Saving Simon

Mark Latham has achieved his aim of deflecting attention from Simple Simon’s poor poll results by hyping his ‘saving plan for low income families’.

Mr Latham said breaking the poverty cycle was crucial in overcoming many social ills, such as welfare dependency and crime. “If you want to do something about the long-term cost to government of welfare and policing and social breakdown … the best way of doing it is ending poverty.”

I agree, but the best way to reduce poverty is to improve the public’s ‘financial literacy’ (FL), not give them handouts that will be swallowed up by increased fees (not widely understood by the great majority of consumers, including, I suspect, Mr Latham) that continue to inflate the profits of our financial institutions. His statement,

Working Australians have had a taste of economic ownership and not surprisingly, they want more. Not the cars and refrigerators that their parents aspired to but real economic assets: equity investments, business ownership and financial nest-eggs.

will simply cause a lot more grief amongst low income families, unless they have a better understanding of how to invest.

The ANZ funded the first Australian study into FL with the results published in May this year. Amongst the plethora of motherhood statements a few gems are hidden which give an insight into why the savings ratio in Australia is in such a mess. For instance,

E3.5 Understanding of Investment Fundamentals.
There are few concepts more important to sound investment and money management than the relationship between risk and return. On the positive side, most people (85%) knew that high returns generally mean high risk. However, many people did not apply the concept when presented with specific scenarios. For example, when faced with an investment advertised as having a return ‘well above market rates at no risk’, 47% would have made some level of investment.

It’s not hard to understand why Australians lose upward of $600 million each year in schemes that are touted as ‘no risk’. Consequently it would come as no surprise if some of Latham’s taxpayer contributions to Matched Savings Accounts would end up in the pockets of all sorts of ‘no risk’ schemes. (Forgive me for sounding like Professor Bunyip, I just happen to agree with him on this one !)

The ANZ study continued to highlight the urban myths that have become entrenched regarding anything to do with superannuation. The level of understanding of the national compulsory scheme is ludicrously low, as evidenced from this quote;

E3.6 Planning for Retirement
Given that Australia’s compulsory superannuation scheme is still in its early stages, it is widely recognised that most people will need to rely on more than their superannuation for a comfortable retirement. Overall, respondents understood the basics of superannuation and recognised its importance. For example, only 5% of the adult population aged under 65 and not retired said that superannuation, planning and saving for retirement didn’t really matter because the Government will make up the gap. However, the survey also found that:
· only 37% of people had actually worked out how much they needed to save for
their retirement ; and
· of those people over 35 with inadequate savings for retirement (calculated by considering the individual’s current level of savings and investments) 40% thought they would be living at least as comfortably in retirement as they are living today. The survey also highlighted limited awareness of fees, charges and taxes in relation to superannuation:
· fifty- five per cent (55%) of fund members claimed to know little or nothing about the fees and charges that apply to superannuation; and
· only 54% of those with superannuation were aware that it is taxed at a lower rate than other investments.

Further evidence of the average punters reluctance to save comes from Roy Morgan Research May, 2003 in the study.

– sixteen per cent (16%) of the adult population spend all their income as soon as
they get it and do not really plan for the future; and
– twenty-six per cent (26%) of the adult population have problems setting aside money for major financial outlays.

A far more efficient method of encouraging people, particularly low income families, to save would be to improve financial literacy at secondary school and make VET courses available for free, so that poor people could better understand where their money goes; a third of every glass of beer, eight cigarettes in every twenty, and a huge proportion of the their pay they pump into the pokies, would be a good start.

Concomitant with the ANZ study, ASIC has issued a discussion paper seeking submissions to consider methods by which FL could be improved. Research was carried out on the current levels of FL in schools;

It was found that whilst there are opportunities for teaching financial literacy skills, it is not a formal course of study in any jurisdiction and there is no systematic approach to its teaching. At present not all students will be exposed to financial literacy teaching and no course covers all aspects of financial literacy.

Our research has found that schools are already teaching aspects of financial literacy and that many more opportunities exist in the curriculum. Anecdotal evidence suggests that these opportunities are currently under-utilised. This situation in no way reflects negatively on teachers. Rather, our research suggests that, irrespective of opportunities in the curriculum, for financial literacy to have any chance of being taught in schools, teachers need more support in terms of up-to-date resources and professional development.

There is no systematic approach to the teaching of financial literacy. There are no agreed elements or competencies for financial literacy and no coordination across curricula to reinforce and ensure systematic learning. The term ‘financial literacy’ is rarely used in curriculum documents; however, there are a number of learning outcomes that directly relate to elements of financial literacy. The Northern Territory is the only jurisdiction that uses the term ‘financial literacy’ in its learning outcomes. This occurs in the Enterprise strand in Studies of Society and Environment (SOSE).

At the level of implementation, at both school and classroom level, the Erebus research revealed that there is currently a wide interpretation of the term and its related concepts. In their interviews with educational stakeholders (officials from Boards of Studies and other curriculum authorities and approximately 30 teachers) they found that, overwhelmingly, there was little understanding of the term financial literacy. Very few had actually heard or used the term before. Most could guess what it might mean, but did not have a good grasp on what this might imply in schools.

The research found that there was a common belief among teachers and curriculum developers that the most appropriate people to develop school resources about financial literacy were members of the financial industry. We would support this view, provided that resources were produced in accordance with set criteria and verified by a body independent of the industry. This is explored in further detail in Section 7.

A couple of models already exist in the UK, see Australian Securities & Investments Commission, June 2003 Page 38.

Personal Finance Education Group
pfeg is a UK-registered charity that was established in 1996. Its goal is to promote and facilitate the education of all UK school pupils about financial matters so that they can make independent and informed decisions about their personal finances and long-term security. Pfeg lobbied for the inclusion of personal finance in the National Curriculum. It has a board comprising representatives of financial industry associations and consumer groups and an Advisory Group which consists of 43 organisations, including government departments, consumer organisations, education stakeholders and individual financial institutions. The UK financial services regulator, the Financial Services Authority, acts as a special adviser to the pfeg board. pfeg is funded by members of the financial industry. The FSA, the DfES and National Savings also contribute towards pfeg.

and jump$tart in the US.

Jumpstart was established in 1997 in the US. Its mission is to improve the personal financial literacy of young adults and promote the teaching of personal finance. It also encourages curriculum development to ensure that students attain basic personal financial management skills. Jumpstart has a similar organisational structure to pfeg. It is constituted as a non-profit organisation consisting of a Board with representatives from 30 educational and financial services organisations, and has 140 Partners including government agencies, universities, finance industry bodies and sponsors of education programs.

Now it seems to me that, if I can find out about what our corporate regulators, financial and education institutions think about ways to improve savings rates with half an hours Googling , you’d think that Mark Latham, with the resources at his disposal would be privy to much more (better?) information, wouldn’t you? That’s why I think this ‘savings account’ proposal is so much rubbish, designed to keep his leader off the front page.

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Ken Parish
Ken Parish
2022 years ago

Wayne,

Your assumption that this is merely an attention-diverting exercise on Latham’s part seems to flow from your accurate observation that his savings proposal is half-baked, ill-considered, and (as you eloquently explain) pays no attention whatever to the far more important financial literacy issues (a fool and his money are soon parted).

However, if you were to look back at Latham’s earlier policy ideas over the last decade or so; from leaping on early “third wave” communitarian notions; through Puttnam’s ‘social capital’ (now hijacked by Costello); employee share ownership promotion; and now the savings initiative; you’ll find that every one of them was half-baked and ill-considered. This is simply a hallmark of Mark Latham. The only reason Latham’s got a reputation as one of Labor’s “ideas” generators is that he actually has and espouses some ideas, where most of the rest of the current federal ALP is a policy-free zone. The trouble is that most of his ideas are silly ones, or at least ideas that need huge amounts of development and rethinking before they could ever become practical policies. Whether it’s better in political terms to express stupid ideas or none at all is a moot point.

Geoff Honnor
Geoff Honnor
2022 years ago

I think you’re both being a bit generous. Latham’s has never had an original idea in his life. They’re just Third Way policy initiatives culled from esoteric American and Brit publications that he’s betting no-one else has read.

I thought his recent observation that the poor are feckless bastards who are pissing, gambling and smoking it up against the wall was original only in the sense that it cast Amanda Vanstone in a much more reasonable light in comparison. And also that it sat hilariously at odds with his my “kind of fella” valediction of John Singleton.

Niall
2022 years ago

Isn’t it interesting, though, that both the US and UK have fostered savings schemes for the low-paid wage earner under current administrations?

Geoff Honnor
Geoff Honnor
2022 years ago

Well….not if you accept my theory about where Latham gets his ideas from Niall :)

Yobbo
Yobbo
2022 years ago

You can’t go around teaching the plebs about finance. What if they do too much research and learn some economics as well? Both the major parties would be finished.

Homer Paxton
Homer Paxton
2022 years ago

Ken,
You are really don’t like Iron Mark do you.
The expenditure tax is a beauty and should be adopted.
The best way to increase savings is to tax superanuuation only at the benefit stage and at the person’s Marginal tax rate.
This would mean money in the accumulation stage would be tax free.
Watch the money flood in then.
I think the idea of matching payments for low income earners is a good one.
He might try to reduce the highest MTRs around, ie the ones for people who are on some sort of Government assistance and then get a job.

Ken Parish
Ken Parish
2022 years ago

Homer,

I certainly agree with making occupational super even more attractive. However, most of Latham’s newly announced plan doesn’t seem to have much to do with super. It’s simply a plan for government matching grants for low income earners who achieve a certain designated level of savings in a particular time period. As Wayne suggested, without education in financial literacy skills it’s a dead set certainty that most low-income earners will simply squander the savings and grant money on unwise, high risk, get-rich-quick investments (a fool and his money are soon parted).

I certainly don’t have a high opinion of Latham, but that flows from a reasonably objective evaluation of each of the supposedly new and exciting policy ideas he’s launched over the years, not from an instinctive antipathy (as you seem to be suggesting).

woodsy
woodsy
2022 years ago

Homer: you’ve got it all wrong mate. Superannuation is only attractive to those on marginal tax rates above 30%. Ask around, which of your low paid friends would voluntarily contribute to super, no matter what the contribution tax rate was ? This is particularly true of small business; in my experience very few SME proprietors make contributions to super, because they are not compelled. I’m all in favour of schemes to improve savings, and I don’t believe superannuation is the way to go; it’s too subject to regressive legislation and the huge union-run super funds will become increasingly the playthings of a movement bereft of ideas for improving the lot of their members. (come in Gummo).

AS I said at the end of the post, Mark Latham has the resources to research and propose something that really meets the needs of both the community and address the dismal savings ratio. Why he hasn’t done so is suss IMO.

Homer Paxton
Homer Paxton
2022 years ago

Woodsy,
I am advocating what every person who has studied Super has sais.
The only tax should be at the benefit at the MTR that is both the accummulation and earnings are tax free.
What would you put your money in if that was the case?

woodsy
woodsy
2022 years ago

Three things Homer; first, only contributions that are eligible for a tax deduction are taxed. In the case of compulsory super contributions the employer gets a tax deduction. If you put already-taxed contributions (ordinary savings) into super they are not taxed, indeed it has become a very effective way of reducing the tax payable on the benefit to do so.

Secondly, where is your evidence that more people would save more in super if it were not taxed ? The super funds would have us believe that is the case but they only want the increased fees generated by bigger funds. The facts are that your average saver does not want his money tied up until 55; and you’ll find that 55 will soon become the minimum, with lump sums prohibited and whatever tax regime the Government of the day decides it needs to generate taxes from all the retired babyboomers, because goodness knows there’ll be too few ordinary income earners to pay tax.

Thirdly, I’m past the accumulation phase now and living off the savings I’ve put aside during my working life. I only have about $105,000 in super, the tax free amount that’s unlikely to be reduced, given that most laws relating to super are not retrospective.

Should you wish to receive further information please ask, I know lots of sites where one can get to know much more about super.

Observa
Observa
2022 years ago

For the vast majority of PAYE income earners, the highest returning, riskless form of super would be to invest in their mortgages which they are currently paying off with after tax income. No super fund could match this risk/return value if compulsory super was allowed to be funnelled into the beneficiary’s principal place of residence. Such a super scheme would have to see this compulsory super component inaccessible(logically also the first home buyers grant as well) upon sale of the PPR, and reapplied to the purchase of another(or be available upon retirement). The tax free status may also need a ceiling or redundancy when the PPR is paid off. The benefit of retirees owning their own homes is obvious, given the costs of public housing and rent assistance. The downside is further demand induced price hikes in housing, but this may be offset if home owners capital gains are then treated the same way as investors.

woodsy
woodsy
2022 years ago

Good comment Observa. You’re right, the effects of price inflation would have to be considered, perhaps at the end of the present bubble, low income homeowners could be given the option of automatically directing (part?) of their compulsory super payments into their mortgage. Especially if they were given tax exemption on these contributions, ie pay off their mortgage with before tax dollars, it would meet a number of social goals. The only down side would be further concentration of investment into residential property instead of diversification to achieve a better rate of return; but most average punters don’t understand the necessity for investment into anything other than bricks and mortar so this idea would be very attractive to most. Why don’t you suggest this to Mark Latham, it’s a much better idea that what he’s proposing at the moment ?

Observa
Observa
2022 years ago

Woodsy. The application of compulsory super to PAYE taxpayers mortgages for their PPR doesn’t sound like high finance to me. Just about all Australians would understand it. Currently with the average tax rate of about 25% for most wage and salary earners facing 6% variable mortgage rates, that equates to a gilt edged return of about 7.5% (assuming their compulsory super is untaxed going in) No super fund could match that capital guaranteed return even without fees. Latham and Co must have come across this sort of analysis, so why go off on tangents like his proposal? Personally I think he’s just trying to appear like a nice, concerned bloke by thinking out loud. He must know that subsidising punters to save up a lump sum and then go and blow it on a wide screen TV, will never get a guernsey.