Don't Be Tempted by a $2 Trillion Piggy Bank
(Bloomberg Opinion) -- What if you defused the pensions time bomb and it just kept ticking?
That’s what seems to be happening in Australia. In contrast to the U.S., where the pending exhaustion of the Social Security trust fund is a recurring political worry; the U.K., where corporate pension plans are 270 billion pounds ($352 billion) in deficit; or continental Europe, where public pension spending usually exceeds 10% of gross domestic product, the country’s retirement-savings problems appear to have been solved a generation ago.
Under a system set up in 1992, roughly 90% of people receive payments from their employers equivalent to 9.5% of their income into retirement-savings accounts, known locally as superannuation, or super. Over the years, that’s grown into one of the world’s biggest pools of pension assets. The A$2.9 trillion ($2 trillion) currently invested for Australia’s 25 million people is a bigger sum than the retirement savings of Japan, a country five times as large.
Thanks to this ample pile of cash, government spending on retirement welfare is unusually low, and the local political debate is largely free of the worries about pension sustainability that periodically roil other countries. Super funds are run by both traditional private-sector financial companies and trade unions while everyday voters are the beneficiaries. With such a mix of interest groups, there's an unusually broad political consensus backing the status quo.
The reverberations of the coronavirus pandemic may finally be causing cracks in that unity.
The government of Prime Minister Scott Morrison, having long promised to return the federal budget to surplus, is now projecting a record deficit of 11% of gross domestic product in the current fiscal year. For politicians committed to tight budgets who are now pushing gross debt above A$1 trillion, there’s a tempting alternative: Let people tap their own retirement savings early, putting the burden of supporting incomes on households’ nest eggs rather than the government’s balance sheet. The coronavirus will cause the nation “to have a hard discussion on super,” according to a recent book by Andrew Bragg, a government senator and superannuation gadfly who has called to make the system entirely voluntary.
One of the first policies introduced by Morrison as Covid spread was a rule allowing people to withdraw A$10,000 a year from their super to see them through tight patches. About 2.5 million people, equivalent to about a fifth of the country’s workforce, applied to withdraw cash in the first two months and a total of A$42 billion is forecast to be taken out over the program’s two-year term. As a result, withdrawals in the June quarter exceeded contributions for the first time since the superannuation system was introduced.
There’s now a push to extend that further. Bragg and other government legislators would like to see first-home buyers allowed to withdraw from their employer-paid super to fund deposits on their houses. That would extend rules introduced in 2018 that permitted this only for people’s voluntary top-up contributions. Meanwhile, Morrison is considering scrapping a law passed under the previous Labor government that would have increased the employer payment rate to 12%, on the basis that raising the cost of hiring when the economy is weak would be counterproductive.
What's the solution? Probably to resist the temptation to tinker.
For all the concerns about the way the system is set up, retirees in Australia report the highest levels of satisfaction with their financial situation of any group. That sentiment has improved rather than deteriorated since the coronavirus pandemic struck. This suggests there’s little need to push compulsory payments above the current 9.5% rate. Wage-earners already find it harder to make ends meet now than they will in retirement. Forcing a yet larger share of their compensation into savings will further skew super benefits toward the wealthy. It will also depress incomes and spending, just when households and the economy most need it.
At the same time, treating the superannuation pool as an inexhaustible resource that can bail the government out of tougher policy decisions is a mistake. A one-time drawdown of funds to cope with a once-in-a-century pandemic seems excusable — if unnecessary, given Australia’s low government debt levels and borrowing costs. Putting retirement savings in the service of the country’s grossly overvalued housing market is a different matter. Using super for mortgage deposits will mostly serve to drive up home prices, and benefit only the affluent slice with the income to take advantage of the associated tax concessions.
Super isn’t perfect. As with any self-funded system, it tends to exacerbate the wealth gap built up during people’s working lives. Men have roughly A$3 for every A$2 saved by women, and an outsize share of savings is held by the rich.
The solution to that over the coming decades, though, is not to dismantle a popular and effective program but to address the wider causes of inequality in the housing market and tax system, as suggested in a report last year by the Grattan Institute, a think tank. Giving fewer tax breaks to the wealthy, and more assistance to people struggling to pay their rent, would do far more for the welfare of retirees than tearing up their pension plan.
In contrast to the situation in many other countries, Australia’s retirement-savings system isn’t broke. Politicians should resist the urge to fix it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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