Australia has a compulsory superannuation scheme, and I have questions about it. These questions have been floating around in my head for a while, but the catalyst for thinking about them this week was this article by Brian Toohey, which I discovered through the Australian political blog Larvatus Prodeo. I’ve always been a supporter of Australia’s compulsory superannuation laws, which seem to be popular across the Australian political spectrum and were introduced by one of the two great men of modern labour politics, Paul Keating, but over the last year I’ve seen an increasing range of criticisms of the underlying concept and the Australian system in particular. I’m no economist, but some of these criticisms seem so basic that it’s hard to believe they haven’t been thought of and dismissed by people who understand these kinds of systems, and the logical answer to them appears to be a shift away from the neo-liberal model of personal retirement savings and back to a Keynesian (?) version of government-funded pensions. The conclusions of a sustained criticism of the Australian system, one way or the other, probably have relevance to the ongoing US debate about privatizing social security.
This post, then, is an attempt to frame these questions in the hope someone out there will answer them. It’s clearly off-topic, so sorry about that.
How it Works
The Australian superannuation system basically works like this: all Australian employers are required under law to contribute 9% of their employees’ salaries at least every three months to a registered superannuation fund. This 9% is on top of the employer’s wages, and is meant to represent a kind of top-up of their wages into a pool of funds that are reserved for their future. Soon this top-up will go to 12%, and many employers choose to top-up more. Employees can also choose to set aside some proportion of their wages – I typically put a small amount aside – and all of this is sequestered away in an account until they turn 55 (or older), when they get the resulting vast scads of cash. Employees who put their own money aside get tax breaks on that money which can be quite lucrative (especially for the higher income earners).
The system was introduced in 1992 by Paul Keating, at which time the compulsory contribution was 3%. This contribution is generally seen as taking the place of a pay rise, that is Australians forewent a 3% pay rise in order to obtain this superannuation security in their old age; but many commentators have pointed out that this is a disingenuous comparison (one made by Toohey in the linked article above) since it’s unlikely that the government could have mandated a 3% pay rise for all employers – if not diverted to superannuation this money would be going into the pockets of employers, not employees, and then (in theory) 30% of it would be taxed as corporate taxes.
For the purposes of my questions about super, though, I want us to assume a few basic principles about superannuation as it’s presented to us:
- Fears about the ageing of the population are true: part of the justification for the superannuation guarantee (at least in retrospect) is that the population is ageing so we need to devote more money to retirement funds, or at least change the balance of private to public funding, since there will be less taxpayers in the future
- The superannuation contribution would otherwise be a pay rise: we don’t need to assume that the entire proportion of it would be a pay rise, but let’s assume that at least a decent proportion of the superannuation contribution would otherwise be delivered to employees as a pay rise
- The main alternative to compulsory private superannuation is government pensions: that is, if we don’t have a compulsory system of superannuation, the government will provide everyone with a (means-tested?) pension from general taxation
So, let’s consider the objections I have heard over the past few years.
The Libertarian Objection
As I said, compulsory superannuation seems to be generally well supported across the political spectrum in Australia. Free market types like it because it moves responsibility for retirement savings from government to individuals, but at the same time it doesn’t leave (many) people uninsured, which is always the risk with wholly private systems. That is, it introduces a private savings mechanism without having a problem of free-loaders. Government intervention types like it because it maintains a safety net through its compulsory nature. Most libertarians in Australia are pretty practical about their libertarianism, so tend to accept limits on the economic “freedoms” that their libertarianism would lead to, so I think many libertarians would support this kind of policy too. However, there is a common libertarian objection I have read, which is this: for the lowest earning people in the labour market, their compulsory superannuation contributions will also be low, and at the end of their working life they will get a very small pension from their superannuation account. So, accepting that the contribution to superannuation is foregone wages, these people are being forced to forego a small improvement in their current poverty, in order to guarantee them a retirement future of … poverty. A 9% pay rise at the bottom end of the income distribution is much more valuable than at the top end; yet when they retire, low income earners’ superannuation will provide them nothing better than they would get from any economically reasonable state pension. So from a libertarian perspective, these people are being forced to spend their money now in a way that doesn’t benefit them later. They’d be better off receiving that 9% now, spending it on cocaine and dancing girls, and retiring on the state pension.
Note that this libertarian argument assumes the existence of a state pension. So it’s contradictory in libertarian theory, but I think it’s very true in a real world. The superannuation system benefits the wealthy far more than the poor. Of course, this argument fails if assumption 2 (the contributions would otherwise be a pay rise) were not true. But a variant exists even then: if the employers pocketed that 9% contribution, 30% of it would go to the government as corporate taxes, and some proportion of that would support a higher level of state pension, and poor people would benefit most from that increased state pension.
The Perverse Tax Cost of Compulsory Superannuation
The system as currently constituted provides tax breaks to people who make voluntary contributions to their superannuation, in order to encourage individual contributions. These tax breaks are now estimated to cost up to $100 billion, which is more than the state pension would cost if everyone were accessing it. We can see this through a few simple calculations of what we could spend this money on if we didn’t blow it on tax breaks for superannuation:
- A universal government wage: That $100 billion could be turned into a guaranteed income for every Australian of $4500 a year, a long-held libertarian goal. This would lead to the abolition of the welfare system, which money could also be turned into a guaranteed income, which would probably go up to about $6000. We could then simplify the tax system to get rid of poverty traps and other disincentives for poor people to work, which most people think would both increase the tax take and reduce the number of the absolute poor – a worthy goal. And because the universal wage holds across your lifetime, working parents can put their childrens’ wage into trust for their education, and will receive the universal wage as a pension when they retire. Is this a less efficient use of $100 billion?
- A decent aged pension + maternity scheme: Australia’s current paid parental leave scheme costs about $150 million a year. This $100 billion dollars of superannuation tax breaks could easily be used to institute a well-paid state pension for the over 65s, along with a huge increase in the scope and value of the paid parental leave scheme – in fact, I would suspect that $100 billion could be used to basic pay every Australian the equivalent of a full-time wage as a parent, achieving the long-held feminist goal of paying women (or, in the modern world, men too) for the value of their household labour. One of the main justifications for the superannuation scheme is the demographic shift predicted for the next 30 years, with an increase in the ratio of dependents to tax payers, but this can be reversed easily by increasing the birthrate, and the accepted best way to do this is a good paid parental leave scheme. So by spending this money on the state pension plus the parental leave scheme we guarantee a stable, reliable pension into the future.
- A return to free education: The single best investment a poor person can make in their future is education, and some argue that the best way to guarantee that this will happen is free access to education. The money could be spent on the education system, and better educated poor people earn more, so are better able to voluntarily save for their retirement.
- Changes to the housing system: Housing in Australia is becoming hideously expensive and creating increasing amounts of inequality. The easiest way to make young people safe for the future is through a massive change in Australia’s housing system, and this could easily be achieved through judicious spending of this $100 billion[1]
Regardless of the particular spending benefits of this money, it seems crazy to me that the tax breaks on superannuation should exceed the cost of a decent government-funded pension.
The Equity Objection
One of the strongest ongoing objections to these kinds of social insurance systems – where your contribution to the system and your ultimate repayment from it are proportional to your income – is that they benefit the rich more than the poor. A 9% foregone pay rise at the bottom income quintile is a much more punishing idea than 9% foregone at the top, but at the end of their working life the people at the bottom income quintile get a much lower return for that foregone pain than the people at the top. Under a fixed state pension, funded from general taxation, the rich benefit much less from the scheme than the poor. Both have received that 9% pay rise, both have paid taxes, but at the end of their lives the poor have gained more from those taxes than the rich because the pension is a much higher proportion of their pre-retirement incomes than it is for the wealthy. This is the essence of progressive taxation, and it’s a strange quirk of history that a labour government introduced such a regressive system.
The Boom-and-bust Objection
One significant consequence of the superannuation scheme is that it has led to a massive increase in the amount of Australian money floating around in investment funds, causing trouble. Current estimates are that $1.2 Trillion are floating in the investment market, paying $18 billion in commissions to fund managers. All this private money looking for somewhere to invest is supposed to do good in the local economy – fund managers invest in shares, which promotes the growth of industry, which is good for economic growth. But this money also is a lure for all sorts of ponzi schemes and economic bubbles – bubbles tend to happen when large amounts of money are available to invest. Other countries (e.g. the UK) are operating similar schemes, and naturally once the pool of available funds exceeds the capacity of the real economy to absorb the money, the remaining funds start being invested in capital growth schemes, which then burst because they have no real foundation, and cause crashes. Is it a coincidence that the world’s last few big crashes correspond to an era when huge quantities of money are available for investment through 401(k)s, superannuation schemes, and sovereign funds? I don’t think so.
Also note the cost of this money – it’s $18billion to invest $1.2 trillion. Is it possible that if that money were collected as taxes, the $18billion would be spent on jobs in the public sector spent administering that money? Is a job in the public sector worth less than a job as a fund manager? Does either person contribute less to society? And can we say after the GFC and the subsequent economic troubles it has caused that the $1.2 trillion would not be better spent on government infrastructure investment? Especially given that one of the major causes of inflation in Australia is infrastructure bottlenecks and environmental problems?
There is a general argument that the private sector distributes money more sensibly (?) or efficiently (?) than the public sector, but is this still true when the available investment funds exceed the capacity of the market to spend them? Governments can store that money as surplusses, against hard times; investment funds piss it against the wall in investment bubbles and ponzi schemes.
The Stored Wealth Objection
Money invested in superannuation for the future is seen as providing for one’s retirement, but that money doesn’t suddenly appear when you retired as a golden watch, a bottle of champagne and food and medical care for the next 20 years. It appears as money to spend on those resources, but if those resources haven’t been secured in the period between your investing the money and realizing the returns, or if they have become scarce in that time, then your money won’t actually provide for anything. The superannuation funds focus on increasing their own value, but they don’t necessarily do that by increasing the size of the actual economy where you actually live. So for example your fund could invest in high-return farming projects in Iceland, Africa and Russia, so that when you retire you get lots of money – but then you have to buy food imported from those high return farms overseas, because no-one was investing locally.
Superannuation funds are under no particular obligation to improve the economy of the people who invested in them, so in the long run do they actually help to maintain a good environment for the superannuant? Shouldn’t at least some of this money be being spent by the government, to avoid the risk of market failure? (And is this objection any different to the Boom-and-Bust objection?)
The Poor Returns Objection
The Stored Wealth Objection can probably be answered by pointing out that the issue it addresses is handled by inflation. But the performance of superannuation funds over the past 20 years has been dreadful, with their average returns only 0.1% higher than long-term inflation. So really, the money would be better spent if it were just saved in a normal bank account, or invested in cash or government bonds. So why the special system of compulsory superannuation? The money from the foregone 9% pay rise might be better used if it were kept by the companies to use in investment or profits (which are taxed, and then used by the government to fund infrastructure development, which lowers inflation) or paid directly to employees (where it is taxed, and then used by the government to fund infrastructure development, which lowers inflation) to be spent (economic growth) or saved (future economic security). None of these alternative options could possibly provide a lower rate of return than the superannuation funds have offered.
It’s all a Big Scam
(This is also an objection). Some have implied that the whole thing has been set up by the finance industry as part of its 10 year long march into control of the economy, and the main beneficiaries of the whole process over the long term have been the funds management industry. This is partly ameliorated by the observation that the biggest superannuation funds in Australia tend to be union-related, industry-specific funds, not big bastard international banks; but I’m sure the people in charge of those industry funds are still managing to feather their nests nicely compared to doing a real job. So who really benefitted from this program?
Final Notes
Looking at these objections, it seems to me that Paul Keating conned us (or, more likely, got it wrong). We’re better off with a state-funded pension system supported through taxes, and the problem of the demographic shift that will undermine our ability to support old people in the future is better dealt with by addressing it directly – through schemes to increase the birth rate, lengthen the working age, etc. The huge flood of money into the private sector has led to increased boom and bust cycles, reduction in affordability of housing, and inflation, at a time when Australia needs its government to be spending huge amounts of money on infrastructure development and environmental improvement. However, my understanding of the details of these arguments is limited so please, if you have an alternative opinion, out with it in comments!
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fn1: and obviously everyone would also get a pony
Compromise and Conceit 
February 13, 2011 at 8:26 am
A lot of food for thought, thanks for going to the effort.
I don’t know much of anything, but my 0.02c… on your conclusion that Paul Keating ‘got it wrong’; from a strictly policy point of view, I can see why you conclude that. But from a political point of view, I’d rather have money going into a super fund rather then trust that my pension will be paid by the ‘Facebook’ generation. It is all too easy to let inflation slowly erode a well funded system then to practice the financial discipline (as a government) that is required to keep well funded pensions. After all, we do live in a very neo-liberal world.
February 13, 2011 at 10:30 am
Given that subsequent political leaders of a different political party massively expanded the tax perks for the super scheme, it seems like he misjudged politically. The “facebook” generation are just as likely to support these schemes as anyone else, maybe. It’s just that by doing it through super they’re doing it inefficiently. Keating was always ready for a good stoush, I don’t see why he couldn’t have put a strong case for state pensions – as he did for the Accords, for Enterprise Bargaining, and for his response to Mabo. I think he genuinely believed in this for its own sake, because he was never one to shy away from a hard battle for something he thought was economically right – look at his legacy on protectionism as an example of that.
February 13, 2011 at 8:08 pm
I’d like to respond to this but I’m probably too drunk to manage anything other than an ad hominem on you [1]. I’ll shelve my notes and try to get back on this later this week. Based on the amount of information you have here I think I need to attack the root rather than the branch, otherwise I get bored.
In an aside, it’s interesting you’ve been considering this as I’ve recently been starting to consider how I favour funding retirement. And the basic response of that process was that while I oppose death duties (as basically a government mandated form of grave robbing [2]) I probably would support a system that forced home owners to sell their houses to pay for old age care with a safety net for non-home owners. After all, aged care is a service (and hence worth money) and leaving stuff to your kids is a bonus, not an expectation (grave robbing aside).
[1] Not that that’s not a good option too.
[2] To note I don’t oppose grave robbing, but generally I believe the corpse in question should be dead for at least 200 years, otherwise the descendants have a right to get a little upset. [3]
[3] Take for example disturbing native burial grounds, there’s got to be some point where it’s a valid archaeological pursuit, but I think we can all agree that the answer is not “While the widow is still weeping on the grave” [4]
[4] Yes, I concede this view on grave robbing may have been formed on my beliefs of the inherent Lawful Goodness of robbing necromancer graves. Blame Gygax.
February 13, 2011 at 8:17 pm
As ever, the world trembles in anticipation of your rant…
Isn’t that method of funding retirement what we have now? And is it a sign of our sad approaching dotage that we’re starting to think about these things, instead of “how best to fund dancing girls”?
February 21, 2011 at 9:51 am
As foreshadowed in black books of dread and in an earlier post, I’ve returned. So far I’ve only covered the “libertarian” section of your post. I’ll try to get back to the rest later.
“for the lowest earning people in the labour market, their compulsory superannuation contributions will also be low, and at the end of their working life they will get a very small pension from their superannuation account.”
And as a result they get more funding from the public purse. On the other hand people with a greater private saving get little to no funding from the public purse. On average the person with the private super is probably better off, but any system that doesn’t tax you 100% of your assets at age 65 then force you onto a mandatory pension will have that as a feature. The fact that some people are funding themselves also allows tax cuts in the future which will probably be skewed towards marginal benefit of the future less well off. We know that any tax cuts except the most regressive ones will assist the less well off as “A 9% pay rise at the bottom end of the income distribution is much more valuable than at the top end” So a flat tax reduction benefits the less well off more, just as a flat tax increase disadvantages them more.
“So, accepting that the contribution to superannuation is foregone wages, these people are being forced to forego a small improvement in their current poverty, in order to guarantee them a retirement future of … poverty.”
It’s foregone wages today in return for a tax break and compound interest. Your argument here suggests that poor people should never save, which is exactly the school of thought that dooms them to a cycle of poverty because of an inability to build up assets.
“They’d be better off receiving that 9% now, spending it on cocaine and dancing girls, and retiring on the state pension.”
You’ve got an assumption that the state pension is 1. Available at all when you retire, and 2. As good as the pension plus super. But you don’t have any evidence of either. And examining the aging population suggests that even assumption 1. is a poor assumption to make given the tax burden it will impose on the future generations facing a disproportionately high pensioner to worker ratio.
“The superannuation system benefits the wealthy far more than the poor.”
The limits on contributions actually caps this out at some level. You can only contribute $25k/year (at our age) and can only have a max of around $1M in your super before extra taxes kick in. So once you hit those limits (and $25k isn’t hard to hit if you’re focused on it) you start paying extra taxes (the tax rises to 46.5%) that actually make it better to take the money as cash (top tax rate is 45%). This means the very rich (call it anyone earning more than $277k) actually has to compulsory pay a super contribution that gets hit by an extra tax when they’d prefer to get it as cash then put it in a bank.
And all your comments here ignore that low income earners can earn money at a low tax rate (15% income tax), then make a personal contribution that isn’t taxed (as it was already taxed as income) and have the government make a matching contribution. In some years these are actually matched $1 to $1.5 so that poor people who plan for the future actually get extra rewards (on top of compound interest). The ratio is currently $1 to $1 with a policy of returning to $1 to $1.5 in 2014/15.
“But a variant exists even then: if the employers pocketed that 9% contribution, 30% of it would go to the government as corporate taxes, and some proportion of that would support a higher level of state pension, and poor people would benefit most from that increased state pension.”
This is just manifestly untrue. If the extra money were going to profits, and then being taxed it still wouldn’t go towards the current workers future state pension! The Australian government does not have sufficient savings to cover future pension liabilities for public employees (http://www.theaustralian.com.au/national-affairs/states-face-super-liability-crisis/story-fn59niix-1225958841611). It certainly doesn’t have any saving mechanism to cover general pension liabilities. Furthermore we can guarantee that any increased funding now would go into some crackpot scheme such as funding the National Broadband Network or tax cuts rather than saving it to cover the future liabilities. Those would then fall onto the future generations, including the poor in those generations who would get doubly screwed.
I have a message from the aggregate poor over time to those mounting these arguments: “Please stop helping us!”
February 21, 2011 at 10:03 am
”That $100 billion could be turned into a guaranteed income for every Australian of $4500 a year, a long-held libertarian goal. This would lead to the abolition of the welfare system, which money could also be turned into a guaranteed income, which would probably go up to about $6000.”
For someone who’s job involves tracking health benefits over time you’ve done a great job of focusing on a current number and assuming it’s constant. Are you seriously saying that the superannuation tax breaks are costing the Australian government $100Bn/year? The Australian government budget for 2010/11 has a revenue of $321.8Bn [1], so the government could increase spending by 30% by removing this tax break? Nonsense.
It may have a current value of $100Bn, but with about 22 million Australians, that comes in as $4500 available as a one off payment. The income per year from that would be about $450/person, assuming a 10% risk free rate of return (good luck finding that).
I’m not going to both critiquing your comments on how this pipe dream money should be spent unless you can provide an a source for this $100Bn figure that explains how they dreamt it up.
[1] http://www.budget.gov.au/2010-11/content/overview/html/overview_31.htm
February 21, 2011 at 10:06 am
the aggregate poor over time
I should explain that term given ‘ve just made it up. I mean that once you allow for the presence of poor people at various stages over time you can sum their opinions on an idea to assess whether a short term benefit outweighs a long term loss. And in this case the average benefit is greatest if the person making these suggestions gets hit by a bus.
You know Lenin would support it.
February 21, 2011 at 10:10 am
Paul! Thanks for the comments and taking the time with all the details! But please remember these aren’t all my opinions. So that you can go back to addressing the tax costs, the source for the “$100 billion” is from the post I linked to (by the slightly mad(?) Brian Toohey). At the end:
I may have slightly misread this when I wrote the OP – it includes the current age pension in the calculations, but if we extrapolate from the $8 billion figure given there it seems that super tax concessions are costing at least $32 billion – half as much at least as the current age pension is already costing.
So, is that 32billion better spent on super funds, rather than just being used to increase the current age pension by 50% – or, alternatively, should it be spend on expanding parental leave schemes to reverse the ageing population?
February 21, 2011 at 12:50 pm
”Under a fixed state pension, funded from general taxation, the rich benefit much less from the scheme than the poor. Both have received that 9% pay rise, both have paid taxes, but at the end of their lives the poor have gained more from those taxes than the rich because the pension is a much higher proportion of their pre-retirement incomes than it is for the wealthy. This is the essence of progressive taxation, and it’s a strange quirk of history that a labour government introduced such a regressive system.”
No.
If you give everyone their 9% back then rich people can afford to save or spend it. If they save it then they’ll end up with both income from the savings in the future and also a general pension. Or do you want to means test it? My advice to you is that all comments on government payments should have “means tested” added to them – never forget to put it in.
If its not means tested, then you’re encouraging rich people to blow their money now to maximise their free money later. What’s best is you can even give the money to your kids! So you have all the advantages of either spending the money on hookers and blow while young, or the advantages of being rich with an extra government funded kickback while old!
”Especially given that one of the major causes of inflation in Australia is infrastructure bottlenecks and environmental problems?”
Yeah, therefore the government should confront the problem by spending $40bn building a fibre to the door telecommunications network monopoly! Are you suggesting that the NBN is a bad idea, or that our infrastructure bottleneck is in how fast I can download clips from YouTube?
”There is a general argument that the private sector distributes money more sensibly (?) or efficiently (?) than the public sector, but is this still true when the available investment funds exceed the capacity of the market to spend them?”
Yes. Its still true. But first I have to point out the flawed basis in your assumption. You’ve repeatedly said that there isn’t the capacity of the market to absorb the investment, but you’re making an assumption that the investment has to occur inside Australia. It’s perfectly acceptable to buy overseas resources and use them as an income stream in the future.
To elaborate on why the market id still more sensible and efficient than the public sector I have to point out that in any case where the government lets people make money off infrastructure, investors will happily invest in it. Take for example toll roads, which are primarily held back by the government knowing the general population hates them, or improved ports, where mining companies build ports in spots that make sense to them – near mines. These show that if the government either puts the right incentives in place (i.e. tax concessions) or gets out of the way (i.e. removes bureaucracy/approves the build) then the market is perfectly willing to invest in good ideas. It’s crap ones like Myki, or the NHS computer system where they realise that the intelligent behaviour is gouging the ideas in government.
“Governments can store that money as surplusses, against hard times; investment funds piss it against the wall in investment bubbles and ponzi schemes.”
What a crock. Who do you think holds government bonds and other low risk investments? By contrast who always digs out some extra cash to use as a kickback around election times every 3 years?
Given a choice between ticking the box of “conservative investment” on my superannuation and putting my faith that the government will save a dime for me I’ll take option 1 every time. Or just convert the money into alcohol. Those are both good options. The government one is the only guaranteed loss.
”So for example your fund could invest in high-return farming projects in Iceland, Africa and Russia, so that when you retire you get lots of money – but then you have to buy food imported from those high return farms overseas, because no-one was investing locally.”
Yes. Because if farming in Australia is a terrible idea with bad rates of return but farming the Russian tundra is a good idea with a good rate of return then you should invest the one with a good rate of return. You need to stop seeing “good rate of return” and thinking “evil capitalist” and start thinking “good idea”. Things that work efficiently have a high rate of return. Things that work inefficiently have a low rate of return. So saying you prefer a low rate of return is also saying that you prefer to have resources wasted.
To return to your example, if underinvestment in Australian farming and overinvestment in Russian farming happens then the rate of return in Russia will decrease and someone will spot that there is a potentially greater rate of return in Australian farming. They’ll then ship some equipment to Australia and organise farming here.
The only cases this doesn’t apply is things with massive investment cost that lock you in. Making CPUs or building power plants are a bet you’re stuck with. But the rule is that the longer the period of time you consider it over, the lower the hurdles get. If I challenged you to start a web company tomorrow you’d refuse as you couldn’t learn a useful computer language in time or build anything that’d make money. But if I gave you an idea that would make money for 10 or 20 years, then you’d bother sinking the time in to learning the language and building the site. It’s the same with everything else. If it’s a good idea now and is going to stay a good idea then someone will bother putting the effort in.
February 21, 2011 at 12:59 pm
”I may have slightly misread this when I wrote the OP – it includes the current age pension in the calculations, but if we extrapolate from the $8 billion figure given there it seems that super tax concessions are costing at least $32 billion – half as much at least as the current age pension is already costing.”
No. Your maths is still wrong [1]. Firstly, if it’ll be an extra $8bn cost for 12% in 2019 then the 9% would cost $24bn, not $32bn. Secondly, that’s a 2019 figure, so you’d have to reduce for inflation to discount it to the present. So about 8 years at 3% discounts per year [2]. I’m going to do the logical thing (Work it out?? Get lost.), and discount it to $20bn currently.
But you still can’t compare that to the current pension funds as we don’t know how much the pension outlay would increase if the super funds weren’t available to retirees.
[1] Yes. I do love saying that to a mathematician. 🙂
[2] I tend to use 3% as my inflation rate, but I haven’t looked at the figures in years. That’s based off government targets that I remember from uni. The last I saw suggested the inflation is all over the shop depending on what you measure it by.
February 22, 2011 at 10:21 am
I have to defend that comment! The maths isn’t wrong, the English is… The 32bn I gave is for 2019, so should have used future tense. so pfft. 32billion is about 25billlion in today’s money at your given CPI (which is about right, depending on how the CPI is measured[1]). So in today’s money the super tax concessions are costing as much as 33% of the current age pension.
So, we’re spending 33% of the current age pension every year now in order to reduce the cost of the current age pension in 2019. Now, I know this guy – he’s a bit of a free marketeer but he’s okay, generally – who thinks that we should be very careful about investing today’s money to mitigate future climate change risks, because people in the future will be wealthier and can easily afford the extra costs of climate change. I wonder if that guy would support spending 33% of the current age pension every year from now until 2019, to reduce the cost of the aged pension in 2019? Bear in mind that repeated studies show that old people are the wealthiest part of society, so we’re spending money now to support future rich people.
I presume you agree that these superannuation changes have a lead time, right? Probably we won’t see the full benefit of the superannuation changes in reducing aged pension costs until about the time I retire (I was the first generation to enter work when the super rules were extant), so we’re looking at this tax-break lasting until 2040 with no noticeable effects (except at the very high end of the wage scale, who have probably always been self-funded in retirement). After 2040 we should expect the means-testing to kick in and reduce the pension costs being drawn from taxes. So we will be spending $25 billion a year for the next 30 years. Let’s suppose at the end of that time the cost of the current age pension drops to zero – then we’ll still be paying $25 billion in tax breaks (to support superannuation investment by young people of that generation). So we’ve spent $750 billion to get the cost of aged-care arrangements down from $75 billion to $25 billion.
Does this seem like the best possible use of that $750 billion? For example, if it were invested in social housing or widening the housing pool so that more people can afford to buy houses, as security for their retirement? What about if it were spent on environmental recovery, particularly to try and secure water supplies and reduce salination damage, so that by 2040 we could guarantee that the farm sector was still a functional part of our economy? Or what if we just gave that $25 billion a year as tax cuts, and let individuals decide whether they want to fall back on the aged pension or save for their own future? Surely as a free marketeer you accept that individuals spending that $25 billion in the market place now would be more likely to invest in things that benefit the country in the future, than if the government forced them to put that $25 billion per year into super funds?
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fn1: for example if the CPI were a fish[2] the measurement would be 4 apples and a groat
fn2: which increasingly seems to be about as accurate a measure as we currently have, based on recent controversies
February 22, 2011 at 10:23 am
I’m going to come back to your comment at 12:50 pm (the one that starts with the quote “Under a fixed state pension…”) last because I think it concerns the part of the arguments against compulsory superannuation that I consider the weakest (the one about money not being resources) and I want to handle it last.
February 22, 2011 at 11:02 am
Okay, so now addressing your comments from the beginning, having dealt with the issues of numbers. Let’s start with your response to the “Libertarian objection,” since that’s probably the most interesting one.
First, you’re assuming that a means-tested pension will exist in the future, which I think is reasonable. So yes, the poor get forced to give up 10% of their pay now in exchange for a top-up on the pension when they retire. So they don’t have to save that much to benefit above the level of the pension, though pension payments rapidly cut off so – as usual – the working poor get caught in a poverty trap with their superannuation savings just as they did with their benefits. But let’s assume for now that this poverty trap is not serious. Then you’re right, the poor benefit from a partial state pension and also from their superannuation. But they gave up 10% of their pay over their whole life for this partial win. So couldn’t we just give them a 10% pay rise, tax it at 100%, and increase the state pension or soften the means testing? Doesn’t this get the same effect?
You say that the poor being forced to forgo wages in exchange for future poverty is not an issue because
only the problem is that it’s fuck all compound interest on fuck all. According to NCOSS the pay for a cleaner is $300 a week in 2006. So that’s about $15000 a year, let’s say $20k to handle inflation etc. Then in one year this person will put $2000 into their super fund. But this super-fund has a long-term return on investment that is 0.1% above inflation. So over 45 years that year’s savings will increase to $3130, giving them a maximum possible retirement nest egg of $141,000 (45 years at this maximum investment outcome). Divided over 15 years, say, they will get an annual payment of maybe $10,000, or $384 a fortnight. This is enough to reduce their pension (the means testing threshold is $146 a fortnight). The current age pension is $17000 a year (470 a fortnight) and after means testing will be 14k, so they’ll probably end up getting about 24k a year including their superannuation nest egg.
Now let’s look at how this compares to their wage. At the end of their life their pension is about 40% higher than it would have been if they had put no super away at all, but they’ve given up 10% of their income for 45 years to do this. And their final income when they retire is only 10% higher than when they first started working, if they hadn’t been putting money into super (it’s 25k vs. 22k) and probably lower than for much of their life (unless we assume that they never increased their wage from the original 22k). Note that if we assume that they never increased their wage from the original 22k, their final nest egg will be much less than $141000 (because they didn’t put progressively larger amounts into the super fund as the benefits of compound interest dwindled), so they will likely retire with an income very close to the age pension, having sacrificed 10% of their salary for 45 years.
This doesn’t seem like a deal that the poor are getting much out of. And saying they don’t benefit isn’t the same as saying “poor people should never save.” Rather, they should save for things that will benefit their income, e.g. save that 2k a year for two years then go to night school for a qualification that increases their wage for the next 30 years. Or save for nice clothes and a ticket to the Slip Inn so they can marry a Danish prince. Either process benefits them more than giving up 10% of their salary a year for … almost zilch.
The post I linked to suggests that tax arrangements still benefit the rich:
so I’m not sure that your example of the cap is very relevant.
My comments ignore that low income earners can earn money at a low tax rate from personal deductions because it’s extremely hard for low income earners to make those contributions, and they’re only a purely theoretical form of welfare.
Finally I point out that this money, if it weren’t paid into super or as wages, would go into corporate profits and be taxed, and you say:
First of all the future pension liabilities of public employees are a furphy, a completely different issue. Secondly, the government doesn’t need to have any “saving mechanism to cover general pension liabilities.” It pays them out of state finances, which are paid by taxes. So when that 9% super levy goes into corporate profits and is taxed, that tax money (partially) supports current pensions. In the future that 12% super levy would support pensions being paid at that future time. Pensions are just an outgoing, a liability, and we’ve seen that they’re well covered by current budgets – about $75 billion a year is our first guess, out of a government outlay of 328 billion. And if you’re worried that in the future that tax burden will increase due to reduced numbers of tax-payers compared to pensioners, the obvious alternative to spending 10% of everyone’s money on compulsory savings is to spend a fraction of that amount on a decent parental leave fund and childcare support, so that more children are born.
So I think the aggregate poor aren’t so impressed by giving up 10% of their income for life to obtain these dubious future gains. An alternative message from the aggregate poor: “tax the rich now, and in the future, and we’ll be just fine thanks!”
February 23, 2011 at 9:30 am
“I wonder if that guy would support spending 33% of the current age pension every year from now until 2019, to reduce the cost of the aged pension in 2019? Bear in mind that repeated studies show that old people are the wealthiest part of society, so we’re spending money now to support future rich people.”
Don’t look at me. I already said I could support a system where old people have to sell off their homes at the end of their lives to support themselves. See comment 3 above.
And remember that the end game of this isn’t in 2019. From memory it’s closer to 2035 to 2050. And the aim is that the pension outlays can be cut significantly.
To do this another way we could have the government putting aside money now so that it could benefit from compound interest and cover the pension costs later. Of course that would require trusting the government to actually save money and then not dig into it to cover their next crazy scheme, which is basically a bet only a lunatic would take. So directly assigning the money to individuals so that the government can’t get at it is a good idea.
“So we’ve spent $750 billion to get the cost of aged-care arrangements down from $75 billion to $25 billion. Does this seem like the best possible use of that $750 billion?”
I don’t know. I’ll get a mathematician to work it out for me. You need to calculate the present value of a $750bn cost over 30 years against a $50bn saving from 30 years out to infinity. That’s still not quite accurate as the savings would be gradually realised till they hit their full $50bn figure, but I can’t work out the rate to apply there.
February 23, 2011 at 10:05 am
“So couldn’t we just give them a 10% pay rise, tax it at 100%, and increase the state pension or soften the means testing? Doesn’t this get the same effect?”
Sure, you can just give the same money to the government and then distribute it via a pension. The only catch is that the only group less capable of picking good investments than fund managers if government ministers and beaurcracts. So your options here are:
1. Let private fund managers manage the money. Get OK returns
2. Let government save and manage the money to cover the costs. Get worse returns.
3. Don’t both saving to cover the pension liabilities. Let them eat cake.
“But this super-fund has a long-term return on investment that is 0.1% above inflation.”
It is for the time period that you looked at, which included a massive recession in the 10 year period examined. If we just assume that the individual choose a low risk investment option (government bonds generally) they’d get a 6%+ rate of return that’d crap on any inflation rate of 3%. Try runing your numbers again when you get a 3% real return per year.
The problem with the fund returns was that every idiot and their dog ticked aggressive growth, which invested in a combination of mortgage backed securities and moonbeams. For someone our age, that makes sense. I took a hit then and I’ll get it back in the next boom. It’s every person who was 2 years from retirement but was to greedy to forgo a 10% return that got screwed.
“My comments ignore that low income earners can earn money at a low tax rate from personal deductions because it’s extremely hard for low income earners to make those contributions, and they’re only a purely theoretical form of welfare.”
I’d be more willing to concede these are a bad idea if you hadn’t just said:
“save that 2k a year for two years”
So it shows that they can find the money if they want.
“the obvious alternative to spending 10% of everyone’s money on compulsory savings is to spend a fraction of that amount on a decent parental leave fund and childcare support, so that more children are born.”
Sorry, are you the guy who believes in global warming and environmental damage or not? If you believe in those things then a stance of “Well, just keep growing the population” isn’t an option. You need to take steps to steady the population and even allow for it’s decline. The only way to do that is save now to cover future costs. If you don’t do that you hit the environmental damage that you were complaining about earlier in this same thread!
“An alternative message from the aggregate poor: “tax the rich now, and in the future, and we’ll be just fine thanks!””
My message back to them if they want that stance is I’m OK with it, but I want freedom to either house my money *and myself) outside the country (which I do currently have, so good luck taxing me harder in the future if you irritate me too much), or alternatively I can just get a bad back at any stage.
Remember, if I (or say the entire rich population of Australia) get a bad back and fall back on disability payments we do it on a much higher asset base. You can complain all you want about how disability isn’t enough to live on, but I’ll bet I can do it much better if I just suck up a couple of crap years and work to pay off my mortgage. After that the pension is not taken by mortgage or rent. So I’d win in that scenario too. [1]
[1] I want to illustrate that there are no reasonable scenarios where the rich don’t end off OK. It’s sort of the defining factor of being rich. There are unreasonable ones (“Up against the wall”), but frankly history shows that everyone loses in those scenarios.
February 23, 2011 at 10:09 am
This brings me to the next point I want to make about the arguments against the state pension and in favour of compulsory superannuation: government survivalism.
You can’t claim to me on the one hand that the poorest of society will be fine with compulsory superannuation because the (means-tested) state pension will still exist in 2050; but then on the other hand tell me that we can’t trust the government “to actually save money and then not dig into it to cover their next crazy scheme.” Which is it to be? Do governments break their covenants at the drop of a hat, or do they keep them? I propose to you that you can trust government to keep their covenants on handling retirement, and the existence of the state pension since 1909 suggests that they’re a damn sight better at this sort of thing than, say, banks are at upholding their covenants on protecting their core assets or managing risk. Occasionally governments have to bail out banks from pension savings… not the other way around.
Furthermore, the figures I’ve adduced here make it pretty clear that people below the median income – and especially the working poor – can’t plan for their own retirement in the absence of a state pension (i.e. redistribution of wealth), and the entire modern Australian capitalist settlement is based on that pension (which is why Lenin hated social democracy, I’ve no doubt). Which makes a government’s willingness to cleave to this covenant pretty clear.
And on top of that, one of the main reason that governments have problems cleaving to previous covenants is that free marketeers take over the reins of power. When social security is privatized in the US, various libertards will be jumping around saying “see, you can’t trust government to keep its promises!” while conveniently ignoring that the main drivers of social security privatization are free marketeers, who claim that “government can’t be trusted.” This is a self-fulfilling ideology.
So let’s set aside our cynicism about government – at least in this area – for the moment. Australia has run an aged pension for 100 years through two world wars, multiple financial crises, and significant cultural changes (immigration, reconciliation, etc). If the Australian government were to say tomorrow “we’re going to commit to saving for your retirement” (which they don’t need to do), they would. If they were to say “we’re going to commit money from here on to ensuring that the population balance remains sustainable (in terms of tax revenues)” they would.
February 23, 2011 at 10:25 am
Taking on the first half of the comment that starts with “Sure you can just give the same money to the goverment…”
So if governments are so bad at picking good investments, how come government bonds are a better return on investment than those provided by a fund manager? And do you think that fund managers will continue to be better at picking investments than governments as the pool of funds expands, more and more people have to take up the job of “fund manager” and regulatory capture ensures they know that they’ll continue to receive funds to manage – and fees paid to them – even if they fuck up?
I mean, that’s what you’re saying here: these guys got a 0.1% above-inflation return on investment, i.e. they cocked up, so let’s increase the amount of money they get to use by 25%, and employ more of them.
And how do you square “the only group less capable of picking good investments than fund managers if government ministers and beaurcracts” with “The problem with the fund returns was that every idiot and their dog ticked aggressive growth”? Given that government bonds give a higher return than the fund strategy picked by “every idiot and their dog”?
You can argue that this isn’t the fund managers’ fault, that it was due to a crash. But there has been a crash at least once every 10 years for the past 30 years. So you aren’t going to “get it back in the next boom” because that boom will bust.
So if everyone is investing in government bonds with this money as the only means of guaranteeing investment growth, what really is the difference between this and just letting the government keep the money and use it as they see fit, on the (reasonable) assumption that in the future they’ll cover your age pension liabilities?
As an aside on fund growth:
These people have been putting their money into super for less than 15 years, and it wasn’t their money (it was compulsory contributions by their employer), there isn’t much there and anything they get is a windfall. They haven’t had 45 years to grow it, so 2 years before retirement I don’t think you can characterize them as “too greedy,” so much as acting rationally with their “investment.” And isn’t this a secondary problem of a compulsory super system? i.e.
1. the fund managers know the money is coming to them no matter what (it’s compulsory!)
2. the joys of compound interest mean that even underperforming funds will benefit in the long term
3. it’s not the investor’s (the contributing employee’s) own money, so they don’t really care about it the way they would their own investments
4. there will always be an aged pension to fall back on
Is it any wonder that these super funds invested in “mortgage backed securities and [sic] moonbeams”? This is not a recipe for responsible management of an enormous amount of money.
February 23, 2011 at 10:36 am
Then moving on to
No, if you take a Malthusian view of these things then “just keep growing the population” isn’t an option. And in any case the solution for the superannuation “problem” isn’t necessarily to grow the population, merely to balance the ratio of tax payers to tax recipients. This can be done by making sure there is a minimum number of young people to keep the population static, and ensuring that women can continue to work while they have children (so they don’t leave the workforce) and adjusting the retirement age as people grow older. Recall the target for population policy in Australia is simply to maintain the “replacement rate” of population. And if you look at a population that is genuinely facing a significant aging “problem” (Japan), the change in population capable of working over a 50 year period is actually really small (I think in Japan the prediction for 2050 is that the working age population will have shrunk by a mere 5-7%, a figure easily repaired without increasing the population).
So we can have our cake and eat it too.
Next:
This threat is hollow, and everyone knows it, for three reasons: everywhere else is doing the same thing; people don’t choose their residence based on purely mercenary grounds, they like to live in their home country; and “tax the rich” doesn’t mean “fuck the rich” or eat the rich, having our cake and eating it really isn’t so tough on the rich. And what could be better than being rich in Australia, even if you’re being taxed higher than you might be in Bahrain?
Anyway, let’s not get distracted by the bigger problem of whether social democracy is the “right” approach. Let’s assume that it’s happening and progressive taxation is here to stay, and stick to asking whether that system will be broken in the future by the need to fund retired people. The question I’m trying to get at here is whether compulsory superannuation is a good idea, not whether we should change everything else!
February 23, 2011 at 10:50 am
Going back to the earlier discussion that I avoided, about “money does not equal resources,” I think the core of the argument against that objection to compulsory superannuation is (kind of) in this comment of yours:
When I wrote this I wasn’t thinking “evil capitalist” vs. “good idea.” I’m trying to tease out this concept that “good rate of return” does not (apparently) necessarily secure resources for the society that is making the good rate of return. So the idea here is that although Australians have got lots of money in their super nest egg, they don’t have any resources to spend it on (because they made all their money speculating on russian farms). So when it comes time to spend their money in retirement the country they’re actually physically in doesn’t have the resources to physcially support them.
I think what this must mean in practice is that inflation in the country they’re physically in will run very high, and so their investment won’t be worth much. Which, funnily enough, is exactly what has happened with Australian superannuation funds.
As an example: if you spend 10 years investing in mortgage backed securities, you make lots of money but you haven’t done anything to improve infrastructure in Australia. Australia has no more resources to support you than it did when you started investing. If in the interim your society has grown a little, there a slightly less resources to go around, and everything thus costs more. So you haven’t gained physically from your investment. Whereas had you invested in environmental improvement in Australia the rate of return might have been lower, but your physical environment would be better able to support your population, and so prices would reflect that and your (not so big) super nest egg would be sufficient to live on.
I think this is the argument about investing in superannuation as opposed to leaving the money for the government to use. For example, the government could invest in energy security projects, to reduce the vulnerability of Australian society to oil price shocks.
As I understand it this argument (money does not equal resources) is suggesting that all this money sloshing around in the world isn’t making our lives easier, because in looking for maximum returns it isn’t necessarily securing resources. I don’t understand how this can happen in the aggregate – presumably those russian farm programs would make russian fruit and vegetables cheaper and we could then purchase them with our huge nest eggs. But I suppose it depends on whether the products of those investments are fungible (is that the term?) And it seems like the superannuation money has been chasing booms overseas that have no material, resource implications for Australia because they aren’t fungible – e.g. property, mysterious financial instruments, and certain commodities we don’t use.
February 24, 2011 at 2:03 pm
“and the existence of the state pension since 1909 suggests that they’re a damn sight better at this sort of thing than, say, banks are at upholding their covenants on protecting their core assets or managing risk.”
1. What was the average lifespan in 1909? Referring to the fact the pension worked with a much lower life expectancy has about as much relevance as pointing out that the average person didn’t need it during the Black Death, therefore it should be done away with all together.
2. The existance of failed states, including Lenin’s USSR, shows that government failure is a bit more common than you claim.
3. I don’t know what the pension covered in 1909, but I do know the standard of life that the Harvester decision mandated as a minimum wage and if we’re accepting that as the minimum then a) I think it’s perfectly affordable and b) I don’t want it.
“If they were to say “we’re going to commit money from here on to ensuring that the population balance remains sustainable (in terms of tax revenues)” they would.”
Nonsense. They could say this till they were blue in the face, but they only have very crude levers to control population growth. Tax breaks and maternity leave have a positive correlation with more children being born, but you can’t say “The tax balance requires X more people, therefore I need to put in Y dollars to hit that mark.”
“So if governments are so bad at picking good investments, how come government bonds are a better return on investment than those provided by a fund manager?”
Here you’re misunderstanding what a rate of return on a government bond indicates. A government bond is a promise to pay a debt back at a later date, not a form of investment that may or may not have a return. The difference is that with a 99 year bond the government can be stone broke for 98 years, then harvest and sell it’s citizens organs to pay back the bond, by contrast an investment that goes broke in year 2 is stuffed. The rate of return you get off a government bond reflects the amount of money the government has to offer to find enough greedy people to sell its promises. For example Greece recently had a real chance of defaulting, so they had to offer high rates of return to get enough greedy people to raise the money they wanted. If Greece had defaulted then those people would be classified as greedy and stupid. By contrast there is an expectation that America will never default [2], so it can offer much lower rates or return than Ireland or Greece.
“regulatory capture ensures they know that they’ll continue to receive funds to manage – and fees paid to them – even if they fuck up?”
No. I think that fund managers who cock up badly enough should be allowed to fail. Then the government should directly help the people impacted, not the business. The government guarantees given to every bloody business under the sun currently are a massive problem as they promote companies being stupid because they have a safety net. Who wouldn’t take a one way bet? Heads I win, tails the tax payer loses? I’d place every dime I had on that and it’d be the government’s fault for taking a stupid deal like that for it’s people. They should be (figuratively) shot (and so should I).
“And how do you square “the only group less capable of picking good investments than fund managers if government ministers and beaurcracts” with “The problem with the fund returns was that every idiot and their dog ticked aggressive growth”? Given that government bonds give a higher return than the fund strategy picked by “every idiot and their dog”?”
Every idiot and their dog referred to the populace, not the fund managers. The fund managers were doing what they were told to do – go find risky assets that had a good chance of good returns. It turns out that the important word in the prior sentance isn’t “good” it’s “risky”.
“But there has been a crash at least once every 10 years for the past 30 years.”
Actually there hasn’t. We were in the longest period of sustained growth since WW2 (and maybe before). The dot com crash and the asian financial crisis didn’t hit the broader world economies enough to trigger a recession.
“So you aren’t going to “get it back in the next boom” because that boom will bust.”
Yeah, and given I’m investing for 30 years, the two after that will bust too. I’m planning on swapping to conservative growth mid boom cycle when I’m about 55. I’m going to try to learn the lesson.
“So if everyone is investing in government bonds with this money as the only means of guaranteeing investment growth”
No. Again, that’s not what bonds are. The government isn’t making “good” or “bad” investments it’s promising that when the time comes it’ll tax it’s people to pay you back. Basically any government that cares about its debtors more than its people is risk free, and any government that cares about its people (or has a chance of being overthrown) has a degree of risk.
“1. the fund managers know the money is coming to them no matter what (it’s compulsory!)”
That’s why the change to being able to swap super funds was so important (I can’t recall who brought it in. I think it was Howard, but it could have been Rudd). If the fund manager knows the money is coming to them (like the industry super funds did) then doing a shit job didn’t matter, you still got more cash. Now that someone can say “You’re shit, I’m leaving” the fact that the money has to go somewhere doesn’t matter as each fund manager needs to do a good job so it comes to him.
“and [sic] moonbeams”
Why did you put sic in there? That’s what I said. Sic is used when theres a typo or spelling error isn’t it to indicate that the person quoting isn’t the source of the error?
“This is not a recipe for responsible management of an enormous amount of money.”
So what’s your alternative? The money needs to be there to pay pensions in one form or another, so the alternative isn’t “Let people have their own money” unless you cancel the pension. The alternative is “A faceless, unsackable government bureaucrat will take huge amounts of money and direct it in ways that may or may not be more responsible, but will be unknown until complete. And you can’t even change to another manager.”
By the way, I think my text may be a little heated in this thread. I’m pretty sure you know already, but please assume that any time I’m pouring scorn on an idea it’s just for lolz. If not I apologise unreservedly [3].
Ultimately, I think we need to examine the concensus of economists on this and then consider what the science says. Based on that, I submit your a superannuation denialist [1]
[1] BTW, this accusation is just for fun. But do feel free to explain why environmental science is too complex and must be taken on faith while economics can be questioned by anyone.
[2] The reason being its the default currency of the world and could always print more money. I don’t 100% agree with the logic, but the exceptions are a bit far fetched.
[3] I admit, I’m only willing to apologise unreservedly as I want to be the first person on the internet to ever have done so.