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.