ECONOMIC BENEFITS OF UNIVERSAL SUPERANNUATION - HOW SUPERANNUATION WORKS FOR ALL OF US - MCKELL ...
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M C K E L L I N S T I T U T E V I C T O R I A Economic Benefits of Universal Superannuation How superannuation works for all of us M A R C H 2 02 0
About the McKell Institute
The McKell Institute is an independent, not-for-profit,
public policy institute dedicated to developing practical policy
ideas and contributing to public debate.
For more information phone (02) 9113 0944 or visit
M C K E L L I N S T I T U T E V I C T O R I A
www.mckellinstitute.org.au
About the AuthorS
JAMES PAWLUK KYLE TAYLOR
Economic Benefits
James is the Executive
Director of the McKell
Institute Victoria. Prior
Kyle joined the McKell Institute in May
2019 as Policy Officer. Prior to this,
he held several positions in the NSW
of Universal
to taking on the role,
James was Manager of
Business Development
for Australia Post,
focusing on developing business strategies for the and future skills needs.
Government where he conducted
research and evaluation across an
extensive portfolio relating to various
policy issues, including skills shortfalls
Superannuation
company’s parcels business including overhauling
its domestic air freight arrangements. James has
also served as Senior Advisor and Deputy Chief
In addition to his public sector experience in Australia, Kyle
had the opportunity to conduct research and evaluation at the How superannuation
works for all of us
United Nations Office on Drugs and Crime in Lao PDR and for
of Staff to various Federal Cabinet Ministers with Global Affairs Canada at the Balsillie School of International
experience across areas such as government Affairs in Canada.
service delivery, digital transformation, budget
processes, policing and customs. Kyle holds a Master of International Public Policy, with
concentrations in Human Security and International Economic
James completed a Bachelor of Arts and Relations from the Balsillie School of International Affairs.
Bachelor of Commerce at the University He also holds a Bachelor of Arts, Honours Political Science
of Melbourne majoring in Economics with Legal Studies and Research Specialisation Options from
and Political Science. Wilfrid Laurier University.
acknowledgments
We would like to thank Professor Susan Thorp
(University of Sydney) and Professor Helen Hodgson (Curtin
University) for their constructive feedback on an earlier draft.
The opinions expressed herein are solely those of the authors and not
necessarily those of Professor Thorp and Professor Hodgson.
The opinions in this report are those of the authors and do not necessarily represent the views
of the McKell Institute’s members, affiliates, individual board members or research committee
members. Any remaining errors or omissions are the responsibility of the authors. M A R C H 2 02 0
4 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 5
Contents
Foreword 6
Executive Summary 8
Introduction 12
Part One: Enhancing Financial Stability and Long-Term Economic Growth 15
Superannuation boosts Australia’s national saving........................................................................................................................15
Superannuation funds reduce Australia’s reliance on foreign sources of finance....................................................18
Superannuation has a positive fiscal effect on the federal budget in the long-term.......................................... 24
Superannuation supports Australia’s infrastructure needs..................................................................................................... 28
Superannuation increases capital’s focus on long-term sustainable returns............................................................ 28
Superannuation offsets ageing population effects on economic growth.................................................................. 29
Superannuation helps counter the boom-bust cycles’ adverse effects on the Australian economy........31
Part Two: Increasing Financial Independence for More Australians 34
Superannuation helps Australian workers fairly benefit from the wealth that they help create.................34
Superannuation expands workers’ benefits by adapting to a changing work environment.........................36
As superannuation funds grow, they increase value for money for members.........................................................37
Superannuation reduces exposure to financial shocks by diversifying Australian household assets..... 38
Conclusion 40
Appendix One: modelling assumptions and methodology 44
Appendix Two: modelling assumptions and methodology 46
footnotes 48
6 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 7
Foreword
To be sure, there are things that need improving: on their behalf, can share in those same benefits
too many Australians find themselves in of diversification as can the regional economies
underperforming funds; others accumulate that they are part of.
multiple accounts when they change jobs; or
are simply exposed to excessive fees or cost 28 years ago, the core building blocks of our
structures that eat into their returns. Some system – the Superannuation Guarantee, the
unfortunate Australians get hit with all three and industry-based default allocation and the
it should be a priority of policymakers to fix this. switch to defined contributions – kicked off a
Almost three decades ago, gradual and conservative disruption to how
But even these shortcomings do not eclipse the capital is managed in Australia. A process
when Australia introduced
gains that we’ve already made, including for that has strengthened our economy and
compulsory superannuation, the people described above. In the past those made it more resilient. But there’s a sobering
our retirement income system switching employers under a defined benefits point. By abandoning the original path to
has gone on to become the scheme could simply lose all entitlements 15% contributions we inevitably slowed down
envy of most nations around the whatsoever. Meanwhile many of the low-fee the pace of this disruption and diminished its
and high-performing public offer funds we benefits. Meanwhile for workers themselves,
world. In raw terms, it’s seen the
know today simply did not previously exist we’ve denied them the opportunity of reaching
13th largest national economy and were only brought into being by a system higher balances sooner in their working
accumulate the 3rd largest of compulsory contributions that generated lives and the increased engagement and
private savings pool with scale via member numbers in lieu of high initial compounding returns that brings.
balances and representative trustees charged
around $3 trillion in assets It’s time to get that journey back on track and
with maximising sustainable returns.
under management and turn our attention to how make the system more
allowed millions of low This unleashed a new breed of institutional efficient, more effective and more universal.
investors faced with the challenge of investing
and middle income
on behalf of multiple generations, which has
Australians to find encouraged longer-term horizons unlocking
greater dignity in capital for unlisted assets such as infrastructure
their later years by and stewardship of all assets that better
entering retirement manages risks to long-term returns, in particular
short-term focussed behaviour that might
with a supplement to
damage a business’s reputation or drive
their age pension. increased costs through damages or fines.
Australian superannuation sometimes been
described as a decentralised sovereign
wealth fund, that has helped the nation to
diversify its asset and income base equipping
it to better respond to economic shocks. Kelvyn Lavelle James PAWluk
The decentralisation means households, that Chair Executive Director
wouldn’t be able access many of the assets held McKell Institute Victoria McKell Institute Victoria
Advisory Board
8 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 9
Executive Summary
Superannuation has a positive fiscal Superannuation offsets ageing
effect on the federal budget in the population effects on economic growth.
long-term. It is estimated that increasing the Australia’s ageing population could have
Superannuation Guarantee from 9.5 per cent to a significant impact on economic growth,
12 per cent over the period 2021 and 2025 will particularly on aggregate demand. As workers’
save the government roughly $34,306 million superannuation rises, it will increase their overall
Australia’s superannuation system not only ensures that working Australians over the period 2021 and 2060, averaging a wealth and fuel consumption in retirement,
can retire with dignity but also provides a number of broad economic benefits gain of $857 million per financial year over which would otherwise be at lower levels
for the Commonwealth Government and the Australian economy. the long-term. By 2038, the net budgetary without universal superannuation.
cost of superannuation tax concessions
Universal superannuation has also had an
would be positive, meaning that the gains in
impact within the Australian economy through
superannuation contribution and earnings taxes
superannuation funds investing directly in real
and savings on the age pension will exceed the
assets, such as property and infrastructure
This report outlines the evidence that universal was about 1.5 per cent of GDP as of 2011, and costs of the superannuation tax concessions.
projects, and an indirect impact through
superannuation has benefitted and will continue if the Superannuation Guarantee rose from
to benefit all Australians. It does so by collating 9.5 per cent to 12 per cent by 2019-20, as Superannuation supports Australia’s investing in the Australian share market.
the wide variety of research that has been initially planned, the estimated contribution of infrastructure needs. Australian As household superannuation assets rise,
superannuation funds have played a significant investment from superannuation funds increase
undertaken detailing the various benefits of superannuation to national saving would have
role in funding Australia’s increasingly pressing the economy’s capacity to produce goods and
Australia’s superannuation system. This report been more than 2.0 per cent of GDP today,
infrastructure needs, and that role will only services.
also updates that work and provides detail on rising to roughly 3.0 per cent by 2040.
further ways in which universal superannuation increase in the future. The long-term investment
Superannuation helps counter the
has benefitted and will continue to benefit Superannuation funds reduce Australia’s horizon of superannuation funds makes them
boom-bust cycles’ adverse effects on
Australians and the Australian economy. reliance on foreign sources of finance. natural investors in less liquid, long-term assets
the Australian economy. Without universal
For much of its modern history, foreigners have
Institute such as infrastructure.
It also provides confirmation of the large benefits superannuation in place, the cyclicality of
owned more equity in Australian companies than
to Australians and the Australian economy from Australians have owned in foreign companies. Superannuation increases capital’s focus resources industries would have been even
increasing the Superannuation Guarantee from But since 2013, Australians have owned more on long-term sustainable returns. The more pronounced with more income hitting the
9.5 per cent to 12 per cent, keeping the default
selection process in the industrial relations
McKell
foreign equity than foreigners have owned
Australian equity.
reliable flow of funds from existing and future
members via the Superannuation Guarantee,
economy during the boom than being saved
and built into a savings pool for when workers
system, and safeguarding the compulsory nature and through default arrangements, provides a reach retirement. There are three main ways in
of the Superannuation Guarantee.
TH
This has put the country in a net foreign equity
E steady stream of capital-seeking investment which superannuation mitigates adverse effects
asset position, and largely reflects the significant opportunities and has provided a source of posed by the boom-bust cycles of Australia’s
allocation to foreign equity by the Australian demand for equities issued by companies. A resources industries. First, the Superannuation
Enhancing Financial superannuation industry together with the fact consequence of this is that superannuation Guarantee ensures that a growing share of
that the superannuation sector is relatively funds, being invested in a company over unusually high incomes is saved for longer-
Stability and Long-Term large as a share of the Australian economy. term benefit rather than being used for current
the long-term, are more concerned with
Economic Growth The ongoing accumulation of both Australian environmental, social and governance (ESG) consumption. Without the Superannuation
and foreign equities by Australia’s large factors than other types of investors, ensuring Guarantee in place, the pro-cyclicality of boom-
Superannuation boosts Australia’s superannuation sector has also partially that funds are maximising members’ long-term bust cycles would be even more pronounced
national saving. The amount of national offset continued equity inflows to Australia returns while mitigating negative externalities. as wages and local profits would be recycled
saving has important implications for the from foreign investors. Another consequence is that investing back into the economy in lieu of superannuation,
Australian economy; it provides a source of strategies of superannuation funds can act pushing prices up further.
funds available for domestic investment, which The shift to a net foreign equity asset position
counter-cyclically to movements in equities
in turn is a key driver of labour productivity and also reflects asset valuation effects, as foreign Second, increased investment in superannuation
prices, and thereby reducing volatility in the
higher future standards of living. equities have outperformed Australian equities through incremental increases in the
equities market.
over the past decade. The shift also reflects Superannuation Guarantee have helped to
The Treasury estimated that the boost to the depreciation of the Australian dollar diversify household balance sheets, which in
national saving from the introduction and over this period.
increases in the Superannuation Guarantee
10 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 11
turn would have mitigated the damage from Superannuation expands workers’ Superannuation reduces exposure
a bubble in the property markets of resource- benefits by adapting to a changing work to financial shocks by diversifying
rich communities. Australians tend to have a environment. Universal superannuation Australian household assets. The strong
high allocation of wealth in non-financial assets, enhances the retirement incomes and well- growth in superannuation has facilitated a
which leaves them prone to negative shocks being of retirees in an increasingly insecure broadening of the range of assets held by
from a boom-bust cycle. work environment. Globalisation, technological Australian household, particularly in asset
progress and demographic change are having classes where households have relatively
Finally, superannuation funds themselves
a profound impact on society and labour small direct holdings, such as in equities.
ease pressure on trade-exposed sectors by
markets. And in the face of such change in the
dampening the appreciation of the exchange Increased investment in superannuation
job environment, staying competitive means
rate arising from the boom, in particular, may help to diversify the household
adapting to that change.
by investing in foreign assets. Without balance sheet, which in turn may lower
superannuation, investors would hold more In an era where job opportunity matters more the risk of the household asset portfolio.
domestic assets, meaning that the global than job security and where flexibility and Australian households’ high allocation
portfolio share of assets denominated in mobility mater more than stability and company of wealth to non-financial assets may
Australian dollars would be higher than loyalty, universal superannuation allows older leave them more vulnerable to adverse
otherwise, risking a further appreciation workers to adapt to the forthcoming changes movements in property prices. As the
of the dollar. in the labour market without forgoing their property market changes, households
retirement incomes that would have otherwise may reduce the riskiness of their
been impacted under a superannuation system portfolio by investing more in
Increasing Financial with limited access and pension portability. financial assets. Investing
Independence for As superannuation funds grow, they
in superannuation also
reduces the weighting
More Australians increase value for money for members.
of domestic assets
The fees charged by superannuation funds
Institute in the direct
Superannuation helps Australian workers remains a hotly debated issue in Australia. There
investments
fairly benefit from the wealth that are still inefficiencies in unnecessary multiple
of Australian
they help create. Superannuation provides accounts, subscale funds that struggle to deliver
McKell households.
employees with recognition as stakeholders value, and underperforming superannuation
who are due a share of the productivity gains products. However, overall, the superannuation
paid out when profits rise. Investing workers’ sector is continuing to improve its offer to
TH
capital in the businesses where they work
E
members by improving services and benefits
is an important mechanism to ensure that and increasing returns while reducing its
workers’ interests are represented regarding headline fee rates.
investment decisions. In an age of excessive
Significant economies of scale have been
short-termism and declining private investment,
realised in the superannuation system over the
superannuation provides a durable means to
last decade. However, there is little evidence
ensure long-term corporate prosperity.
that these cost savings have been systematically
Economic inequality cannot be solved through passed through to members in the form of
wage increases alone; the gaps in individual lower fees. Scale benefits may have been passed
wealth are too large. Along with other ways to through in the form of member services or
build assets, a clear way to rebalance wealth in increases in reserves or offset by the costs of
the Australian economy is for employees to have meeting new regulatory requirements. Scale
a share of the wealth in the businesses where benefits may have also been realised through
they work via superannuation. increasing returns to scale.
12 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 13
Introduction
These characteristics are often cited as a on overseas borrowing, which can reduce risk at
trendsetter of future developments in other a time of currency volatility. These benefits have
nations, as policymakers explore options to also been extended to households by providing
transfer increasingly unaffordable pension access to asset classes where they would have had
liabilities from government and corporate balance relatively small direct holdings.
sheets to individuals.
Australia’s superannuation system has also
Over the last 30 years, the Government of Australia has encouraged Australians to The superannuation system is still relatively played a significant role in disrupting the
save more for their retirement through a range of saving schemes, including the immature in the sense that many people are traditional channels for financial services, making
Superannuation Guarantee and tax incentives for voluntary contributions. yet to have made contributions above 9 per the market more contestable. But this disruption
cent or more over an extended period of time. along with the many benefits identified and
And there are still inefficiencies in unnecessary described within this report were destabilised
multiple accounts, subscale funds that struggle when the decision was made to forgo a 12 per
In 1986, the Government of Australia and the Australian Council of Trade Unions (ACTU) struck a deal for
to deliver value, underperforming superannuation cent rise in the Superannuation Guarantee in
3 per cent superannuation and tax cuts in exchange for a 2 per cent discount of a Consumer Price Index
products, and the gaps in universality, such as 2014. Freezing increases to the Superannuation
(CPI) based wage increase for award-reliant workers. Since, at the time, superannuation did not affect
the $450 monthly income threshold for employer Guarantee has already costs workers millions
payroll tax, workers’ compensation and the like, it gave workers’ a share of productivity gains and offset
superannuation payments, or superannuation in higher retirement balances. And with talks
labour costs to employers, putting downward pressure on prices and reducing inflation.
while on parental leave. of another freeze in 2021 – which could be
Since the introduction of the Superannuation Guarantee in 1992, super contributions have become a permanent – would strip workers of an adequate
While it is important to acknowledge that
central part of Australia’s retirement income system. Household assets in superannuation as a per cent retirement and harm the broader economy.
the system is in need of improvement, this
of Gross Domestic Product (GDP) have risen progressively since the 1990s (Figure 1). As of June 2019,
should not minimise the inherent benefits of Had we stuck to the rise in 2014, the efficiency
household superannuation assets were around $2,657 billion, or roughly 137 per cent of GDP.
superannuation to the Australian worker and to and performance of Australia’s superannuation
the Australian economy. system would not only have more scale, but
FIGURE 1 HOUSEHOLD ASSETS IN SUPERANNUATION, PER CENT OF GDP workers would have reached higher balances
The lack of transferability of superannuation
sooner and accrue greater benefit earlier. Ensuring
before the Superannuation Guarantee created a
160 that the push to 12 per cent moves forward would
serious obstacle to labour mobility, as it would
increase the superannuation savings of millions of
140 disincentivise workers from switching employers,
Australians to ensure dignity in retirement while
and those who did would lose out on accruing
boosting the national pool of capital required to
120 cumulative balances.
generate jobs and economic growth.
PERCENTAGE
100 Universal superannuation has brought into effect a
This report outlines the evidence that universal
system of where workers benefit from the wealth
80 superannuation has benefitted and will continue
they help create, and where economies of scale are
to benefit all Australians. It does so by collating
60 realised so that services and benefits for members
the wide variety of research that has been
are continually improving, reducing headline fee
undertaken detailing the various benefits of
40 rates, while maximising long-term returns.
Australia’s superannuation system. This report
20 To ensure that the system is sustainable to provide also updates that work and provides detail on
an adequate income in retirement, superannuation further ways in which universal superannuation
0 has benefitted and will continue to benefit
funds have invested in a way that generates
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benefits in the long-term, such as in illiquid assets, Australians and the Australian economy.
promoting sustainable commercial investment
Source: ABS, RBA, Authors’ calculations. It also provides confirmation of the large benefits
in nation-building infrastructure projects. This
to Australians and the Australian economy from
approach avoids concentrated risk by highlighting
The particular dynamics and history of Australia’s superannuation system have resulted in it having several increasing the Superannuation Guarantee from
the importance in creating long-term value in
structural characteristics that distinguish it in important ways from other major world pension markets. 9.5 per cent to 12 per cent, keeping the default
contrast to seeking to maximise short-term return.
Notwithstanding the fact that it is mandatory, there has also been a seismic shift away from defined benefit selection process in the industrial relations system,
(DB) occupational pension schemes to define contribution (DC) schemes, making Australia the most DC- Superannuation is a decentralised form of boosting and safeguarding the compulsory nature of the
centric of any of the world’s developed market pension systems. At the same time, many superannuation national savings, which reduces the risks of Superannuation Guarantee.
funds have expanded beyond their origins as industry-based, single-employer entities to become more decision-making by any one entity. This means that
broadly-based financial institutions representing multiple employers across a variety of industries. Australian enterprises do not have to be as reliant
14 MH
T C EK EML CL K IE NL SL T I N
T U
S T IE T V
U IT CE T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 15
Part One:
Enhancing Financial
Stability and Long-
Term Economic Growth
Superannuation boosts Australia's national saving
The amount of national saving has important implications for the Australian
economy; it provides a source of funds available for domestic investment, which in
turn is a key driver of labour productivity and higher future standards of living.
The Treasury estimated that the boost to national saving from the introduction and
increases in the Superannuation Guarantee was about 1.5 per cent of GDP as of
2011, up from around 0.5 per cent of GDP in 1992.1 If the Superannuation Guarantee
rose from 9 per cent to 12 per cent by 2019-20, as initially planned, the estimated
contribution of superannuation to national saving would have been more than 2.0
per cent of GDP today, rising to roughly 3.0 per cent by 2040.2
However, opponents to increases to the Superannuation Guarantee have doubts
about the magnitude of the effect on national saving, and if there is an impact on
national saving of any kind. If the introduction and increases in the Superannuation
Guarantee results mainly in switching saving from one vehicle to another there may
not be an increase in overall individual saving.
With limited empirical literature on the estimated impact of the superannuation
on national saving, there are at least four good reasons to take the view that the
superannuation system in Australia contributes to national saving:
1. The design of the phase-in of employer contributions to superannuation should
ensure that existing real wages are not lowered so that existing saving can
continue;
2. The historical low financial saving among Australian households means that they
have had restricted capacity to offset superannuation saving by reducing other
financial saving;
3. The design of the policy means that superannuation is a poor substitute for other
forms of saving; and
4. Most economists believe or estimate that savings offset for superannuation is
between 30 per cent and 50 per cent.
These are discussed in more detail in the following pages.
16 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 17
THE PHASE-IN OF THE MINIMUM EMPLOYER CONTRIBUTION RATE LOW EXISTING FINANCIAL SAVINGS AMONG AUSTRALIANS
HAS BEEN DESIGNED NOT TO DECREASE REAL WAGES
Since most Australians have very little financial assets outside superannuation, they have little capacity
to offset superannuation saving by reducing other financial saving. Indeed, historical low financial
saving among low-income Australian households means that they have had restricted capacity to offset
FIGURE 2 INFLATION-ADJUSTED WAGES GROWTH AND TREND LABOUR PRODUCTIVITY GROWTH superannuation saving by reducing other financial saving (Table 1). Because superannuation assets cannot
be borrowed against, holding superannuation assets do not increase the borrowing capacity of Australian
households.
5
4
TABLE 1 INFLATION-ADJUSTED WAGES GROWTH AND TREND LABOUR PRODUCTIVITY GROWTH
3
2 TOTAL FINANCIAL TOTAL NON-FINANCIAL
VALUE OF VALUE OF
PERCENTAGE
ASSETS, ASSETS, EXCLUDING
1 QUINTILE SUPERANNUATION TOTAL PROPERTY
EXCLUDING TOTAL PROPERTY
FUNDS ASSETS
SUPERANNUATION ASSETS
0
-1 Lowest $7,400 $17,200 $25,600 $18,100
-2 Second $30,600 $75,500 $65,500 $213,500
Inflation-adjusted WPI; total 3 year trend productivity
-3 Third $51,900 $122,900 $91,300 $512,100
-4 Fourth $124,700 $216,100 $119,600 $802,900
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Highest $855,200 $646,600 $185,200 $1,854,000
Source: ABS.
Source: ABS.
The Superannuation Guarantee has been points would divert 0.25 percentage points from
As shown in Table 1, predominant form of very limited circumstances of access before
effectively phased in at an average rate of real wages growth to superannuation. This still
saving for most Australians is the family home. retirement (mainly related to specific medical
0.5 per cent per increase. This is well below leaves scope for real wage rises. As long as real
However, given the resistance of Australians to conditions or severe financial hardship) mean
estimates of average labour productivity growth, wages do not fall below 0.25 per cent, workers
home equity conversions, only what is held in that capital stays in the system and that abuse
measured as GDP per hour worked, of roughly should be able to afford the same standard of
financial assets would be likely to generate a of tax concessions by funds movers is limited.
1.55 per cent since 1998 (Figure 2). If nominal living and attain higher balances at retirement
retirement income outside of superannuation. In
wages growth was consistent with inflationary when the Superannuation Guarantee increases
the absence of the Superannuation Guarantee,
expectations and workers received their share of from 9.5 per cent to 12 per cent over the period
most Australians would likely need a full rate
ESTIMATES OF THE SAVING
productivity gains, average real wage rises could 2021 to 2025.
pension. OFFSET BY ECONOMISTS
be 1.00 to 1.50 per cent per annum.
Increases in the Superannuation Guarantee
The extent to which the superannuation boost
In our research paper, ‘Does higher minimum employer contribution rate have also
SUPERANNUATION IS national saving depends on the extent to
superannuation come out of workers’ wages?’, been implemented in the context of a wage
we argued that there was scant empirical rise – so existing financial savings would not A POOR SUBSTITUTE FOR which money saved in the system is offset by
OTHER FORMS OF SAVING reductions in other forms of saving and by the
evidence of a causal relationship between necessarily fall from a further increase in the
cost of tax concessions.
superannuation increases and low wages Superannuation Guarantee. Given that roughly
growth to support the assumption of a one- two-thirds (62.5 per cent) of Australian workers Superannuation is a poor substitute for other
For low-income earners, credit constraints imply
for-one trade-off between superannuation are covered by award or enterprise bargaining forms of saving because a fixed amount is put
limited capacity to reduce other forms of saving
and wages.3 If we assume conservatively agreements, it is quite reasonable to expect that into people’s superannuation accounts and
in response to increases in the Superannuation
that the superannuation-wage elasticity of all increases in the Superannuation Guarantee will because withdrawal of superannuation is heavily
Guarantee – which suggests that the offset is
workers to be less than -0.50, increasing the reflect productivity rather than a drop in real regulated. Controlled entry, preservation until
likely to be small for these people.
Superannuation Guarantee by 0.5 percentage value of take-home pay. age 60 (people born after 1 July 1964), and
18 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 19
For high-income earners, credit constraints from the government, because of the FIGURE 3 CURRENT ACCOUNT BALANCE, PER CENT OF NOMINAL GDP
are less binding and reductions in other forms concessional taxation of superannuation.
of saving from a rise in the Superannuation The government forgoes tax revenue that
Guarantee seem entirely plausible. otherwise would have been collected had the 4
Superannuation Guarantee been paid as wages
However, there are also a series of behavioural Current account balance
to employees or remained with companies as
factors that impact saving, such as hyperbolic 2
additional profits. For the increase in private
discounting – tendency to choose smaller short-
saving to translate to the same increase in
term gain over a larger long-term gain – and loss
national saving requires that the shortfall to tax
aversion biases – tendency to view less money in 0
PERCENTAGE
revenue from the Superannuation Guarantee
the short-term as a greater loss than equivalent
be offset by raising public saving rather than
gains in the long-term.
cutting public investment. It also requires that -2
There have been a few attempts to estimate the making up the shortfall elsewhere in the budget
extent to which other forms of private saving does not lead to lower private saving in other
-4
are reduced in response to the Superannuation financial assets. These budget savings are
Guarantee. primarily from lower age pension payments.
-6
Philip Gallagher of the Treasury made
assumptions in RIMGROUP model based on a
Superannuation funds reduce -8
review of previous studies, such as by FitzGerald
and Harper and Covick and Higgs.4 Gallagher Australia’s reliance on foreign
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suggested a private saving offset between 30 sources of finance
per cent to 50 per cent.5 Put differently, net
private saving increases 50 cents to 70 cents For much of its modern history, Australia has
per dollar of superannuation. been a net importer of capital. Because there
are a lot of profitable investment opportunities
Perhaps the most compelling of these estimates,
in Australia relative to the size of the Australian
based on an analysis of microeconomic survey
savings pool, it has sourced capital from 4
data from the Household Income and Labour
elsewhere around the world either in the form
Dynamics in Australia (HILDA) survey, is by Ellis
of debt or equity. This is not because savings
Connolly of the Reserve Bank of Australia (RBA) 2
in Australia is particularly low; its saving rate
who estimated a private savings offset between
exceeds that of the United States, Canada, and
10 per cent and 30 per cent.6 That is to say, net
the United Kingdom.7 Rather, it is because the 0
private saving increases 70 cents to 90 cents
PERCENTAGE
share of investment in the Australian economy
per dollar of superannuation.
is higher than that in many other advanced
-2
The household saving ratio has been less than economies, as foreign investors see Australia as
5 per cent since 2017, and currently sits at 2.6 a relatively safe and attractive place to invest
per cent as of June 2019. If workers were paid with good long-term capital gains. -4
employer contributions to superannuation as
The counterpart to Australia being a net
increased wages, it is hard to imagine more
importer of capital is that the country runs a -6
than 30 per cent of the increase in take home Trade balance Income balance
current account deficit (Figure 3). For three
pay being saved for retirement in the form of
decades, the current account averaged a deficit
financial assets. -8
around 4 per cent of GDP. But since 2015, the
current account had narrowed to a deficit
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Subject to some caveats, the increases in private
saving should translate over the medium-term around 1 per cent of GDP. As of June 2019, the
to an increase in national saving. current account posted its first surplus in 44
Source: ABS, Authors’ calculations.
years, of $7.5 billion, or 1.5 per cent of nominal
Part of the increase in private saving comes GDP.20 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 21
Each quarter that Australia finances its current account with borrowing from, or lending to the rest of the This has put the country in a net foreign equity accumulation of both Australian and foreign
world, it will add to, or deduct from the stock of net foreign liabilities it owes to the rest of the world. As asset position, and largely reflects the significant equities by Australia’s large superannuation
Australia ran current account deficits through the 1970s, 1980s, 1990s and 2000s, the stock of net foreign allocation to foreign equity by the Australian sector has also partially offset continued equity
liabilities grew, peaking roughly 60 per cent of GDP in 2009. superannuation industry together with the fact inflows to Australia from foreign investors. With
that the superannuation sector is relatively more than $1,838 billion, or roughly 94 per
large as a share of the Australian economy. cent of GDP in total assets in APRA-regulated
FIGURE 4 NET FOREIGN LIABILITIES, BY TYPE, PER CENT OF GDP As of June 2019, 24.4 per cent of assets held superannuation funds as of June 2019, Australian
by Australian Prudential Regulation Authority superannuation funds have the scale to compete
(APRA)-regulated superannuation funds were with large foreign investors both at home and
70
allocated to international shares, valuing $448 abroad.9
billion, or 23 per cent of GDP.8 The ongoing
60
FIGURE 5 GROSS EQUITY POSITIONS, PER CENT OF GDP
50
100
40 Australian equity investment abroad
Foreign equity investment in Australia
80
Net foreign equity position
30
PERCENTAGE
60
20
40
10
20
PERCENTAGE
0
0
-10
-20
Total Debt Equity
-20 -40
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-60
Source: ABS, Authors’ calculations.
-80
But since then, reflecting the shift of the current account from deficit to surplus and correspondingly lower
net capital inflows, the stock of Australia’s net foreign liabilities (as a share of GDP) has declined over the
past decade to be roughly 50 per cent of GDP (Figure 4). The decline in the net foreign liabilities as a share -100
of GDP masks some significant changes in the composition of both the gross foreign liabilities and gross
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
foreign assets, including a shift in the net equity position.
For much of its modern history, foreigners have owned more equity in Australian companies than
Australians have owned in foreign companies. That is, the country has had a net foreign equity liabilities Source: ABS, Authors’ calculations.
position, averaging 10 per cent of GDP between 1990 and 2010. But since 2013, Australians have owned
more foreign equity than foreigners have owned Australian equity (Figure 5).22 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 23
The shift to a net foreign equity
asset position also reflects asset
valuation effects, as foreign equities
have outperformed Australian
equities over the past decade.
Since 2010, the Australian Securities
Exchange (ASX) All Ordinaries
Index, which is made up of the
share prices for 500 of the largest
companies listed on the ASX, has
had an average annual return of
less than 5 per cent. In comparison,
the S&P 500, which measures
the stock performance of 500 of
the largest companies on stock
exchanges in the United States, has
had an average annual return of 12
per cent.
The shift also reflects the
depreciation of the Australian dollar
over this period. The Australian
dollar has seen historic lows in the
exchange rate when compared
to the U.S. dollar. At the peak in
the last 10 years one Australian
dollar bought $1.10 U.S. dollars. The
Australian dollar has depreciated
significantly since then and now sits
at less than 70 U.S. cents. Because
Australian equity investment
abroad are predominantly
denominated in foreign currency,
the value of Australian equity
investment abroad in Australian
dollar terms increases when the
Australian dollar depreciates.
But the value of foreign equity
investment in Australia, which are
denominated in Australian dollars,
does not change. However, foreign
investors may take advantage of
a depreciating Australian dollar by
increasing investment in Australia,
especially by speculators who may
be expecting a rise in the value of
the Australian dollar in the future.24 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 25
Superannuation has a positive million for concessional taxation of employer Employer contributions to superannuation years coincided with a freeze on the planned
superannuation contributions.10 are generally taxed at 15 per cent,i compared increase in the Superannuation Guarantee. If there
fiscal effect on the federal to a marginal income tax rate, if it were paid were indeed a trade-off, surely wages growth
Tax expenditures are estimated as the expected
budget in the long-term as wages, of between 19 per cent and 45 per would have been higher during a period of stable
difference in revenue between the existing tax
cent. Additionally, superannuation earnings are employer superannuation contributions.
treatment and the benchmark tax treatment. In
The Treasury’s Tax Benchmarks and Variations generally taxed at 10 per cent, compared to a
the context of superannuation, this effectively A more likely explanation, supported by economic
Statement, which outlines tax expenditures, is capital gains tax (CGT) between 9.5 per cent and
means estimating the difference between the theory, is that employers have responded on
often used to claim that the Superannuation 22.5 per cent for individuals.ii
tax paid on superannuation contributions and multiple fronts to the introduction of, and the
Guarantee is a burden on the federal budget.
earnings, and the tax that would have been Based on the Treasury’s assumptions, it is subsequent increases to, the Superannuation
In 2018-19, the estimated tax expenditures
paid if contributions and earnings were taxed as estimated that increasing the Superannuation Guarantee.
were $19,550 million for concessional taxation
personal income. Guarantee from 9.5 per cent to 12 per cent
of superannuation entity earnings and $17,750 Some employers may have responded to the
over the period 2021 and 2025 will cost the
Superannuation Guarantee by passing on the
government roughly $288,480 million over the
added labour costs in the form of higher prices.
period 2021 and 2060, averaging a cost of $7,212
FIGURE 6 Indeed, in a purely competitive economy, where
million per financial year over the long-term
EFFECT OF INCREASING SUPERANNUATION GUARANTEE FROM 9.5 PER CENT TO 12 PER CENT ON all firms are experiencing the same increases in
(Figure 6).iii
GOVERNMENT REVENUE, SUPERANNUATION-WAGE ELASTICITY -1.00, $ MILLION labour costs, economic theory predicts a share of
However, estimating the tax collected under the the labour cost increases will be passed through
superannuation concessional regime with the tax to consumers.
20000 that would be paid if the income were taxed at an
In cases where the Superannuation Guarantee
individual’s marginal rate of personal income tax is
is passed through to consumers, employer
based on the assumption that there is a complete
15000 contributions to workers’ superannuation would
and immediate trade-off between employer
be a valuable source of net government revenue;
contributions to workers’ superannuation and
10000 the higher taxable employer superannuation
their wages. This assumption is not supported
contributions provide tax of 15 per cent (and
by economic theory or empirical evidence, and
5000 superannuation earnings tax to a maximum of
should be rejected.11
15 per cent over the accumulation period), in
VALUE ( $MILLIONS )
In our research paper, ‘Does higher addition to a goods and service tax (GST) rate of
0
superannuation come out of workers’ wages?’, we 10 per cent on the added value of taxable goods,
argued that there was scant empirical evidence services and other items sold or consumed in
-5000 of a causal relationship between superannuation Australia. Employer income taxes would remain
increases and low wage growth to support the unaffected, as would tax from salary and wages.
-10000 assumption of a one-for-one trade-off between
Alternatively, some employers may have absorbed
superannuation and wages.12
a share of the extra costs from the introduction of
-15000 Given our findings, if the Superannuation the Superannuation Guarantee and subsequent
Guarantee was not introduced in 1992, it is increases by accepting lower profits. The gap
-20000 difficult to imagine a scenario where workers’ between productivity and a typical workers’
Tax Loss (Income, CGT) salaries and wages would be 9.5 per cent higher compensation has increased dramatically since
-25000 Tax Gain (Superannuation Contribution and Earnings Taxes) today than otherwise, which is the underlying the mid-1990s.13 Industries with high productivity-
assumption among estimates that suggest that pay gaps may be able to pay for workers’
Net Annual Fiscal Effect
-30000 the superannuation is a burden on the budget. superannuation without lowering their wages.
Indeed, we note in passing that the very weak They would have the gains in productivity to draw
wages growth experienced over the past few on for more resources.
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053
2055
2057
2059
i Low income earners (earnings below $37,000 per annum) are effectively refunded the tax on their contributions through the low income superannuation tax offset (LISTO).
Contributions on behalf of high-income earners (earnings of $250,00 and over per annum) are taxed at 30 per cent.
ii Superannuation earnings are taxed at a 15 per cent, compared to capital gains which are taxed at the marginal rate for individual taxpayers and between 27.5 per cent and 30 per
Source: Authors’ calculations.
cent for companies. If an asset is held for at least 1 year, then any gain is discounted by 50 per cent for individual taxpayers, or by 33.3 per cent for superannuation funds.
The 50 per cent CGT discount is not available to companies except for small businesses (business entity with an aggregated turnover of less than 2 million).
iii Modelling assumptions and methodology can be found in Appendix One.26 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 27
If we assume, conservatively, that the The forgone revenue estimates do not make FIGURE 7
superannuation-wage elasticity of all workers allowances for the fact that people would EFFECT OF INCREASING SUPERANNUATION GUARANTEE FROM 9.5 PER CENT TO 12 PER CENT ON
to be -0.50; that is, half of the increases in the minimise their tax by making use of trusts or by GOVERNMENT REVENUE, SUPERANNUATION-WAGE ELASTICITY -0.50, $ MILLION
Superannuation Guarantee came out of workers’ investing in negatively geared assets or owner-
wages and the other half came out of company occupied housing. Companies would also
profits, the estimated tax expenditures for minimise their tax by making use of company tax
concessional taxation of employer superannuation structures, exemptions and concessions, such as 20000
contributions would be significantly lower. This research and development expenditure, or avoid
would reflect the difference in the benchmark paying tax entirely by relocating profits offshore
when measured as a mixture of the corporate to lower-taxed foreign jurisdictions. 15000
tax rate and the marginal rate of personal income
Alternative savings vehicles are much less
tax compared to being measured as fully the
generous than superannuation, which would 10000
marginal income tax rate, which would be higher.
have incentivised people to save in the first place.
Based on Australian Taxation Office (ATO) data
Indeed, behavioural factors such as hyperbolic
VALUE ( $MILLIONS )
for the 2016-17 income year (latest available data),
discounting and loss aversion biases influence
the estimated weighted average marginal rate of 5000
peoples’ behaviour on whether they would
personal income tax is 37.5 per cent for individuals
substitute superannuation with other forms of
whereas the weighted average rate of corporate
saving.
tax is 29.2 per cent for companies. 0
Additionally, when people’s disposable income
Additionally, the estimated tax expenditures for
increases, they tend to consume more. The
concessional taxation of employer superannuation
Reserve Bank of Australia (RBA) estimates that -5000
contributions would be lower when measured
the marginal propensity to consume for Australian
as a mixture of the corporate tax rate and the
disposable incomes is 0.54.14 This consumption
marginal rate of personal income tax because a
would not be applicable to CGT at the marginal -10000
share of employees work for an employer who
rate for individual taxpayers but almost certainly
did not pay tax in any single financial year. Based
Goods and Services Tax (GST) at a lower rate of
on ATO data for the 2016-17 income year (latest
10 per cent in any financial year. -15000
available data), approximately 30 per cent of
Tax Loss ( Corporate, Income, CGT, GST )
employees worked for an employer who did The Treasury’s tax expenditure estimates for
not pay tax, and the forgone profit that would concessional taxation of superannuation entity Tax Gain ( Superannuation Contribution and Earnings Taxes )
-20000
have gone towards employers’ contributions to earnings are also based on the assumption that Savings on Age Pension
workers’ superannuation would not be enough the rate of earnings on assets is the same whether
Net Annual Fiscal Effect
to change the taxable status of these companies. taxed in superannuation or under the benchmark
-25000
tax treatment. However, most Australians – if
In the Treasury’s forgone revenue estimates,
they substitute superannuation with other forms
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053
2055
2057
2059
there is also a need to measure the income
of saving – invest in cash deposits, Australian
tax that would have otherwise been paid
listed equities, or housing, which have average
on investment income which requires some
annual returns lower than average annual returns
assumptions of where people would otherwise
on superannuation earnings over the long-term. Source: Authors’ calculations.
have invested their savings. The Treasury’s
Furthermore, assets like housing are generally
estimates show the tax expenditure based solely
exempt from CGT.
on the difference in tax treatment between
Based on the above mentioned assumptions, It is estimated that increasing the Superannuation Guarantee
superannuation earnings and the benchmark Finally, superannuation savings is expected to from 9.5 per cent to 12 per cent over the period 2021 and 2025 will save the government roughly $34,306
treatment, without the allowance for any increase the savings of people in retirement, million over the period 2021 and 2060, averaging a gain of $857 million per financial year over the long-
behavioural responses. However, the treatment resulting in reduced outlays on the Age Pension. term (Figure 7).iv By 2038, the net budgetary cost of superannuation tax concessions would be positive,
of investment income under this counterfactual This expenditure saving is not recognised in the meaning that the gains in superannuation contribution and earnings taxes and savings on the age pension
scenario is inherently problematic. estimates of the superannuation tax expenditures. will exceed the costs of the superannuation tax concessions.
iv Modelling assumptions and methodology can be found in Appendix Two.28 M C K E L L I N S T I T U T E V I C T O R I A
Economic Benefits of Universal Superannuation How superannuation works for all of us 29
Superannuation supports If the Superannuation Guarantee rises from its flows that occur in the distant future. Such Superannuation offsets ageing
current 9.5 per cent to 12 per cent by 2025, long-term cash flow forecasting is difficult to
Australia’s infrastructure needs It is projected that the value of assets in the predict and can be affected by sudden changes
population effects on economic
The infrastructure requirements of Australia are
superannuation system could rise to $5,075 in consumer preferences, standards and laws. growth
billion by 2030.19 If the proportion of assets
growing. To a large extent, this has to do with Finally, many superannuation funds as well as
invested in infrastructure remained at roughly Australia’s ageing population could have
economic and population growth and a general members have ethical considerations about
5 per cent on average this suggests that there a significant impact on economic growth,
underinvestment in the past investments. Superannuation funds want to
will be over $254 billion in assets dedicated to particularly on aggregate demand. Aggregate
ensure their members that the assets they
For example, population growth impacts are infrastructure development by the year 2030. demand refers to the total level of spending
acquire are compliant with human rights, labour
being felt in fast-growing cities as infrastructure in the economy, which includes household
rights, corruption and environmental laws,
is placed under pressure, including congestion spending, investment by business and
and more than this, that they are compliant
on Australian roads and crowding on public Superannuation increases with their own internal benchmarks for what is
households, spending by the government, and
net spending from overseas. Data on lifetime
transport. Australia’s population is projected capital’s focus on long-term responsible investing.
earnings, consumption and saving show that
to reach between 28.3 million and 29.3 million
by the year 2027 from 24.6 million as of 2017.15 sustainable returns Another consequence is that investing strategies income, consumption and saving tend to rise
Additionally, the proportion of Australians of superannuation funds can act counter- during an individual’s initial working years,
It is well known that superannuation funds adopt peaks in the mid-to-later working years, and
living in capital cities is projected to increase cyclically to movements in equities prices,
longer term investing strategies than other types declines in the years leading up to retirement.21
to between 69 per cent and 70 per cent by the and thereby reducing volatility in the equities
of investors. This is because the investment goal As a larger proportion of the ageing population
year 2027, up from 67 per cent as of 2017.16 market. This is because long-term investors can
of superannuation funds is to maximise value falls into the older age categories, the level of
afford to absorb short-term price fluctuations.
The level of investment in infrastructure far beyond the time of a members’ retirement consumption would be expected to fall with it.
needed to meet anticipated demand cannot be age, not the day-to-day return on assets.20 Superannuation funds comfort with counter- Consumption accounts for more than half of
financed by traditional sources of public finance Furthermore, they must achieve this across cyclical investing strategies can help stabilise GDP so a declining level of consumption would
alone. Failure to make significant progress multiple generations of members, existing and financial markets by providing liquidity at critical generate a sharp fall in economic growth over
towards bridging the infrastructure gap in future. The reliable flow of funds this creates times, such as during an economic recession. the long-term.
Australia could prove costly in terms of slower via the Superannuation Guarantee, and through
The current default fund process has played
economic growth and loss of international default arrangements, provides a steady stream
an important role in ensuring that members’
competitiveness. Australia currently ranks 18th of capital-seeking investment opportunities and
best interests are represented in long-
in the world for ease of doing business, having has provided a source of demand for equities
term investment decisions and strategies,
dropped over the past decade from 9th in issued by companies.
balancing the interests of incoming,
2008.17 Economic infrastructure, such as utilities,
A consequence of this is that superannuation ongoing and outgoing members.
transportation and communication networks,
funds, being invested in a company over The Commonwealth Government
drive competitiveness and support economic
the long-term, are more concerned with should ensure that any changes
growth by increasing labour productivity,
environmental, social and governance (ESG) to the current default system
reducing business costs, diversifying means of
factors than other types of investors, ensuring do not reduce the long-
production and creating jobs.
that funds are maximising members’ long-term term investment focus of
Australian superannuation funds have played a returns while mitigating negative externalities. superannuation funds, as it
significant role in funding Australia’s increasingly will dilute the contribution
There are a number of reasons why
pressing infrastructure needs, and that role that superannuation can, and
superannuation funds are incorporating ESG
will only increase in the future. The long-term should, be making towards
factors in their investment strategy. First,
investment horizon of superannuation funds productive capital and
companies may face public backlash, even when
makes them natural investors in less liquid, sustainable returns by creating
operating within the existing legal framework, as
long-term assets such as infrastructure. As of liquidity uncertainty.
standards and laws may take time to catch up
June 2019, 5.6 per cent of assets held by APRA-
with public sentiment.
regulated superannuation funds were allocated
to infrastructure investments, valuing Second, capital stocks of a company are long-
$104 billion, or 5.3 per cent of GDP.18 term assets, as most of the value is from cashYou can also read
