be as cheap as it has ever been to borrow (for a mortgage, a business, for anything) it means there’s no risk of that suddenly changing because the bank gets rush of blood to the head. It’s about the future, but it matters now.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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