Super – the next installment of the ‘Gruen Plan’

This week’s column is the third in about five weeks on super to co-incide with the introduction of super-choice. The other two are here and here. So as someone who commented on a draft said, I might be getting near the stage when I can call it a Gruen Plan.

I wrote it in three drafts and am very grateful to James Farrell for actually explaining what it was I was getting at. (Ever had that problem when you realise what you were getting at after a good deal of pounding away saying stuff? It happens to me all the time)

And I managed to get into slogan form a theme that often crops up in economics and in my columns. “A vicious circle is often a virtuous circle in disguise”. Keynes made this idea central to his own economics, but more generally, wherever there’s positive feedback there’s the scope for the phenomenon.

Ross Garnaut summed this up in a different way a few years ago when he said that Australia was likely to enjoy all of a range of good things – low unemployment and inflation, budget surpluses and productivity growth – or none of them. They feed on each other. Anyway, the column is below the fold.
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A super way to turn a vicious circle into a virtuous one

Long overdue, ‘super-choice’ finally arrived on 1 July. Of course the overarching goal of superannuation is to constrain choice.

In Homer’s Odyssey, Odysseus, sailing past the Isle of the Sirens, had himself lashed to the mast and his crew’s ears filled with wax. That way he could hear the song which had lured other sailors to their death and yet live to tell the tale. In embracing self-constraint, Odysseus saved himself.

Our super system lashes some of our savings to the mast as we pass our own Isles of the Sirens. Plasma screen or home extension anyone?

But pity that generation of twenty and thirty somethings increasingly resentful at the way us forty, fifty and sixty somethings have bid up the housing market. When they’re madly saving their deposit we force them to save another nine percent of their earnings and invest it elsewhere! And isn’t it odd that, as even as our leaders exhort us to ‘lifelong learning’ they won’t let us draw on superannuation savings to fund a spell of study.

Within the Central Provident Fund Singapore’s equivalent of our super system superannuation savings are used to fund both home ownership and education. But where our superannuation system is still underdone, Singapore’s CPF is paternalistic overkill. Against our 9 percent, Singapore’s compulsory contributions are 40 percent of earnings down from 50 percent two decades ago!

We shouldn’t copy Singapore, but its example does suggest that we’ve got ourselves into a bit of a vicious circle.

At nine percent of earnings, compulsory super still falls well short of meeting our retirement needs. So policy makers are rightly cautious about burdening it with additional tasks to fund. But no-one’s falling over themselves to increase compulsory super because in an impatient world with a three year electoral cycle, its costs are immediate for most, and its benefits far away.

But a vicious circle is often just a virtuous circle in disguise. Increasing the flexibility in how we use super savings should make it politically easier to expand. And expanding super enables us to fund greater flexibility in the use of super savings. So that’s our way out.

First, tight targeting can reduce the drain that greater flexibility has on the super savings pool. We could limit pre-retirement access to super savings for appropriate purposes to some specific figure say $20,000.

Some would reduce savings effort running down their super instead. But offsetting this, super flexibility would bring forward the date on which many bought homes and thus took on the higher savings rates that mortgage repayments often involve.

It’s true that many spend too much on their houses. But there are huge social and economic benefits from expanding home ownership amongst those of modest means. Home-owners enjoy lower living costs and greater security fantastic assets in old age. And natural incentives to look after their properties cuts out agents’ inspections and commissions. That’s efficiency.

We should keep cranking up compulsory super, which would be relatively painless if done as we used to a percent or so every couple of years.

But, since progress on this front has stalled along with most other economic reform that doesn’t involve giving money away, we should experiment with smarter alternatives.

First, we could require those accessing greater flexibility in the use of their super savings to commit to higher contributions.

Second the new field of ‘behavioural economics’ tells us that in situations of great uncertainty like figuring out how much we should save now to fund a retirement that is several decades away we look around to see what others do. (Terror of deviating from ‘normality’ is one reason investment managers so rarely outperform the market).

As US Bureau of Economic Research economists argued in their aptly titled paper “Passive Decisions and Potent Defaults”, (which was picked up recently in an excellent book by four young Australians Imagining Australia) we can influence savings by influencing people’s conception of what is ‘normal’. That’s easier from government, but it can even be done by an Opposition by simply making increasing your super contributions a talking point.

Our leaders could try making it normal for people to salary sacrifice an additional one percent this year, two percent next year and so on until total contributions are say 15 percent of earnings.

And there’s something much more powerful than talk inertia. We can establish a system whereby a progressively increasing portion of our own wages are automatically deducted from our pay-packet and paid into super. You could still elect to contribute less completing a form declaring you understand what you were doing and electing to reduce your non-compulsory contributions as much as you wanted.

But by tilting the burden of inertia and the frame of ‘normality’, we’d trigger a healthy amount of doubt in people’s minds before they unshackled themselves from the mast. If they did end up saving too little, they’d have done so by design rather than default.

To the extent these reforms succeed they’d yield a double dividend: solving the problems we face now, while minimising the degree of compulsion required in the future.

It’s an idea worthy of the wily Odysseus.

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Jacques Chester
Jacques Chester
2022 years ago

Nicholas;

Good article. Currently I manage to save about 40% of my takehome pay, though the below-the-poverty-line amount I earn working 19 hours per week means that even that fraction can’t make substantial headway against regular expenses such as registering and repairing my car, or electricity bills. But particularly the effing car.

What will really help me, and what will help others as they age, is for real wages to improve through the agency of falling money prices. We can’t do this on a broad basis with the current monetary framework. Yes, I’m talking Austrian theory, with which you seem to be more familiar than most.

Some industries buck the general inflationary trend – computers technology, for instance, is an extremely competitive market with a very high rate of technological improvement. Yet the malaise forecast by critics of falling cash prices – a fall in production – does not occur. People buy when they buy. Some delay, some buy now. Everyone complains how something twice as good appears instantly, yet people will still buy a computer when they want a new computer.

I guess I’m saying that putting ever-larger portions of our income into savings to offset, in the first instance, future price rises, strikes me as a bit backwards.

observa
observa
2022 years ago

Super choice is problematic for low to average income earners, as some returns will be squandered by the need for advertising to attract and keep new members(a new cost to my CBus industry fund now)and their will be the inevitable market failures. You already mention the need for more retirement savings and you allude to the best asset investment for most workers-the family home. Let me address the latter.

Reducing mortgage payments out of after tax income has to be the safest, most cost effective investment strategy for the vast majority of workers. Home ownership is the first best strategy bar none. One fly in the ointment is the demand induced price hike due to negatively geared investing. This could be overcome if all capital gains from RE were taxed, but this means taxing the family home upon sale. A reasonable benefit limit could be applied to all home owners here and workers could apply their Super to the family home. This money along with First Home Owners Grant could be quarantined with their home and revert to a Super fund of choice, upon sale, until reapplied to another principal place of residence purchase. Simplest, safest, most cost effective super plan for the majority.

Nicholas Gruen
2022 years ago

Observa,

I agree with your comments. I could have been much bolder. Perhaps I should have been. I was trying to show that we could move in a pretty promising direction with fairly modest changes.

observa
observa
2022 years ago

Yes, it doesn’t seem like rocket science to me and with the Oz predisposition for home ownership, not difficult to sell. We have the Torrens Title land system with its encunbrance facility ready and waiting, just as we do with third party financial interests now.

You mention the Singapore experience with its education grants tied in. We could incorporate something similar with a life grant awarded to all at school leaving ageof 16(Year 10 completion) Such a life grant would roll together all tertiary/Tafe/apprenticeship/training subsidy now, as well as the FHOG and be quarantined and applied to either a principal place of residence or further approved education and training, over the recipient’s lifetime. They could not use it for anything else. The introduction of such a life grant would see some miss out, but this could be retrospective for HECS debtors now, albeit Baby Boomers with their free tertiary degrees have already used theirs. Seems to me that equity demands the son of a greengrocer, who leaves school at 16 and joins the family business, deserves as large a life grant from the public purse as the son of a tertiary professional, who does medicene after another 2 years of secondary schooling. The Govt can borrow the money to pay the life grants immediately, from a Super fund industry, hungry for safe returns. Mind you, the Senior Secondary, TAFE and University education sectors, along with private training institutions, would need to sing for their life grant supper money. About bloody time!

observa
observa
2022 years ago

When you think about HECS debts logically, there is little point in applying SGL to a super fund on behalf of the employee now. Far better to allow that money to pay off the HECS debt now and reduce indebtedness of young family formers. After all there is evidence that HECS debts of some tens of thousands of dollars are making young couples reluctant to start families until financially secure. This has fertility ramifications, particularly for educated women who leave the biological clock ticking too long, in order to establish themselves financially. HECS debt must enter their calculations here, whereas saving for retirement is probably too distant. That can be accelerated in later life as the awareness increases.

It is the lifetime nett debt position of workers that is important here, rather than the pigeon holes of specific assets and liabilities, that administrators have particular fetishes for from time to time.

observa
observa
2022 years ago

Actually Nicholas, public servants and politicians with their particular portfolio, pigeon hole mentality, are a lot like businessmen’s wives in this regard. We have an enormous struggle early on getting our wives out of this ‘money in different jars'(or savings accounts) mentality, when you have a mortgage(usually for business purposes)It is far better to run one overdraft business chequing facility, where all income and outgoings are channelled. You do add a credit card with 30 days free interest to this for ease of purchases. The benefits are one set of bank account keeping costs(tax deductible notice)and every cent of income reduces the outstanding principal. You can’t work your money any better or harder. Some add a self managed super fund to this strategy, by investing in their business premises. You are of course, your own best tenant.

Nicholas Gruen
2022 years ago

Observa,

Your arguments are all fine, but super is (at least for the forseeable future) a necessarily partial system. So while letting people save in the form of housing equity is a good idea, one also needs to be aware of substitution possibilties. In particular many of the people who one will let pay down their home loan with their super (instead of buy into super funds) would have paid down their home loan anyway. So allowing leakage into home ownership can reduce total saving.

The only sensible solution to this that I can think of is to increase flexibility at the same time as expanding the compulsory level of super.

observa
observa
2022 years ago

Nicholas,
Let’s suppose the average home loan is $250,000, then clearly until that is paid off, your average couple is a nett debtor, although you have to add in HECS debt here and then offset Super assets currently. A reasonable benefit limit of SGL applied to their debt could be say $250,000. Their SGL could be applied firstly to HECS debt and then to any capital amount above this and up to the statutory RBL of $250k on capital repayment of their home loan. The moment that target is reached, all additional SGL must begin to be applied to a Super fund of choice as now, bearing in mind the SGL component of equity in their home is quarantined for life(or until retirement) It may be that they have to legislatively contribute more into super at that point, for retirement purposes. With $250k less debt, that would certainly be more affordable for them at that stage of the lifecycle. The rate of saving(or nett debt reduction) is still governed by the mandated SGL(which could be raised from 9% now), but it should be more cost effective to invest in this debt reduction strategy.(riskless and lower investment management costs)At present they pay into Super, pay off any HECS debt as proscribed AND must pay interest on any mortgage out of after tax income. The less they have to pay out of after tax income, the quicker they will be debt free and not ultimately reliant on rental subsidy payments from the public purse in retirement.

At present the public purse is concerned about the cost to revenue of retirement incomes. What needs to be appreciated is that rental assistance is an integral part of that cost now. SGL applied now to putting a roof over more workers heads, will be as cost effective as providing retirement incomes with no roof. More so if returns are better.

Nicholas Gruen
2022 years ago

I agree with your basic line of argument

observa
observa
2022 years ago

I get the gist of your substitution effects Nicholas, but is it a case now of couples delaying household formation until HECS debts are paid and a decent dent in their mortgage occurs? They shift the costly child-rearing years later in life at the expense of topping up retirement incomes in that period. My hunch is they don’t view their Super entitlement as real wealth(or a problem) until the kids are off their hands. I know I didn’t. Probably needs some real research into attitudes.

Nicholas Gruen
2022 years ago

Yes, agreed

blank
blank
2022 years ago

“albeit Baby Boomers with their free tertiary degrees have already used theirs”

Stop picking on BBs, Observa.
The oldest BBs were 28 by the time free uni came along. Most would have been married with kids by then.

And back in them days, a much, much smaller %age of young people completed Year 12, never mind going to uni.

Homer Paxton
Homer Paxton
2022 years ago

15% is desirable however this was going to happen with the law tax cuts ( surely the WORST decision the present government ever did) and wages as well.
This could happen now.

If you changed the tax to make it only at the benefit stage at the person’s MTR then you would have quite a bit of volutary money going into Super.
You would also hav tax revenue when you need it when people are retiriing not at present when they are at work.

Rafe
2022 years ago

I like the idea of converting vicious circles into virtuous circles if you can just start to make improvements at more than one part of the circle.
From this perspective the industrial relations reforms provide one of the parts of the reform jigsaw that were long delayed, both in NZ and here.