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The speakers were taking questions, and a member of the audience asked whether mandatory superannuation contributions had helped to insulate Australia from the GFC, by promoting saving and reducing borrowing. The keynote speaker, one David Gruen from the Treasury, replied that he thought they did increase saving. Ross Gittins, who had been the second speaker, said ‘a bit, but not as much as you might think’. Prompted to elaborate, he explained that people tend to reduce their voluntary saving to offset the compulsory part.
Gruen then asked Gittins why, having made irrational decisions the central theme of his talk, he was suddenly assuming that people would base their intertemporal consumption choices on rational considerations. Gittins’ good-natured response to that question supplied the title of this post.
This all happened on Tuesday evening at the Riverside Theatre in Parramatta, in the first of three ‘public information forums’ entitled ‘Getting to Grips with the Australian Economy’, organised by the Whitlam Institute at the University of Western Sydney, in collaboration with the School of Economics and Finance. Aimed at the general public, the series is intended ‘to help increase understanding and debate about the state of the Australian economy, the implications for us all, and what Australias economic options are in the context of the continuing and dramatic global economic turmoil.’
The event lived up to expectations, attracting 200 or so people, including a number of school groups. Judging from the number of laughs, gasps, and grunts of agreement, the audience found the two-hour session absorbing and informative.
Unfortunately there wasn’t time to pursue the issue of superannuation and saving, an interesting question that has been investigated in one or two well known studies. But it’s not a crucial issue at the moment because, until we’re back to full employment, the saving rate doesn’t matter very much.
Apart from that spark of controversy, the two speakers were largely in agreement, their talks complementary rather than opposing. Gruen gave a useful overview of the long run chararcetrsitics of the Australian economy, summarised the causes of the financial crisis, outlined Treasury’s view on how events will unfold in Australia, and suggested that certain ‘lucky accidents’ had helped to prevent Australia’s financial system out of trouble.
Gittins outlined his own theory according to which business cycles are driven by two elements of human psychology — namely the herd instinct and the tendency to cycles of optimism and pessimism.
The next forum, on 18 June, will feature Clare Martin, the CEO of ACOSS and former NT Chief Minister, Raja Junankar and Bob Fagan, discussing the impact of the GFC on households and businesses at a more localised level. (Originally Patricia Apps and Bob Gregory were too take part in the program, but had to withdraw.)
In the last forum, on 23 July, the keynote speaker will be John Quiggin, with responses from Steve Keen, and Guy Debelle from the Reserve Bank. There are still tickets available for these sessions; see the Whitlam Institute link above for details.
Can I complain about the inefficiencies and inequalities of our employer based superannuation system as opposed to a centralised aged insurance system like UK or Canada.
It is a duplication of effort to administer 500,000 superannuation funds at a minimum cost of $3000 per annum per fund. Each employer has a fund and high wealth individuals run their own fund and some people are members of multiple funds.
With the current number of funds its difficult to guarantee the competence and honesty of the trustees. How many factory workers have discovered the boss has stolen their savings
With ineffective regulation there are a lot of sharp financial planners preying on 60 year olds ready to fleece they of their life times savings
Then of course tax regulations have made superannuation an effective vehicle to transfer intergenerational wealth.
Of course radical changes to the superannuation system would cause massive unemployment in the accounting and finance sectors. And the insurance companies would have a lean time too
That was a dumb question by David – that people are sometimes irrational does not mean that they are always irrational. And if you think about it, the claim that super substantially increases national saving does indeed depend on systematic irrationality by the populace. Does no-one else think that a fragile basis on which to base a policy of this magnitude and duration?
Anyway, you just have to look at the empirics. Our household savings rate has fallen all through the period in which super has operated.
DD:
In fact the policy assumes irrationality twice over, doesn’t it? First that people are too myopic in deciding how much to save in the first place, and second that they’ll continue their voluntary savings. It’s a kind of second-best policy, countering one irrationality with another to produce a rational outcome.
Regarding the empirical evidence, are you inclined to completely dismiss Connolly and Kohler’s estimate of 38 percent as the ‘offset coefficient’?
I am intrigued, James, what would be a first-best policy?
Also, even though I love rationality, and I resent the rigidity of our super at least a little bit, the assumption is not intuitively wrong. Is there any evidence of people behaving rationally to increase savings to match smaller super? Should we expect Italians and French to be increasing their savings as the probability that they won’t get all the super they expect increases?
Are low-super countries high non-super savers? Or is it actually the inverse – high super countries actually those that are high savers anyway?
On Connolly and Kohler, I think they didn’t capture the major form of offset – longer and bigger mortgages. A lot of super saving has popped up as higher land prices – an unproductive rent, and distributionally undesirable as well.
So yes, I reckon its an understatement.
Patrick, the point becomes clearer when you remember that it’s net saving that matters. Super puts more money on the assets side of the ledger, but precisely for that reason a rational person would gear more with bigger debt.
Now people may indeed be myopic, but I want evidence of that. And that young people (quite rationally – consumption gives you more utility when young) have a high personal discount rate, or that old people ex post wish they’d saved more (they really wish they’d consumed as much and still saved – ie they’d had more income), is not evidence of myopia.
Voluntary retirement savings are notoriously low in Northern Europe, precisely because of their earnings-related pension schemes. A great deal of their saving appears to take place after retirement – which is the exact reverse of what compulsory super aims to achieve.
Suppose I take the money that would have gone to super and spend it on a new computer and faster Internet connection for my kids. Is that saving for the future, or consumption, or infrastructure spending?
Accounting never has solved the problem of inventory valuation.
??? The computer is not inventory, is this a second thread of spot the non-sequitur?
Perhaps Tel was making a separate point about inventories.
As for the other point: if the internet connection increases his kids’ future earning capacity, it’s investment; if it’s accompanied by an offsetting reduction in other consumption, it’s also saving; and if it’s fun then it’s simultaneously consumption and investment. The national accounts don’t permit anything to be both, but since the macroeconomic discourse is fixated on GDP, investment and growth, rather than on consumption, no one complains.
Possibly you would be happier if I said, “Accounting never has solved the problem of asset valuation.”
So write a list of assets and what do you have? An inventory… bah!
The computer can be resold if necessary, probably not for a profit but you never know. I’m well aware that most accountants would suffer head explosion if you try to call the same object both running plant and inventory for resale, but I see that as a design limitation in accountant’s heads, not my problem.
I’m trying to point out that a lot of our dearly held beliefs about expenditure and value are largely arbitrary categories that suit some people some of the time. If you purchase any object for any reason, obviously its value to you must be higher than the listed price, so value is subjective, so the distinction between consumption, saving and investment is also highly subjective. We can get a better idea AFTER the fact, based on a full life-history of the item, but anyone can be smart in hindsight.