Author Archives: Bruce Bradbury

Saving the young from superannuation

Posted on by
39

Of the many policy debates in Federal Parliament in 2011, one which gathered support from both major parties was the proposal to lift the superannuation guarantee employer contribution from 9 to 12 per cent.  Not surprisingly, this was wholeheartedly endorsed by the superannuation industry. However, superannuation contributions impose large burdens on young adults at a time when they can least afford them. With this proposed increase, it is time that the policy was amended to improve the match between retirement saving and costs across the life course.

More superannuation, it is argued, will increase intergenerational equity, relieve fiscal stress on governments and compensate for the myopia suffered by individuals when saving for their future retirement. Even though the superannuation guarantee is paid by employers, it is generally agreed by analysts that the cost of the employer contribution ultimately falls on wage earners via reductions in wage increases. This means that, while superannuation saving addresses one important issue of lifecycle resource transfer (low incomes in retirement), it exacerbates another. Uniform rates of contribution increase the financial stresses faced by families during the household formation stage of life.

The mis-match between superannuation contribution patterns and financial stress across the life course is illustrated in the figure below.

Financial stress and saving capacity by age, Australia 2009-10

The red line shows the percentage of households where people report being not able to pay utility bills on time over the previous year (people were interviewed across the 2009-10 financial year). These results are grouped by the age of the highest income earner in the household (using the ABS ‘household reference person’ gives very similar results). This measure of financial stress is highest for those aged under 45, then declines steeply, even past retirement. Measures of financial stress such as this are an imprecise indicator. They might reflect changes in resources relative to needs over the life course, but could also reflect other factors such as improvements in financial management skills, increases in aversion to the risk of utility disconnection, or more modest consumption preferences due to the lower income of one’s own age cohort.

A more direct measure is the ‘saving rate’ shown as a blue line in the figure. This is the excess of disposable income over expenditure (as a percentage of disposable income). This is imprecise because of measurement error in both income and expenditure and also because it omits key components of wealth accumulation such as capital gains. Nonetheless, it is a useful indicator of how saving capacity varies across the lifecycle. (The saving amount shown here is in addition to that due to existing employer super contributions and home purchase). Those aged under 30 are high savers, but this drops dramatically when people reach their 30s and start taking time off work to care for children, purchase goods for children and purchase housing. This is despite the substantial cash and service transfers that governments make to people with children in their household. Using this saving measure, saving capacity only increases again once people reach their 50s. Even in retirement, it is not as low as in the 30s and 40s.

Continue reading →

Your Carbon Tax at Work

Posted on by
6

I recently decided to install an air conditioner in my study. Naturally, caring about the environment (but not enough to forego my comfort) I chose the most energy efficient model on the market (the only 6 star split system).[1] Got a phone call yesterday – the importer is out of stock until mid-December. Apparently they so misread the demand for this unit that they have none to sell during the peak sales season!

[1] Search on www.energyrating.gov.au if you are interested (and not in a hurry).

Tax talk-fests and the importance of being dismal

Posted on by
21

Why is tax reform so hard? Reviews such as the Henry Review often point to ‘low-hanging fruit’ where efficiency gains can be made without any significant equity costs. One oft-noted example is property stamp duty, where the Henry Review recommended its replacement by land taxes. Taxes such as stamp duties, it is argued, discourage residential mobility and the most efficient use of the housing stock.

In general, tax theory tells us that the most efficient way to raise a given amount of revenue is to use a tax which does not distort behaviour. Taxes on transactions such as stamp duty and insurance taxes are rated as particularly distortionary because people can easily change their behaviour to avoid them. Taxes that are hard to avoid (eg land taxes) are much more efficient. Putting this another way, the change in behaviour as people respond to distortionary taxes means that the tax rates must be higher than otherwise in order to compensate for this inefficiency. Okuns ‘leaky bucket’ has to return more often to the well, the larger are the leaks in the bucket.

But if there is such consensus about tax efficiency, why has there been a distinct lack of political enthusiasm for replacing transaction taxes such as stamp duties with alternatives such as land tax (or even more ‘radical’ proposals such as death duties)?

Continue reading →

Are employers using part-time work to hang onto their workers?

Posted on by
9

So far during the current recession, the drop in employment hours has been much greater than the drop in employment. Some have described this as evidence that firms are seeking to hang onto their skilled workforce by reducing work hours rather than laying people off. Julia Gillard, for example, interpreted this as reflecting the fact that many employers, working co-operatively with employees and trade unions, are striking innovative arrangements to keep people attached to work during these difficult days (SMH, Aug 7, 2009). Is this a reasonable interpretation? Are employers moderating the impact of the recession by moving valued workers to part time work instead of laying them off?

I think the answer is ‘no’. First, the experience of part-time work in this recession appears to be similar to the experience in the last recession – though it is too early to be sure. Second, even though part time employment has increased in relative terms during the recession, this has not been because more people are moving from full-time to part-time employment. Rather, there has been a fall in the number of part-timers taking up full-time jobs.

Continue reading →

Taming the geese

Posted on by
4

One of the most widely accepted tenents of tax theory is that it is most efficient to tax immobile factors of production such as land. Such taxes cannot be avoided, and so they do not distort behaviour. Consequently, most economists would argue that an annual land tax is preferable to a tax on land transactions such as stamp duty. The latter, it is argued, discourages people from moving to more suitable dwellings and consequently has many undesired consequences. And yet stamp duties remain a major source of tax revenue for state governments and there seems little likelihood of them being replaced by land taxes any time soon. Why is this?

Ross Gittins has a piece arguing that this conventional view is wrong because economic orthodoxy ignores important facets of human behaviour.

Continue reading →

Is Australian social protection ready for the great recession?

Posted on by
8

Australia doesnt really do social insurance. For many years income protection policy has focussed on poverty alleviation rather than protection against negative income shocks. The forthcoming recession might be a time when we begin to regret this model. As the graph below shows, Australian average income workers losing their jobs face a larger drop in income than in most other OECD countries.

Unemployment benefit replacement rates, 2005

bradbury

The graph shows the net family income that people on average wages and eligible for unemployment benefits will receive if they become unemployed, relative to the income that they had when employed. The top panel shows the situation of single workers (the average wage used was around $51,000 in Australia in 2005). Australia is the last runner among the 29 OECD countries, with single unemployed having replacement rates of around 33% compared to the median OECD rate of 58%. The bottom panel shows the situation of a married average wage worker who loses their job while their spouse continues to work (on 2/3 average wage). In Australia, the income test means that such a family would not be entitled to any Newstart Allowance though their family payments would increase.

In most other OECD countries, the typical average wage worker losing their job would be entitled to a relatively high rate of unemployment insurance for some months (eg 6 or 12). Those without sufficient prior employment, or those who experience long-term unemployment, only receive social assistance payments. The Australian system of income protection is reasonably successful in preventing poverty among these groups with long-term disadvantage. However, it provides only weak insurance against shocks like the one we are facing now.

At the macroeconomic level, this suggests that the automatic stabilisers will be weaker in Australia than in most other rich countries. At the household level, it will mean greater short-term income shocks than experienced elsewhere. This will play out in terms of mortgage arrears, increased debt and household stress, and perhaps most importantly, political discontent.

What can be done? We cannot build an unemployment social insurance model overnight and maybe we shouldnt. But we cannot expect that an income support system based on poverty alleviation will be a suitable response to an economic shock of the size of the one we are about to experience. In the absence of automatic stabilisers manual action is required. Small actions could include further relaxation of liquid assets tests (beyond those won by the Greens) and reductions in Newstart waiting periods. Temporary increases in the payments to Newstart recipients who have been conspicuous in their absence from government handouts to date – are the most obvious response.