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When you‘re old, and it’s cold. And who cares if you live or you die, your one consolation’s the money, you may have put by. —Fagin in Oliver
Economics is a querulous subject. Part of this is down to its infection by the delusional shibboleths of leftists, Keynesians and Marxists. But this aside, economic theories are not susceptible to laboratory testing. Little can be proved. Debate is never ending. The Australian’s economics editor, Adam Creighton, recently wrote a couple of pieces critical of compulsory superannuation. Predictably, Paul Keating, who fathered the policy, took a different view. I am with Keating on this one. Let me explain in the hope of being persuasive.
A lot of what Creighton said I agree with. Doing away with compulsory super would result in higher wages for those choosing voluntarily to contribute less or nothing to superannuation. It might contribute to lower taxes if governments took the extra income taxes coming from higher wages and gave them back. Although, being governments, it seems unlikely they would give them all back. It would also gratifyingly hit the many financial parasites who become unduly rich on the back of wage earners’ forced saving. And he is right in saying that the policy’s rationale of significantly reducing dependence on the old-age pension is not being fulfilled. The superannuation savings of the vast majority of wage earners are too small.
Amid agreeing with Creighton, I have two qualms with his position. First, I do don’t accept that the case against compulsory super is made by saying that wage earners remain still dependent on the pension and that, therefore, the government’s pension outlays are not materially reduced. Second, I take issue with a separate point he makes, which is that compulsory super does not boost national savings.
I’m an economic liberal. In principle, I don’t believe in forcing people to spend a set proportion of their wages in the way the government insists, which is the current policy. On the other hand, those who pay the piper have some rights to call the tune. Taxpayers agree to provide those with insufficient means a pension in their retiring years for upwards of two decades or more, until cometh the Grim Reaper. In return, taxpayers, via the government, insist that potential beneficiaries of this largesse stump up an amount each week, when working, to help pay for their own needs in retirement. That doesn’t seem to be unreasonable. But is it still valuable if it fails to materially reduce the number of people eligible for the pension? I think it is.
The old aged pension is miserly. Those solely dependent on it live in relative poverty. That is why there is constant political pressure for its increase. The fewer people who are solely dependent on the pension, the less likely it is that governments will face and succumb to this pressure. So it does potentially save on the pensions bill. That is the ‘cold’ fiscal argument. The other is a matter of lifestyle. Drawing a pension and having, say, $200,000 in superannuation savings (that you may have been forced to put by) offers an infinitely more comfortable way to live than does having nothing.
On national savings, Creighton cites Geoff Carmody of Access Economics in arguing that “as the population ages, people will be dis-saving the stock of savings during their working lives.” The clear intimation is that it will be a zero-sum game. Clever theory maybe. But most likely wrong in my view.
In growing economies, the national stock of savings trends upwards along with the stock of physical capital. The question to be asked is whether the stock of savings will grow faster if people are forced to save for their retirement. It’s an empirical question, and a tough one to answer conclusively. However, approach it this way: Most people do not spend all of their savings. If we assume that, on the whole, people, generation in and out, end up with a greater amount of unspent savings as a result of forced saving then the stock of savings will indeed grow faster. I think that this assumption is reasonable on its face, if hard to prove.
On balance, somewhat reluctantly, I support compulsory super in an entitlement age where many people live spendthrift lives, assuming that others will take care of them later. Albeit to a limited degree, it shelters more frugal taxpayers from picking up the tab. It also compels lots of people into making sacrifices along the way in order to have more comfort in their older years. Call this paternalistic if you like; but being able to afford to turn on the heater on a cold winter’s evening is no small thing. And, finally, compulsory super will most likely increase the flow of national saving which, in turn, will fuel additional capital investment and, consequently, increase prosperity.
During the late 1980s:
my compulsory super contributions were getting 6%
my father’s mortgage was capped at 13.5%
uncapped mortgages hit 18%.
My savings went into paying off dad’s mortgage, as I would one day inherit it. By forcing me to pay super, the govt was robbing me of 7.5% interest. If it had been an uncapped mortgage, that would have been a 12% theft.
And of course, by making me poorer, the govt reduces the likelihood of avoiding paying me a pension!
I retired a few weeks ago. While not rich, a combination of sensible decisions, saving and hard work means that my wife and I should not have to rely on government welfare, a.k.a. the aged pension.
However, while I am a firm believer in private pensions based on compulsory contributions, I am growing increasingly worried that, as Australia’s private pension pot grows, it becomes ever harder for greedy governments to keep their sticky fingers off it. I therefore forecast that, if/when the next recession/GFC hits (and many pundits expect it to be bigger and wider than any before it), our politicians will be unable to ignore the mountain of money that was hitherto ‘safe’ in private hands.
It has ever been thus. The money belonging to the middle class has always been vulnerable. While our individual savings might be relatively modest, as a collective, they amount to an enormous sum, yet we don’t have the lobbying power nor access to powerful ‘financial lawyers’ that the rich do. Just think of the social programs, pollies’ perks and footy stadiums (that is to say, votes) they can buy come re-election time.
So my thoughts are, forget ‘spending the kids’ inheritance’, we should perhaps be planning to ‘spend it before the pollies spend it for me’.
Creighton’s position has two major holes in it. He is aware of them, I believe, but chooses to ignore them in the belief that most of the populace won’t grasp how they are being misled. It seems to me that Creighton remains a millenial Treasury man. Nick Cater had an article in The Aus yesterday (I think) on the envy of the millenials. Add to this the Treasury view that this “concessional” taxation really belongs to it.
First: super as initially envisaged was to be built on for about 40 years of working life – say, one’s mid-20’s to mid-60’s. Super has been available to the general working populace from early-mid 90’s, so at most about 25 years. Only a little over half-way so far, Mr. Creighton, and too soon to call “failure”, especially when the rules change constantly and capriciously.
Second: the rule changes noted above have the deliberate effect of constantly reducing the amounts one can “invest” in super. This matters a great deal in the latter part of a working life when there may be scope to increase one’s deposits. Capricious rule changes also generate anxiety of the type that justifiably worries that another GFC crisis will allow the Govt to do a Cyprus. In short, constantly being poked in the eye with venal rule changes raises the real fear that one doesn’t actually own that savings account anyway.
Oh, and super was not originally promoted as a replacement for the pension but as a supplement to reduce full dependency on it. Creighton sidesteps that, too.
In 1987 I ‘lost’ 40% of a substantial cash windfall I had invested for my retirement with ‘the smartest guys in the room’. I took out what remained and opened my own super fund. I manage and invested it far better than any ‘professional’ advisor or company – with no fees. The downside was being regularly harassed by the ATO and several busybody bureaucracies. For tax purposes I put every ‘surplus’ $$ into my fund (thank you Peter Costello). My aim was to accumulate enough the NEVAAA depend on a government pension. To achieve my aim I skipped holidays, luxury items and some family time.
I achieved that and have now recently retired – just in time to find ‘Electricity Bill’ thinks he deserves a share of my hard won and carefully managed assets. I am sure we do not really deserve the muppet politicians ruling our lives as there are no crimes so bad that Oz has collectively perpetrated in a previous life that deserve this punishment …
To emphasise my point above regarding governments raiding our super, I believe that the current efforts to demonise ‘baby boomers’ by politicians and their mates in the media is all part of that plan. Barely a day goes by when my generation is not accused of having had everything given to us on a plate, buying ALL THE HOUSES when they were dirt cheap, wrecking the environment, clogging up the health services and somehow stealing all the wealth – and the best jobs – from young people.
I won’t bother explaining why all of this is wrong, for instance pointing out that, when my wife and I were buying our first tiny house (next to a railway line and overlooking an industrial estate), a ‘night out’ consisted of sneaking our own sandwiches into the local pub’s beer garden and making two drinks last the whole evening. Anyhow, by casting us Boomers as greedy hoarders and polluters, future governments can safely raid our super accounts, withdraw benefits, reduce tax breaks, etc without upsetting too many people, especially young folks who apparently can’t afford the deposit for a house, but can afford to pay roaming charges on their $1200 smartphone, to call home from the restaurant in Bali.
Peter there is one glaring error or oversight in your argument.
When the old age pension was enacted, a pension component of one and six in every taxable pound was added to the worker’s tax burden.
That is a seven and a half percent loading applied to every taxable dollar(nee pound) earned. That impost has never been rescinded, just absorbed into consolidated revenue.
Thus every one of us taxpayers is already paying a compulsory component to the government for our retirement.
Keating accused those who were contributing to superannuation as “Double dipping” but it was the government who were guilty of double dipping.
Not only were they going to make a further retirement tax on the workers, their long term aim was to deny those who had contributed sufficient to their super to be denied the pension.
Keating realised that the government had already spent the accumulated pension funds and resorted to having the employer fund employee’s retirement whilst reneging on the governments pension obligation. He overlooked the fact that the government employ over a third of all employees, thus he was effectively taxing the government.
At the current interest rate for term deposits there is a a financial nadir where superannuants at the pension cutoff level are worse off than pensioners on a full pension. Superannuants have no option but to draw down on their capital to match the already meagre pension until progressively they become more eligible to the pension for which they have already paid.
The paradox of the current policy is that workers will minimise paying super (saving) to keep below the thresh hold.
Sadly the next level of extortion by the government will be the family home, where a ceiling value will be imposed (like super taxation) and a reverse mortgage extraction will be imposed until the government owns the family home as well.