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



Wes Mountain/The Conversation, CC BY-ND

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

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.


Source: Australian Tax Office

“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

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

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,

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

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:

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

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:

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

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.

Early access to super doesn’t justify higher compulsory contributions


Brendan Coates, Grattan Institute and Jonathan Nolan, Grattan Institute

A big part of the Morrison government’s response to COVID-19 has been allowing people early access to their superannuation.

Australians who have claimed hardship have applied for A$30.7 billion to date.

This has been happening in an environment in which compulsory super contributions are set to climb from 9.5% of wages to 12% over the next five years starting in July next year.

Many in the super industry and former prime minister Paul Keating argue that these scheduled increases have to go ahead in order to repair the damage done to the super balances of Australians who withdrew super.

However, new Grattan Institute modelling shows most Australians will have a comfortable retirement even if they have spent some of their super early.

Withdrawals cost less than you might think

Under the government’s scheme, people who have lost their job or had their hours cut or trading income cut by 20% or more were allowed to withdraw up to $10,000 from their super between April and June, and up to another $10,000 between July and December.

More than 500,000 have cleared out their super accounts entirely. Treasury expects total withdrawals to reach $42 billion.

Retirement incomes will fall for workers who withdraw their super, but not by as much as might be thought.

The pension means test means that the government, via higher pension payments, makes up much of what’s lost.




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


The result is that a typical (median income) 35 year old who takes the full $20,000 would see their retirement balance fall by around $58,000 but would see their actual income over retirement would fall by only $24,000.

Put another way, in retirement that worker would earn 88% of their pre-retirement income instead of 89%.


Retirees need less to live on than while working.

Both are well above the 70% post-tax replacement benchmark used by the Organisation for Economic Cooperation and Development and the Mercer Global Pension Index to determine how much is needed in retirement.

Workers on median incomes who withdraw the full $20,000 will remain well above that benchmark, even with compulsory super contributions staying where they are, at 9.5% of salary.

The very highest and very lowest income earners will receive less extra pension to compensate, and will have less of a cushion.

For most, 9.5% will remain enough

Defaults such as compulsory contributions have to be set so they work for most of the population.

While around one in five Australians have accessed their super early, four in five have not. Policy makers can only justify forcibly lowering someone’s living standards during their working life – by lifting compulsory super – if they are protecting that person from an even worse outcome in retirement.

Our modelling shows workers on all but the highest incomes will retire on incomes at least 70% of their pre-retirement post-tax earnings, the so-called replacement standard.

The graph shows that many low-income workers will receive a pay rise when they retire, even if they withdraw the full $20,000 from super.

Of course, some low-income Australians remain at risk of poverty in retirement – especially those who rent. They struggle even more before they retire.

Boosting rent assistance would do far more to help them than would higher compulsory super contributions, and would do less to make them poor while working.

COVID is another reason to keep super where it is

Before COVID-19, there were good reasons to abandon the planned increases in compulsory super; among them that it would do little to boost the retirement incomes of many Australians, that it would drain government tax revenues and widen the gender gap in retirement incomes.

COVID provides another reason. Previous Grattan work has shown that higher super comes at the expense of future wage increases. It’s a conclusion the Reserve Bank has also reached.




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The retirement income review at present with the government is likely to come to the same conclusion.

Increasing compulsory super contributions in the midst of a deep recession would slow the pace of recovery. And that would be bad news for all Australians, regardless of how much we end up with in super.The Conversation

Brendan Coates, Program Director, Household Finances, Grattan Institute and Jonathan Nolan, Associate, Grattan Institute

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

Warning: what COVID is doing to commercial property it is about to do to super funds


Theodore Connell-Variy, RMIT University and Tony McGough, RMIT University

We’ve heard a lot about what the present crisis will do to home prices, less about what it will do to commercial property prices.

Commercial properties include office buildings, shopping centres, hotels and warehouses.

They account for 8% of the assets of Australian super funds.

Melbourne’s Wesley Place commercial precinct is owned by a property trust.

If their values drop (and they are falling) it will affect all of us, especially those about to retire or already retired.

Until COVID-19, commercial properties were widely regarded as safe investments. They offered both reliable income streams and capital gains as population growth increased the value of scarce real estate.

With the return on government bonds falling below 1% they ought to be becoming more attractive, but offices are empty, their future uncertain, high end shopping centres are receiving less traffic, and hotels have entire floors unused.

Brisbane’s 1 William Street is owned by a superannuation fund.

In July the number of mobile phones active in Sydney’s central business district was down 52% on January and February. In Melbourne’s CBD, before the stage 4 lockdown, mobile phone traffic was down 65%.

Data centres are among the few commercial property bright spots – we are moving more data – along with distribution centres and regional shopping centres – we are shopping online and closer to home.

Over the course of the year the values of commercial property trusts listed on the Australian Securities Exchange have slid 29%, 32%, 34%,48%, 52%, and 69%.

Share price of GPT Group. GPT owns and manages retail, office and logistics properties.
Source: ASX

For super funds with 8% of their assets in commercial property, a decline of 25% in values knocks 2% off their assets — A$54 billion across the industry as a whole.

In the only other big downturn since the advent of Australia’s superannuation system, the global financial crisis, commercial property offered the funds stability while shares were volatile.

Not so this time. The value of the commercial property is diving along with the stock market with just as uncertain a future.The Conversation

Theodore Connell-Variy, Lecturer, School of Property, RMIT University and Tony McGough, Senior Lecturer, Property, RMIT University

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

Why the Reserve Bank should fund super funds during the COVID-19 crisis



Shutterstock

Kevin Davis, University of Melbourne

A significant number of wealthy individuals have used the ability of self managed super funds (SMSFs) to borrow for property and other investments to supercharge their funds.

It is not something done by retail and industry funds.

According to freedom of information documents obtained by the Australian Financial Review, in 2018 the largest 100 self-managed super funds had borrowings averaging around A$10 million each.

Given the tax benefits granted to superannuation, this exploitation of the system by Australia’s super-wealthy is scandalous, albeit legal. In 2018 more than 200 members of those biggest 100 self-managed super funds were members of the Financial Review Rich List.

Along with other members of the 2014 Australian Financial System Inquiry chaired by David Murray, I voted enthusiastically for a recommendation to ban borrowing by funds.

Normally, borrowing creates risk

Unfortunately, after intense lobbying from the self-managed super fund sector, the Coalition government rejected that recommendation.

I am sure that each of the panel members put different weights on the arguments as to why “no leverage in super” would be good policy.

I focused on two.

First, leverage can lead to funds taking excessive risk, and it also enables some to “rort” the system by getting more assets into the tax-preferred status of super at the expense of the taxpayer

The second argument is about financial sector stability. Leveraged (indebted) financial institutions can be at risk of insolvency and exposed to runs by creditors. A highly levered financial system with lots of interconnectedness can face problems of fragility. Keeping super “un-levered”, as is generally the case for institutional super funds, would be good for stability.

These are not normal times

But even funds that can’t borrow, such as retail and industry funds, face problems if there is a “run” of members wishing to withdraw money.

That could arise because, believing that there are legislated limits on when members can access funds, they have invested significant amounts in longer term, illiquid assets such as toll roads, airports and office buildings in order to produce superior long term returns.

Changing the rules on when members can withdraw funds, such as with the current change to allow withdrawals of up to $20,000, pressures funds to sell off assets they had planned on holding to generate enough cash to meet withdrawals.

Between $30 billion and $50 billion may have been pulled out already.

It isn’t a good time to be selling assets. Depressed sale prices mean the value of all members’ accounts will be further depressed.

Super funds could borrow to obtain the cash needed to meet withdrawals. But that would expose their members to considerable risk if asset prices fell further. They would have to have to pay back the loan from assets that were worth less.

For now, I’ve changed my mind

But if the liquidity problem is purely temporary, brought on by a temporary change in legislation, borrowing might not be such a bad option compared to a forced sale of assets.

While I have not changed my view on prohibiting borrowing in general, I think current circumstances warrant a limited exception.

That exception is that where there is a temporary liquidity problem, brought on by a government change in rules, the institutional super funds should be able to borrow from the Reserve Bank.

Banks can borrow from the Reserve Bank in emergencies. Why not super funds?




Read more:
The Australian government opens a coronavirus super loophole: it’s legal to put your money in, take it out, and save on tax


In this regard, I am at variance with commentators like David Murray and indeed the Reserve Bank itself. Moreover, I think there are reasonable arguments for making access to the Reserve Bank ongoing.

Bank access to the Reserve Bank, often referred to as the Reserve Bank being a “lender of last resort” is not about bailing out insolvent institutions. It is about providing temporary liquidity, at a price, to solvent, but illiquid institutions.

And the current issue is one of illiquidity, not insolvency. In principle at least, unlevered accumulation funds can’t go insolvent. If the value of assets falls, liabilities (amounts due to members) fall correspondingly.

The government should fix a problem it created

When an unexpected policy change creates a liquidity problem for super funds, it behoves policy makers to find a solution that avoids the need for funds to generate cash by selling assets at depressed prices.

Allowing super funds to borrow from the Reserve Bank using repurchase agreements would be such a solution. And since the need for liquidity is a consequence of the policy change, those borrowings should not attract a penalty interest rate.

It is important to note that these borrowings are different to the type we argued against in the financial system inquiry.




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There, we were concerned about funds increasing the size of their portfolios by borrowing and taking on additional risks.

Here, the borrowings would enable funds to avoid shrinking their portfolios and enable them to reduce the risks and costs they (more precisely their members) face.

And consider making the fix permanent

My suggestion is that while borrowings by super funds should generally be prohibited, accessing temporary liquidity support from the Reserve Bank should not be part of that prohibition.

If access to such a facility is made ongoing, there would be a case for offering it at penalty interest rates and subjecting funds to liquidity regulation. But those are questions best left for reasoned discussion in more settled times.

Oh, and there has to be a severe crackdown on the ability of wealthy individuals to rort the tax benefits of super by borrowing through their self-managed super funds.

For the government to allow such borrowings but not support institutional funds by allowing borrowing from the Reserve Bank in times of crisis seems, at best, anomalous.The Conversation

Kevin Davis, Professor of Finance, University of Melbourne

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

The Australian government opens a coronavirus super loophole: it’s legal to put your money in, take it out, and save on tax



Helloquence/Unsplash, CC BY-NC

Robert Breunig, Crawford School of Public Policy, Australian National University and Tristram Sainsbury, Crawford School of Public Policy, Australian National University

How would you feel if you were having a Zoom meeting with your accountant and they asked “how would you like to save more than $5,000 in income tax over the next six months?”

While probably a bit sceptical (did I hear right? Maybe this technology is faulty? What’s the catch? Surely this is too good to be true?) you might be intrigued. You might even turn up the volume to make sure you hear the next bit.

What about if they followed up with, “It’s completely legal. The Australian government will be picking up the tab as part of the stimulus packages! Plus, you can do it mostly risk-free. But you do have to rearrange your financial affairs a bit, and deal with some bureaucratic hurdles.”

What the accountant would be referring to is a generous incentive that is on offer now over the next six months.

It is linked to the decision to temporarily allow the early release of A$10,000 in super this financial year and $10,000 the next.

When parliament approved the Coronavirus Economic Response Package Omnibus Bill 2020 last week, they put no new restrictions on how people could contribute into super.

This means that it’s possible to voluntarily contribute $10,000 of your pre-tax income into super over the next three months, and also apply to withdraw a $10,000 lump sum from super tax-free at some point before June 30.




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You still end up with $10,000 in your pocket. But if you contribute through a salary sacrifice arrangement with your employer and stay within the concessional contributions limits, your voluntary contributions will be taxed at 15% rather than your marginal personal tax rate.

When you pull out the funds from super, the withdrawal is tax free. And, you will be able to do the same thing again between July 1 and late September.

In a working paper released by the ANU’s Tax and Transfer Policy Institute, we described these kinds of situations – where people assume a different legal form in order to receive a lower marginal tax rate – as “tax arbitrage”. They are completely legal, and widespread.

Like other tax arbitrage opportunities, there are sizeable tax savings available from the pursuing of the super equivalent of the Hokey Pokey.

This chart illustrates the sums involved.


Potential tax saving in one specific scenario associated with salary sacrificing up to $10,000 into super and withdrawing it in the same financial year

Personal income tax calculations include the Low Income Tax Offset, Low and Middle Income Tax Offset and the Medicare Levy.


It applies to a very specific scenario: a working age individual who is on 9.5% compulsory super contributions, has an annual salary below $158,000, has made no previous voluntary contributions to super in 2019-20, and who elects to make a “simultaneous” (within 2019-20) pre-tax contribution to and withdrawal of the maximum possible $10,000 from super over the next three months.

It suggests that, as long as an individual in this situation has an annual income of approximately $30,000 or more, there is a prospective tax saving from rearranging his or her financial affairs over the next three months.

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The tax savings can be risk-free, if that’s what you want. If you were worried about the stock market falling further and taking away your contributions to super with it, you can direct your super fund to hold all new contributions purely as cash.

In all, its not a bad return for three (or six) month’s efforts – especially as it results purely from a change in legal fiction rather than any change in underlying economic activity.

Who can do it?

As always with these kinds of arrangements, the devil is in the detail, but there is a lot we already know.

First, the arrangements are targeted at those who have been adversely impacted by the coronavirus. On or after January 1, 2020 working hours (or turnover for sole traders) have to have been fallen by at least 20%.

And it benefits those willing to embrace the bureaucratic hurdles (or outsource the embracing to their accountant). Consistent with Australia’s self-assessment tax system, the onus is on the applicant to certify that they qualify. The Tax Office will then make a determination that the funds be released by the super fund.




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There appears to a fair bit of discretion left to the ATO as to what impacts from coronavirus will be considered sufficient.

One thing is that isn’t clear is what the base period for comparison is, although some examples provided by treasury compare outcomes over a month in 2020 against the average over the six months at the end of 2019.


Early access to super fact sheet, Commonwealth Treasury, March 2020

It seems quite straightforward if your workplace has cut back your hours or the business you own has had its trade (say) halved, but it is less clear cut if you have voluntarily scaled back your hours because of childcare or if you have returned from working overseas because of the virus.

The second key condition is you need to be fortunate enough to hold on to a job providing you with taxable income (or if you are self-employed, generating pre-tax income) of up to $10,000 over the next three, and maybe six, months. The new JobKeeper wage subsidy will help.

And you need to be able to handle the “cash flow” gap – between when you start salary sacrificing income (which reduces take-home pay) and when your super fund is able to release the income to you.




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But sole traders whose business is suspended and are ceasing earning income may not be able to do so. And salary sacrifice isn’t an option if you become unemployed and move on to a government welfare payment which doesn’t allow salary sacrifice.

The third key condition is you need to have enough assets in super to be able to withdraw $10,000 per quarter for the next six months. You can only make one application for an Australian Tax Office determination between now and June 30, and one application between July 1 and September 25.

What are we meant to make of it?

Taking it all together, a (probably unintended) consequence of the super changes has been to create a sizeable tax loophole for those who are relatively mildly impacted by the coronavirus, still earning taxable income, and have the financial capacity to salary sacrifice into super.

While it might initially sound like a niche opportunity, it could be of interest to a significant number of the estimated six million recipients of the JobKeeper payment.

The people who benefit will probably welcome their windfall. Some might, quite reasonably, point out that they should be expected to pay only the minimal tax legally applicable. They might even invoke the spirit of Kerry Packer.

At a system-wide level, though, this sort of tax planning is grossly unfair and leads to a tax system that is less efficient, more complex and less sustainable.




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Income tax is easily the most important source of Commonwealth government revenue. Loopholes in it feed through into company tax reveune through refundable imputation (something Labor tried to wind back in the 2019 election). There is no inheritance tax. And the main consumption tax is set at a low rate, is far from comprehensive and doesn’t fund Commonwealth government spending.

We ought to worry about actions that erode the collection of personal income tax.

The policy process has moved astonishingly quickly in the past three weeks. There were always going to be mistakes, and during a recession its often wise for decision makers to not let the perfect become the enemy of the good.

But equally, we must safeguard against details that are objectively bad.

Now we’ll see how the government responds to error.The Conversation

Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University and Tristram Sainsbury, Research fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

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

The coronavirus response calls into question the future of super



Brendel/Unsplash, CC BY-NC

Warwick Smith, University of Melbourne

Understandably, given we are in a crisis, the government has baulked at including superannuation contributions in the A$140 billion worth of $1,500 per fortnight wage top-ups it will be directing to six million Australians.

As the JobKeeper fact sheet puts it:

It will be up to the employer if they want to pay superannuation on any additional wage paid because of the JobKeeper Payment.


Source: Australian Tax Office

This is in the middle of a treasury led Retirement Income Review that is considering, among other things, whether the current 9.5% of salary contribution should be increased to 10% and then to 10.5% and then in a series of annual steps to 12% by 2025.

In considering the idea (it is actually leglislated – if the government decided not to go ahead it would need to unleglislate it) it helps to go back to basiscs.

The blinding power of money

The trouble with money is most people are so busy looking at it they are blind to what’s going on in the real economy – by which I mean the production and distribution of goods and services.

Our current material standard of living depends almost entirely on our current ability to produce goods and services (assuming for a moment imports are funded by exports).

Similarly, our standard of living in 2050 will depend almost entirely on our capacity to produce goods at that time. This means it has little to do with how much money is in our superannuation accounts.

Part of the justification for superannuation is to get us more resources in retirement, and it will for those who have big super balances, but it won’t do much to change the total amount of resources available at the time.

The limits to saving

Often it’s put another way. We are told baby boomers need to fund themselves in retirement, instead of relying on pensions paid for by those who are still in the workforce.

But imagine a perfect scenario where every retired baby boomer has $1 million in super, freeing those still working from the tax burden of funding the pension.

When the boomers are using their super to buy services and goods, who are they going to take them away from?

You guessed it, those still working.

They’ll be giving up resources to support the retirement of boomers, whoever supplies the cash.

In the main, saving can’t create resources

If there was no superannuation and the government instead taxed current workers in order to fund retiree consumption, the real cost to workers would be the same. That cost is the provision of goods and services to retired people instead of workers.

Individuals can indeed save for the future by foregoing some goods and services today in order to have more of them later. Financial planners refer to it as consumption smoothing.

But an entire society can’t save for the future through consumption smoothing.

If Australia as a whole consumes fewer goods and services in one year, it is likely to reduce rather than increase its future wealth because it is fully utilised labour and capital that drives investment and productivity.




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5 questions about superannuation the government’s new inquiry will need to ask


That’s what lies at the core of misunderstandings about the superannuation system. Foreign investment aside, it can’t allow an entire society to save for the future to support itself in retirement.

It can skew the distribution of resources in future years, away from those of working age and those with low super balances towards those with (tax concession subsidised) high super balances.

Boosting productivity can help

If our goal is an adequate and sustainable income in retirement for all Australians, our main priority ought to be ensuring that those remaining in the workforce are productive enough to support themselves, their children, those without work and those who have retired.

In other words, if you’re worried about the economic impact of our ageing population on our material standard of living (and there are reasons not to be worried) you would want our focus to be on productivity, rather than retirement savings.




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To the extent retirement savings are used for productivity enhancing investment, that’s good. The reality is much of our retirement savings are funnelled relatively unthinkingly into an already bloated financial system where they expand speculative bubbles.

Elsewhere I’ve referred to it as Australia’s first compulsory Ponzi scheme.

Like most important economic questions, the best retirement income system is not, at its core, solely an economic question, it is also a moral and political question about distribution and inequality.

So, with that in mind, here’s what my personal moral (plus economic) analysis tells me would be the best retirement income system.

We could give the money back, slowly

The best way would be to get rid of compulsory superannuation, give all the money back to account holders (slowly to avoid too much inflation), mandate a 9.5% pay rise in its place and redirect the tens of billions of dollars we currently spend on superannuation tax concessions toward rent assistance, a higher Newstart allowance and a higher pension.

With retired renters better looked after, a moderate (say 20%) increase in the pension, and continued indexation of the pension to wages, no retired Australian would be living in poverty.

It’d be sustainable so long as we ensured sufficient worker productivity, primarily through full employment, appropriate infrastructure investment and well-supported education, training and research.

There, problem solved.The Conversation

Warwick Smith, Research economist, University of Melbourne

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

‘You can have both higher super and higher wages’: Albanese


Michelle Grattan, University of Canberra

An “unholy coalition” is attacking the planned increase in the superannuation guarantee, Opposition Leader Anthony Albanese says in his latest “vision statement”, pledging to resist any attempt to stop the legislated rise to 12% going ahead.

In a speech on older Australians – released ahead of Wednesday’s delivery in Brisbane – Albanese says critics “want to see super wound back or abolished. They say that the pension should be enough, or that it reduces wages.

“I absolutely reject this binary approach. With economic growth and productivity you can have both higher super and higher wages.”

The rise in the guarantee, at present 9.5%, would take it in increments to 12% by 2025. The increase has strong critics within government ranks (where some would favour making superannuation voluntary) and outside, among them the Grattan Institute. The government has an inquiry into retirement incomes running.

The Australian Council of Social Service has argued that “any increase in compulsory retirement saving above 10% of wages should be based on a careful assessment of the needs of low and middle-income workers before and after retirement”.

ACOSS also says the guarantee should not rise above 10% until tax breaks for super contributions are reformed to make them fair.

Interviewed on Sky on Tuesday, government senator Gerard Rennick, from Queensland, agreed there was a growing push among Liberals to stop the increase.

Albanese says the prescriptions of ACOSS and others play into the government’s hands.

Supporting the guarantee going to 12%, he says: “Having established the superannuation system we will not stand by and see it chipped away. We want to make it better.”

In his speech Albanese also says a Labor government would charge its proposed body Jobs and Skills Australia with strengthening the workforce for the aged care sector.

This is one of “the workforces of the future”, and needs proper pay and training to be able “to provide culturally and linguistically appropriate care”.

Albanese attacks the government’s plan to privatise aged care assessments. “The first interaction the elderly and their families have with the aged care system is through an aged care assessment or ACAT. It is the first step to getting a home care package or entering a residential aged care facility.

“Our aged care system is broken – and this government wants to make it worse by subjecting ACAT to the indifference of the market. There is a role for the market. But markets have no conscience.”

Albanese also endorses the concept of “intergenerational care”.

“The ABC program ‘Old People’s Home for 4 Year Olds’ made me laugh and made me cry – but it also made me imagine a future where intergenerational care is the answer to our aged care crisis.

“Imagine a future where we co-locate aged care facilities including day respites with kinders and preschools.

“Day respite for our elderly is a missing piece of the puzzle. For many families, they want mum or dad to stay at home or live with them, but they worry about the long days when they are at work.

“Imagine being able to drop your child and grandmother off to the same location.

“Imagine knowing their day would be enjoyable and safe, with activities led by well-paid staff.

“The benefits of intergenerational care are immense. It can help our elderly re-engage with the world, minimise their isolation and the effects of their health issues.”

On the issue of older workers who have trouble getting jobs, Albanese says the answer for some is “to upgrade their skills, which underscores the urgency of rebuilding our TAFEs in particular and our VET system in general”.

But cultural change is also needed, he says, and employers must play their part.

“According to Deloitte Access Economics, a 3% increase in workforce participation by Australians aged over 55 would generate a A$33 billion boost to the economy each year.

“Volunteering is great. But to build a stronger economy we must harness the talents of everybody – and that includes older Australians who are sources of wisdom and experience for their employers and co-workers.”The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

5 questions about superannuation the government’s new inquiry will need to ask



Superannuation has a smaller role in the retirement incomes system than is often suggested.
Shutterstock

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

The government’s new retirement incomes review will need to work quickly.

On Friday Treasurer Josh Frydenberg said he expected a final report by June, just seven months after the issues paper he wants it to deliver by November.

The deadline is tight for a reason. In recommending the inquiry in its report on the (in)effeciency of Australia’s superannuation system this year, the Productivity Commission said it should be completed “in advance of any increase in the superannuation guarantee rate”.

In other words, in advance of the next leglislated increase in compulsory superannuation contributions, which is on July 1, 2021.




Read more:
Government retirement incomes inquiry puts superannuation in the frame


The next increase (actually, the next five increases) will hurt.

The last two, on July 1 2013 and July 1 2014, took place when wage growth was stronger. In 2013 wages growth was 3% per year.


Source: Australian Tax Office

And they were small – an extra 0.25 per cent of salary each.

The next five, to be imposed annually from July 1 2021, are twice the size: 0.5% of salary each.

If taken out of wage growth, they’ve the potential to cut it from its present usually low 2.3% per annum to something with a “1” in front of it, pushing it below the rate of inflation, for five consecutive years.

If we were going to do that (even if we thought the economy and wage growth could afford it) it would be a good idea to have a good reason why. After all, compulsory superannuation is the compulsory locking away of income that could otherwise be spent or used to pay down debt or saved through another vehicle, regardless of the wishes of the person whose income it is.

Question 1. What’s it for?

Fortunately, the new inquiry doesn’t need to do much work on this one.

For most of its life compulsory super hasn’t had an agreed purpose. At times it has been justified as a means of restraining wage growth, at times as means of restraining government spending on the pension, at times as means of boosting national savings.

In 2014, more than 20 years after compulsory super began, the Murray Financial System Review asked the government to set a clear objective for it, and two years later the government came up with one, enshrined in a bill entitled the Superannuation (Objective) Bill 2016.

The bill lapsed, but the objective at its centre lives on as the best description we’ve come up with yet of what compulsory super is for:

to provide income in retirement to substitute or supplement the age pension

Which raises the question of how much we need. For compulsory super, the answer is probably none. People who want more than the pension and their other savings can save more through voluntary super. People who don’t want more (or can’t afford to save more) shouldn’t.

Question 2. How much do people need?

Assuming for the moment that how much people need in retirement is relevant for determining how much compulsory super they need, the inquiry will need to examine what people need to live on in retirement.

The “standards” prepared by the Association of Superannuation Funds of Australia are loose. The more generous of the two allows for overseas travel every two or so years, A$163 per couple per fortnight on dining out, $81 on alcohol “or equivalent spent
with charity or church”.




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


It isn’t a reasonable guide to how much people need to live on, and certainly isn’t a reasonable guide for how much the government should intervene to make sure they have to live on. They are standards it doesn’t intervene to support while people are working.

And there’s something else. Super isn’t what will fund it. Most retirement living is funded outside of super, either through the age pension, private savings, or the family home (which saves on rent). Most 65 year olds have more saved outside of super than in it, and a lot more than that saved in the family home.

It’s a slight of hand to say that retirees need a certain proportion of their final wage to live on and then to say that that’s how much super should provide.

Question 3: Does it come out of wages?

The best guess is that, although paid by employers in addition to wages, compulsory super comes out of what would otherwise have been their wage bill.

Treasury puts it this way:

Though compulsory superannuation guarantee contributions are paid by employers, wage setting generally takes into account all labour costs. As such, it is widely accepted that employees bear the cost of higher superannuation guarantees in the form of lower take home pay.

The inquiry will probably make its own determination. If it finds that extra contributions do indeed come out of what would have been pay rises, it will have to consider the tradeoff between lower pay rises (and they are already very low) and the compulsory provision of more superannuation in retirement.

Question 4: Does it boost private saving?

It’d be tempting to think that the compulsory nature of compulsory superannuation meant that each extra dollar funnelled into it increased retirement savings by an extra dollar. But it doesn’t, in part because wealthy Australians who are already saving a lot have the option of offsetting it by saving less in other ways.

For them, the increase in saving isn’t compulsory.

For financially stretched Australians unable to afford to save (or for Australians at times in times life when they can’t afford to save) the compulsion is real, and unwelcome.

The inquiry will have to make its own assessment, updating Reserve Bank research which found in 2007 that each extra dollar in compulsory accounts added between 70 and 90 cents to household wealth.

Question 5: Does it boost national saving?

Boosting private saving (at the expense of people who are unable to escape) is one thing. Boosting national savings (private and government) is another. The tax concessions the government hands out to support superannuation are expensive. The concession on contributions alone is set to cost $19 billion this year and $23 billion in 2022-23, notwithstanding some tightening up. It predominately benefits high earners, the kind of people who don’t need assistance to save.




Read more:
Myth busted. Boosting super would cost the budget more than it saved on age pensions


On balance it is likely that the system does little for national savings, cutting government savings by as much as it boosts private savings. But because the question hasn’t been asked, not since the Fitzgerald report on national saving in 1993 shortly after compulsory super was introduced, we don’t know.

It’ll be up to the inquiry to bring us up to date.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.

Frydenberg outlines financial sector reform timetable


Michelle Grattan, University of Canberra

Treasurer Josh Frydenberg has issued a timetable for the government’s dealing with the recommendations from the royal commission into banking, superannuation and financial services, which aims to have all measures needing legislation introduced by the end of next year.

The opposition has accused the government of dragging its feet on putting into effect the results of the inquiry, which delivered its final report early this year.

“The need for change is undeniable, and the community expects that the government response to the royal commission will be implemented swiftly,” Frydenberg said in a statement on the timetable.

Fydenberg said that in his final report Commissioner Kenneth Hayne made 76 recommendations – 54 directed to the federal government (more than 40 of them needing legislation), 12 to the regulators, and 10 to the industry. Beyond the 76 recommendations, the government had announced another 18 commitments to address issues in the report.

The government had implemented 15 of the commitments it outlined in responding to the report, Frydenberg said. This included eight out of the 54 recommendations, and seven of the 18 additional commitments the government made. “Significant progress” had been made on another five recommendations, with draft legislation in parliament or out for comment or consultation papers produced.




Read more:
Grattan on Friday: How ‘guaranteed’ is a rise in the superannuation guarantee?


Frydenberg said that, excluding the reviews to be conducted in 2022, his timetable was:

  • by the end of 2019, more than 20 commitments (about a third of the government’s commitments) would have been implemented or have legislation in parliament

  • by mid 2020, more than 50 commitments would have been implemented or be before parliament

  • by the end of 2020, the rest of the commission’s recommendations needing legislation would have been introduced.

When the Hayne report was released early this year, the government agreed to act on all the recommendations.

But one recommendation it has notably not signed up to was on mortgage brokers.

Hayne found that mortgage brokers should be paid by borrowers, not lenders, and recommended commissions paid by lenders be phased out over two to three years.




Read more:
Wealth inequality shows superannuation changes are overdue


The government at first accepted most of this recommendation, announcing the payment of ongoing so-called “trailing commissions” would be banned on new loans from July 2020. Upfront commissions would be the subject to a separate review. Four weeks later in March Frydenberg announced the government wouldn’t be banning trailing commissions after all. Instead, it would review their operation in three years.

Releasing the timetable, Frydenberg said the reform program was the “biggest shake up of the financial sector in three decades” and the speed of implementation “is unprecedented”.

“It will be done in a way that enhances consumer outcomes with more accountability, transparency and protections without compromising the flow of credit and competition,” he said.

He undertook to ensure the opposition was briefed on each piece of legislation before it came into parliament.

“This will begin with the offer of a briefing by Treasury on the implementation plan. Given both the government and opposition agreed to act on the commission’s recommendations, we expect to achieve passage of relevant legislation without undue delays,” he said.

He said the industry was “on notice. The public’s tolerance has been exhausted. They expect and we will ensure that the reforms are delivered and the behaviour of those in the sector reflects community expectations.”The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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