Showing posts with label superannuation. Show all posts
Showing posts with label superannuation. Show all posts

Friday, February 23, 2024

How top earners kid themselves (and us) they're overtaxed

Apparently, the nation’s chief executives and other top people are groaning under the weight of the tax they pay. Is it any wonder they’re doing such an ordinary job of running the country’s big businesses? When you see what’s left of their pay after tax, it’s a wonder they bother turning up.

I know this will shock you – just as it does every time the business media remind their readers of it. According to the latest available figures, for 2020-21, the top-earning 1 per cent of taxpayers paid more than 18 per cent of the total income tax take.

Taxpayers in the top 10 per cent paid 46 per cent of the total income tax collection of $237 billion.

Think of it. Just the top 10 per cent pay almost half of all the taxes. Do you know that the bottom 50 per cent of taxpayers pay less than 12 per cent? Talk about lifters and leaners. Those lazy good-for-nothings have no idea how easy they get it. And still, they whinge unceasingly about the cost of living.

How’s your bulldust detector going? All the figures I’ve given you are true, but, like many of the things said in the political debate, they’re misleading. If you’re not smart enough to see how they’re misleading, that’s your lookout.

It’s true that because income tax is “progressive” – people at the top pay a much higher proportion of their income than those at the bottom – people at the top end up paying a much higher share of the total tax take.

That’s because they’re considered able to bear a bigger share of the cost of government. And remember that about two-thirds of those in the bottom half would have (often not well-paid) part-time jobs.

But what the people who bang on about how much tax they’re paying want you to forget is that although income tax is the biggest tax we pay, it’s just one of the many taxes – federal, state and local – we pay.

In fact, it accounts for only about half of all the tax we pay. And almost all the other taxes are “regressive” – they hit the bottom end proportionally harder than the top.

So, take account of all the other taxes, and the rich man’s burden is a lot less heavy than the rich old men try to tell us.

It’s clear that, of all the taxes we pay, it’s personal income tax that the well-off most object to and want to pay a lot less of. Whenever you see them arguing that we need major tax system reform to “sharpen incentives to invest, innovate and hire” and make the system “genuinely productivity-enhancing”, that’s what they really mean.

Most voters approve of Prime Minister Anthony Albanese’s decision to help ease cost-of-living pressure by diverting a big chunk of the stage 3 tax cuts from high-income earners to middle and lower earners, but the (Big) Business Council was distinctly disapproving.

“The [original] stage 3 package rewarded aspiration and started to address bracket creep with a simpler system”, but “the changes do not address any of the real issues with our tax system”, it said.

But if you’re not impressed by the argument that pretends income tax is the only tax that matters, the big business lobby has others. “Personal income contributes too much of our [total] tax revenue … [at] 51 per cent today,” it says, implying we should cut income tax and increase other, indirect taxes.

A related argument is that few countries are as reliant on income tax as we are. Figures for 2021 say our personal income tax as a proportion of total taxes is the fifth highest among the 38 member countries of the Organisation for Economic Co-operation and Development.

Again, it’s true but misleading. It’s a false comparison because, unlike almost all the other countries, Australia uses income tax to cover the cost of social security payments – such as unemployment and sickness benefits, disability and age pensions, as well as healthcare benefits – whereas other countries cover these with separate, income-related social security contributions imposed on workers and their employers.

Calculations by Matt Grudnoff of the Australia Institute show that if you add to income tax the social security contributions imposed in other countries (and, in our case, add the states’ payroll taxes), our ranking goes from fifth highest to seventh lowest. So much for that argument.

Some people argue that we should add our compulsory employer superannuation contributions to our income tax, now set at 11 per cent of wages. But that argument is wrong because the super levy is not a tax.

Taxes involve the government making you pay money into its coffers, which is then spent by the government as it sees fit. With super contributions, the money goes into an account with a super fund that has your name on it and is always yours to spend as you see fit once you reach a certain age. If you die without spending it all, what’s left goes to your rellos.

And here’s another thing. One reason income tax accounts for as much as half of Australia’s total tax collections is that the Abbott government abolished former prime minister Julia Gillard’s carbon tax and her mining tax.

The very business lobby groups who supported these anti-tax-reform measures are now complaining that we’re too dependent on income tax. If they were genuine, the problem could be easily fixed: take up Professor Ross Garnaut’s proposal for a new, bigger “carbon solution levy”, which, by raising $100 billion a year, would greatly reduce our reliance on income tax.

Finally, don’t let the rich guys’ talk of high taxes fool you into believing Australia is a high-tax country. That’s the opposite of the truth. When you take total taxes as a proportion of gross domestic product, the OECD average in 2021 was 34 per cent. Ours was less than 30 per cent, making us ninth lowest. And only three of the eight lower countries are rich like us.

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Monday, February 12, 2024

Let's stop using interest rates to throttle people with mortgages

What this country needs at a time like this is economists who can be objective, who’re willing to think outside the box, and who are disinterested – who think like they don’t have a dog in this fight.

On Friday, Reserve Bank governor Michele Bullock, with her lieutenants, made her first appearance as governor before the House of Reps economics committee.

See if you can find the logical flaw in this statement she made: “The [Reserve’s] board understands that the rise in interest rates has put additional pressure on the households that have mortgages. But the alternative of lower interest rates and high inflation for a prolonged period would be even worse for these households, as well as all the households without mortgages.”

Sorry, that’s just Bullock doing her Maggie TINA Thatcher impression, mindlessly repeating the assertion that “There Is No Alternative”. Nonsense. There are various alternatives, and if economists were doing their duty by the country, they’d be talking about them, evaluating them and proposing them.

What’s true is that the Reserve has no alternative to using interest rates to slow demand. Some economists can be forgiven for being too young to know that we didn’t always rely mainly on interest rates to fight inflation, just as we didn’t always allow the central bank to dominate the management of the economy.

These were policy changes we – and the rest of the rich world – made in the early 1980s because we thought they’d be an improvement. In principle, now we’re more aware of the drawbacks of giving the central bank dominion over macroeconomic management, there’s no reason we can’t decide to do something else.

In practice, however, don’t hold your breath waiting for the Reserve to advocate making it share its power with another authority. Nor expect the reform push to be led by economists working in industries such as banking and the financial markets, which benefit from their close relations with the central bank.

What those with eyes should have seen in recent years is that relying so heavily on an instrument as blunt as interest rates is both inequitable and inefficient. It squeezes the third of households with mortgages – or the even smaller proportion with big mortgages – while hitting the remaining two-thirds or more only indirectly.

It’s largely by chance that the Reserve’s need to jam on the demand brakes has coincided with the worst shortage of rental accommodation in ages, thereby spreading the squeeze to another third of households. Had this not happened, the Reserve would have needed to bash up home buyers even more brutally than it has.

Clearly, it would be both fairer – and thus more politically palatable – and more effective to use an instrument that directly affected a much higher proportion of households. This should mean the screws wouldn’t have to be tightened so much, another advantage.

One obvious alternative tool would be to temporarily move the rate of the goods and services tax up (or, at other times, down) a percentage point or two.

Another alternative, one I like, is to divide compulsory employer superannuation contributions into a part permanently set at 11 per cent, and a part that could be varied temporarily between plus several percentage points and minus several points.

This would leave workers less able to keep spending (or more able to spend), as the managers of demand required to stabilise both inflation and unemployment.

Its great attraction is that it involves the government temporarily fiddling with people’s ability to spend, without actually taking any money from them. Surely, this would be the least politically painful way to manage demand.

Experience with central-bank dominance has shown us one big advantage: the economic car has been driven markedly better when the brake and the accelerator are controlled by econocrats independent of the elected government.

But this simply means we’d have to set up an independent authority to control all the instruments of macro management, whether monetary or fiscal.

Not all our economists have been too stuck in the mud of orthodoxy to think these new thoughts. They were canvased by professors Ross Garnaut and David Vines in their submission to the Reserve Bank inquiry – which, predictably, was brushed aside by a panel of economists anxious to stay inside the box.

A century ago, Australians were proud of the way we showed the world better ways of doing things, such as the secret ballot and votes for women. These days, our economists are dedicated followers of international fashion.

This means the country that should be leading the way to better tools to manage demand will wait until it becomes fashionable overseas. Why should we be first? Because our unusual practice of having mainly variable-rate home loans means our use of the interest-rate tool bites a lot harder and faster, thus making our monetary policy a lot blunter than theirs.

Economists may not fret much about how badly some punters are hurting as the economic managers rapidly correct the consequences of their gross miscalculations – the Reserve played a big part in the excessive stimulus during the COVID lockdowns – but one day the politicians who carry the can politically for these miscalculations will revolt against the arrogance of their economic gurus.

Reserve Bank governors – and, in earlier times, Treasury secretaries – privately congratulate themselves for being the last backstop protecting the nation against inflation. When no one else cares, they do. When no one else will impose a cost of living crisis on spendthrift consumers, they will.

Don’t you believe it. If they cared as much as they think they do, they’d care a lot more about effective competition policy. But when the economists leading the Australian Competition and Consumer Commission – Allan Fels and later, Rod Sims – were battling to get more power to reject anticompetitive mergers, they got precious little support from their fellow economists.

While the (Big) Business Council was lobbying privately to retain the laxity, backed up on the other side by a few Labor-Party-powerful unions that had done sweetheart deals with their big employers, the Reserve and Treasury were missing in action.

The people at the bottom of the inflation cliff boast about the diligence of their ambulance service, while doing nothing to help the people at the top of the cliff trying to erect a better safety fence.

If you were looking for examples of oligopolies with pricing power, you could start with the big four banks. If you were looking for examples of “regulatory capture” – where the bureaucrats supposed to be regulating an industry in the public interest get sweet-talked into going easy – you could start with the Reserve and banking (with Treasury not far behind).

In the natural conflict between the goals of financial stability and effective competition, the Reserve long ago decided we’d worry about competition later.

But the more concentrated we allow our industries to become, the more often the Reserve will have to struggle to control inflation surges, and the harder it will need to bash home-buyers on the head.

Read more >>

Monday, February 5, 2024

Bosses are finding more innovative ways to handcuff their workers

When I joined the John Fairfax superannuation scheme 50 years ago on Wednesday, I little knew my new boss was trying to handcuff me. Fortunately, they were “golden handcuffs”. But these days, bosses use other, more blatant ways to tie their workers to them and stop wages growing so fast.

The Fairfax scheme I joined decades ago must have been fairly common among big companies in the years after World War II, when shortages of skilled labour were almost continuous.

From memory, the company offered to contribute an extra 6 per cent of my pay to the scheme, provided I contributed 4 per cent. That 4 per cent stopped many people joining the scheme, but not me.

What I didn’t realise was that, if you left the scheme before reaching retirement age, you got your own contributions back, with 3.75 per cent interest, but forfeited the company’s contributions and the accrued earnings on them.

But here’s the trick: the company didn’t keep the forfeited contributions and earnings, but transferred them to the scheme’s general fund, to be shared between those loyal employees who did stay until retirement.

Get it? The longer you’d worked for the company, the more you had to lose by leaving. Plus, the more you had to gain by staying on until retirement. You were bound to the company by golden handcuffs.

(A side-benefit to the Fairfax family was that much of the huge sum in the general fund was held in Fairfax shares, thereby increasing the family’s protection against a hostile takeover.)

Relax. My handcuffs are long gone, removed by Paul Keating’s introduction of compulsory super for employees and related reform of existing company super schemes, in the early 1990s. Today, all employer contributions and earnings are immediately "vested" in the employee, meaning you take them with you when you leave the company.

Now, I should remind you that mainstream economists are great believers in "the mobility of labour". The freer workers are to move to another employer offering a better job, or to start their own business, the more efficient the economy is likely to be, and the faster productivity will improve.

So the last thing economists approve of is employers being able to discourage, delay or even prevent their staff from moving on. That is, able to prevent market forces from working the way they should.

But as assistant minister for competition Dr Andrew Leigh reminded us last week, there’s much research showing that employers around the world are increasingly using "non-compete clauses" in their employees’ contracts. To get the job, you have to agree not to leave and work for one of its competitors for a set period, or to yourself set up in competition.

Couldn’t happen in a decent place like Australia? Don’t be so sure. Just as it’s taken longer for our chief executives to start believing they’re entitled to pay themselves many multiples more than they pay any of the company’s other employees, so they’ve been slower to follow the Yanks and Brits in handcuffing those who work under them.

Even so, an online survey conducted by Dan Andrews (not that one) from the e61 Institute, and Bjorn Jarvis from the Australian Bureau of Statistics, found that as many as one in five Australian workers is subject to a non-compete clause.

Smaller percentages of employees must agree not to poach the company’s workers after they’ve left, or not to solicit the business of their former employer’s clients.

The survey found that, as well as applying to senior executives, non-compete clauses may apply to many workers who have close contact with the customers: childcare workers, yoga instructors and specialists in IVF.

It also found that competition clauses applied to 39 per cent of managers, 26 per cent of community and personal service workers, and to 14 per cent of clerical and admin workers.

Leigh says that shifting jobs is typically associated with a substantial jump in pay. Yes, that’s probably why few recruits resist when the new boss slips in some clause about what happens if you leave. Leave? I haven’t even arrived yet.

But Leigh says even many low-paid workers are constrained from shifting to a better job. Don’t forget that, these days, many government-subsidised services are provided by small, for-profit providers.

I hire you to work in my childcare or aged care (or yoga) business, but you prove good at it, and popular with the parents or the oldies’ children, so you leave and set up for yourself, taking some of my customers with you.

Leigh says that, even if some non-compete clauses wouldn’t stand up in court, they are rarely tested. (That’s another yawning gap between theory and practice. In theory, we’re all equal before the law. In practice, lawyers cost big bucks – and the boss has a lot more bucks to play with than you do.)

“In most cases,” Leigh says, “workers subject to a non-compete clause will either choose to suffer the period of enforced ‘gardening leave’ [the months or years that you’ve agreed not to join a competitor or become one] or will stay with their existing employer.”

But this is about more than employers treating you like you’re their slave. It’s also about wages. Especially where workers possess skills that aren’t easy to come by, competition between employers pushes wages up. If you can find a way to dampen that competition, you’ve kept a lid on wage costs.

“This means that workers miss out on potential wage gains,” Leigh says. “It also makes it harder for start-up firms to attract the talent they need to challenge incumbents. In turn, productivity suffers.”

The Bureau of Statistics has added a question about non-compete clauses to its regular survey of employee earnings and hours, which it will publish later this month.

The competition taskforce within Treasury, set up by the government last year, will be looking closely at this information to learn more about the effects of non-compete clauses on workers and businesses in Australia.

Have you noticed how, whenever the (Big) Business Council reads us another lecture on the need for major reform to get our productivity improving again, non-compete clauses never rate a mention?

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Wednesday, June 14, 2023

Grim Reaper is catching up with the Baby Boomers, waving bills

Having witnessed the last days of my parents and in-laws, I don’t delude myself – as they did – that I’ll be able to avoid being carted off to an old people’s home. Sorry, an aged care residential facility.

Actually, I dream of dying in the saddle. My last, half-finished column would be the announcement that I’d finally made way for the bright young women coming up behind me. That’s assuming they hadn’t already found a chance to push me under a bus.

Speaking of bright young women, Anthony Albanese’s Minister for Aged Care and Sport, Anika Wells, seems to be attacking her job with much more enthusiasm than her Coalition predecessors.

In a speech to the National Press Club last week, she noted that Labor inherited a system that a royal commission had characterised with a single word – “neglect”. She’d spent the past 12 months engaged in “triage” and “urgent reform” and was now able to think about the future.

And what’s she been thinking? “I don’t want Australians to be scared about the care they will be provided in later life,” she said. “I don’t want daughters and sons worried about the treatment their parents will receive.”

The Howard government’s Aged Care Act of 1997 was aimed at saving money by turning aged care over to community and for-profit providers. It was focused on how the providers were to run their services, setting out their obligations and responsibilities.

But, as recommended by the royal commission, the government planned to introduce a new act next year, this time focused on the rights of older people, with “a clear statement that the care provided to residents is safe and of high quality”.

Labor had already done much to fix the system, she said, but there were more challenges ahead, and “we must act now”. Why? Because “the Baby Boomers are coming”. (I’d have thought they’d come some time ago, and the real problem was their looming departure.)

But I imagine the Boomers (present company excepted) will be living a lot longer than previous generations – thanks to advances in medical science and being the first generation to realise that exercise was something to be sought and enjoyed, not avoided.

But though their arrival in aged care may be at a later age, their later lives won’t be trouble-free and certainly not doctor-free.

One change we’ll be seeing is more in-home care. Almost everyone would prefer to keep living at home rather than go off to a “facility” (sounds like a toilet block). The previous government did introduce the home-care package, but it was expensive and so was limited in how many people were given it.

Wells is introducing a new Support at Home program in July 2025 which, by delaying or eliminating people’s move to facility care, should save money.

But her big announcement last week was the setting up of an aged care taskforce – chaired by her good self – to answer the royal commission’s “great unanswered question”: How to make aged care equitable and sustainable into the future?

Which is a politician’s way of saying, “How we gonna pay for all this?”

One of the commissioners wanted a new aged care tax levy of 1 per cent of everyone’s taxable income (which, in practice, would be added to the present 2 per cent Medicare levy), whereas the other wanted some unspecified combination of a levy and a means-tested contribution from users.

Wells notes that, within a decade, we’ll have, for the first time ever, more people aged over 65 than under 18. And the proportion of people aged 15 to 64 – the people working and paying income tax – will shrink.

Now, this is the point where we need to remember that we’ve gone for decades stacking the financial rules against the younger generation and in favour of the oldies. We’ve kept handing tax breaks to the ageing. Old people can have good incomes that are largely untaxed, whereas young people on the same money have to pay up - and pay for their tertiary education.

It’s not true that every Boomer’s rolling in it – there are poor people in every generation – but most have done pretty well. Most were able to climb aboard the home-ownership gravy train when homes were still affordable. Many have been able to buy an investment property or two on the top.

And though the compulsory superannuation scheme hasn’t applied to the whole of their working lives, they’ll be retiring with a lot more, hugely taxpayer-subsidised super than any previous generation.

So, the idea of spreading the entire cost of the Boomers’ aged care – whether in-home or in-facility – across all those people young enough to still be working and paying income tax ought to be unthinkable.

If Labor doesn’t summon the courage to ask those Baby Boomers who’ve done OK to help pay directly for the cost of their highly privileged lives’ last stage, it will just prove what a rotten world Albo and the rest of us have left our offspring.

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Wednesday, March 1, 2023

Don't waste sympathy on self-funded retirees ... like me

You probably haven’t noticed, but I never write about self-funded retirees without adding a pejorative adjective – “so-called” or, better, “self-proclaimed”. As worthy causes go, they’re at the top of their own list, but not high on mine.

One day, a reader took me to task: “Why are you so down on self-funded retirees, Ross, when from what I can see, you’ll be one yourself when you retire?”

Ahem, ah, yes, well... Some explaining to do. If self-funded means you’re so well-off you couldn’t possibly meet the means test to be eligible for the age pension then, yes, I’ll be self-funded. One thing I don’t have to look forward to is waiting on the phone for hours for help from those lovely souls at Centrelink.

In my experience, no one ever tells you they’re self-funded without expecting you to give them a medal. While other people have led spendthrift lives and now expect the taxpayer to support them in old age, I worked hard and saved my pennies, and now I’m getting nothing from the government.

What a good citizen I am. If only other people could be as self-sacrificing as I am. And, by the way, while we’re talking money, since it’s a bit of a struggle without the pension, I was wondering if the government could manage to give me a little something by way of appreciation. Say, a special tax offset for seniors, or easier access to a healthcare card?

What gets me about all this is that it’s just the wrong way round. It’s not the supposedly self-funded who are doing the taxpayer a favour, it’s the pensioners who retire without much in the way of super.

Why’s that? Because so much of any superannuation balance comes not from what you saved, but from the accumulated tax breaks you were given. I guess what many people don’t realise is that you get compound interest not just on what you contributed, but also on the concessions you received, year after year.

Many people retire with quite modest superannuation payouts, which do little to reduce their eligibility for the age pension. According to the Association of Superannuation Funds of Australia, the median balance for people aged 60 to 64 is less than $360,000 for men and less than $290,000 for women.

But people who retire with a super balance big enough to extinguish all or most of their pension eligibility will be getting far more help from the government than someone on the full pension. So, for such people to think of themselves as “self-funded” is delusional.

Consider these figures from Brendan Coates of the Grattan Institute. In 2019-20, the average tax break on earnings received by people with at least $1.6 million in super totalled about $60,000 a year. This was nearly three times the value of the single pension.

It’s not well understood that, whereas the age pension costs the government about $55 billion a year, the annual cost of superannuation tax concessions is almost as large – $52 billion. At the rate we’re going, it won’t be many more years before the super concessions exceed the cost of the pension.

Now perhaps, you understand why, at a time when so many demands are being made on the budget, Prime Minister Anthony Albanese and Treasurer Jim Chalmers have decided to make the super tax breaks less generous for the 0.5 per cent of people with a super balance exceeding $3 million.

According to Coates’ calculations, this will free up about $1 billion a year for use in more deserving causes – decent aged care, for instance. Think about it. Balances of more than $3 million – I couldn’t spend that much money before I died if I tried. Especially because, the older you get, the less inclined you are to do things that cost a lot of money. You could be living it up at the George V Hotel in Paris, but you don’t feel like it.

According to Coates, nearly 90 per cent of the tax breaks go to the wealthiest 20 per cent of retirees. So, the critics are right to describe super as it presently stands as a taxpayer-funded inheritance scheme for wealthy Australians.

It’s only natural for people to aspire to leave their offspring well provided for. What’s not natural is for you to expect other, less fortunate taxpayers to contribute to your kids’ greater comfort.

The trouble with super is that it’s arse-about. The people who have the highest incomes, and thus the greatest ability to save, are given the greatest assistance, while the people with the least ability to save are given little or no help.

Oh, perhaps I should have mentioned it. If these appalling Labor people go ahead with lopping the tall poppies of superannuation, they’ll be aiming their scythe directly at me. Please write to the treasurer and say how terribly unfair this would be.

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Monday, September 5, 2022

Breaking news: unions play a central role, for good and ill

Welcome back to a tripartite world, where Labor has returned to power and its union mates are back inside the tent – and at last week’s jobs summit could be seen moving in their furniture. For those who don’t remember the 1983 glory days of Bob Hawke, Paul Keating, consensus, the Accord, and former ACTU secretary Bill Kelty as an honorary member of the cabinet, it will take some getting used to.

For those who’ve been watching only since the John Howard era, it may even seem unnatural. One of Howard’s first acts upon succeeding Hawke and Keating in 1996 was to delegitimise the unions.

He allowed the tripartite committees to lapse, and didn’t reappoint the ACTU secretary to the board of the Reserve Bank. I doubt if many even informal links between ministers and union leaders continued.

The Libs didn’t know the union bosses, and didn’t want to know ’em. They were the enemy – always had been, always would be. Big business bosses, on the other hand, would be privately consulted and were always welcome to phone up for a quiet word with the minister.

This, by the way, helps explain the Reserve Bank’s pro-business bias. Its board is loaded with business worthies - who are there to help keep the central bankers’ feet on the ground – and its extensive program of regular and formal “liaison” with key firms and industries, doesn’t include asking union leaders what they think’s happening.

If you wonder why Reserve governor Dr Philip Lowe’s remarks about wages can sometimes seem naive – even out of “boomer fantasy land” – it’s because he only ever hears the bosses’ side of the story. And I doubt if they ever shock his neoclassical socks by talking about how they exercise their market power.

It’s easy to justify the Liberals’ delegitimation of the unions by noting that, these days, only about 14 per cent of employees belong to a union. But if you find that argument persuasive, you’re revealing your ignorance of our wage-fixing institutions.

Most workers are subject to an industrial award, and there’s a union (and an employer or employer group) on one end of every award, and almost every enterprise agreement. In the Fair Work Commission’s annual wage review – which sets the wages of about a quarter of all employees – it’s the ACTU that stands against the employer groups arguing that times are tough, and they couldn’t possibly afford a rise of anything much.

So, to say the unions have what economists would call a giant “free-rider” problem – a lot of people happy to receive benefits without paying for them – is not to say they shouldn’t be given a seat at the table.

Liberals, business and their media cheer squad may be appalled by sanctification of the unions, but at least Labor’s making it clear it wants business to keep its seat at the table. It will be consulted. This too is Labor’s inheritance from the Hawke-Keating experience: to the extent possible, keep business on side.

The ACT’s second-biggest industry – lobbying – will be busier than ever. It’s third-biggest – consulting – not so much.

What all agreed at the summit is that Labor has taken over an economy with many structural problems that need fixing. Not the least of these is that the wage-bargaining system is broken.

What we learnt last week, from everything ministers said and from the 14-page “outcomes document” is that, in marked contrast to its predecessor, Labor does intend to fix things.

The whole summit, tripartite business is about giving all the key players a say in how things are fixed, giving them a heads-up on the government’s intentions, and an introduction to the minister. About winning support – or, at least, acquiescence – from as many of the powerful players as possible, to minimise the political risks of making changes.

Under Labor’s tripartism, the three parties aren’t equal. The government will, in the end, do what it decides to do. The unions start well ahead of business, because of their special relationship with a Labor government.

They have a further advantage over business: solidarity. The many unions are used to speaking with one, unified voice through the ACTU, whereas business fractures into big versus small, and rival employer groups. The unions know all about playing one business group off against another.

What business has to decide is whether it wants to stay in the government’s tent or walk out. Because, in business, pragmatism usually trumps idealism, my guess is that business will play ball for as long as Labor looks like staying in office.

After the summit ended, the ACTU’s statement said it had always “been clear that we need to get wages moving and increase skills and training for local workers in order for unions to support lifting skilled migration levels. We welcome that this summit has delivered those commitments.”

It was all a talk fest? No, a deal was done and that quote reveals just what the deal was. However, a big part of the business side didn’t support fixing the wage-bargaining system by returning to “multi-employer” bargaining.

What’s clear is that the government will be pressing on with some form of multi-employer bargaining. What isn’t yet clear is what that form will be. Until it’s finalised, business will be busy inside the tent pushing for whatever modifications it can get.

With Labor back in power and the unions back walking the halls of power, it’s important to understand the relationship between the two arms of the “labour movement”. Whereas the relationship between the Libs and business is quite informal, the relationship between Labor and the unions is highly formal. They’re not mates, they’re close rellos.

Historically, the unions set up the Labor Party to be their political arm. To this day, those unions that pay dues to the Labor Party still wield considerable influence over it and the members of the federal parliamentary caucus.

Labor parliamentarians are affiliated with particular unions, which gives some of the bigger unions considerable influence over preselections, on who gets to stay leader of the party, and on certain policy matters.

When Labor is in government, businesses in certain industries use their unions to get to the government. This explains why Labor governments haven’t done as much as they should to tighten up our competition law.

And whereas Howard left the Libs with a visceral hatred of industry super funds, Labor’s links with the unions – and the unions’ links with the ticket-clippers of the super industry – mean it can’t always be trusted to favour the interests of super members over super managers.

Read more >>

Friday, May 13, 2022

Cutting real wages will help inflation, but weaken the economy

At last, as the election campaign reaches the final stretch, we’ve found something worth debating. Anthony Albanese has found his spine and supported a big rise in award wages, while Scott Morrison says a decent rise for the masses is a terrible idea that would damage the economy.

First the politics, then the economics. My guess is history will judge this to be the misstep that did most to cost Morrison the election. Successful Liberal leaders – John Howard, for instance – know never to be caught within cooee of a sign saying “wages should be lowered”. It’s not the way to woo outer-suburbs battlers to the Liberal cause.

That Morrison should defy this precedent in a campaign where the cost of living has become by far the biggest issue is all the more surprising.

Between them, the two contenders have revived and highlighted the oldest stereotype in Australia’s two-party politics: the Labor Party is - surprise, surprise – the party of ordinary workers, and will always champion their interests, whereas the Liberals are the party of business, and will always champion the interests of business.

It’s because the Libs are seen as the bosses’ party that they’re instinctively regarded as better at managing the budget and the economy – a mindset Morrison is desperately seeking to exploit in “these uncertain times”.

But the other side of the penny is that Labor, the party of the workers, is the party that cares, and will spend more on providing government services. Which party’s best at industrial relations and wages? One guess.

But how do the minimum wage arrangements work? And what are the broader economic implications of a rise high enough to cover the 5.1 per cent rise in consumer prices over the year to March - or not high enough, so that wages fall in “real terms”?

The Fair Work Commission conducts an annual wage review to determine the increase in the national minimum wage on July 1. Last year’s increase of 2.5 per cent applied to the 2 per cent of employees on the national minimum rate, but also the 23 per cent of employees whose wage is set by one of the various minimum rates for workers in different job classifications set out in each of the more than 100 industrial awards established by the commission.

The national minimum wage rate is about $20 an hour, or about $40,000 a year for a full-time worker. About 2.7 million workers have their wage set in this way.

A 5 per cent increase in the national minimum wage would be worth about $1 an hour or about $2000 a year. Note, however, that many of those in more skilled award classifications would be earning much more than that.

The rises the industrial parties ask for in hearings before the commission are always “ambit claims”. The Australian Council of Trade Unions wants a rise of 5.5 per cent.

On the employer side, the Australian Industry Group says the most its member businesses could possibly afford is 2.5 per cent. The Australian Chamber of Commerce and Industry says the most it could run to is 3 per cent.

Morrison has implied it would be quite improper for a federal Labor government to seek to influence the decision of the independent commission. But the fact is federal and state governments routinely make submissions to provide information about the state of the economy and indicate how generous or tight-fisted they think the commission should be – though they rarely suggest a specific figure.

The commission will give due consideration to a government’s submission but, rest assured, it will do as it sees fit, usually awarding an increase somewhere between the employers’ lowball and the unions’ highball.

My guess is this year’s decision will be a lot higher than last year’s 2.5 per cent, but not nearly as high as 5.5 per cent.

That’s particularly because the commission can be expected to allow for the 0.5 percentage-point increase in employers’ compulsory contributions to their workers’ superannuation accounts this July. The unions would love to have their cake and eat it, but I doubt they’ll be allowed to.

Albanese says, “the idea that people who are doing it really tough at the moment should have a further cut in their cost of living is, in my view, simply untenable”.

Morrison claims a minimum-wage increase sufficient to stop wages falling behind the rise in consumer prices would be “reckless and dangerous”.

The Ai Group warns that “an excessive minimum wage increase would fuel inflation and lead to higher interest rates . . . than would otherwise be the case”. It would be detrimental to economic growth and job creation.

The chamber of commerce says “any increase of 5 per cent or more would inflict further pain on small business, and the millions of jobs they sustain and create. Small business cannot afford it”.

So, what do I think? I think it’s easy to exaggerate the economic cost of giving our lowest-paid workers a decent pay rise. Small business always cries poor and warns jobs will be lost. But there’s little empirical evidence that higher wages lead to job losses.

It’s true that giving a quarter of our workers little or no compensation for the jump in prices caused by pandemic supply disruptions and the Ukraine war would be the quickest and easiest way to get inflation back down to the Reserve Bank’s 2 to 3 per cent target range.

But it would also be hugely unfair to load that burden onto our lowest paid workers, while business profits escaped untouched. The Reserve will just have to be more patient if it doesn’t want to crunch the economy with big rate rises.

And here’s the bit the business lobby groups seem too short-sighted to see. The more we cut the real incomes of our businesses’ customers, the less businesses will be able to sell to them, and the more the economy will be in anything but the “strong” condition Morrison keeps claiming it’s in.

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Wednesday, December 15, 2021

Inheritance: the major life event no politician wants to mention

When I was growing up, my family didn’t have much. We lived rent-free in a succession of down-at-heel manses (the Salvos called them “quarters”), but my father’s stipend was a small one on which to support four kids.

Mum worried about where my parents would live after they retired but, with much scrimping and saving (including making my sisters hand over almost all their wages), they built and paid off a small cottage at Lake Macquarie, near Newcastle.

After my father died, Mum spent many impatient years in God’s waiting room, longing to be “promoted to Glory” and thus reunited with my Dad.

That was in 2004 but, though all she had was the cottage and a thousand or two in the bank, that was enough for the four of us to receive one or two hundred thousand each. By then, we were middle-aged and well established. It was nice to add it to the pile, but we didn’t desperately need it.

More people are receiving significant inheritances these days. They’re getting bigger and will get bigger still.

We worry that houses are becoming unaffordable, but the other side of ever-rising house prices is that inheritance has become an important event in most people’s lives. Many people look forward to it, and family disputes or unhappiness over wills is not uncommon.

But here’s a funny thing. When was the last time you heard a politician talking about inheritances? You didn’t. They never do. I’m sure they think about their own inheritance, but they never want to mention yours or anyone else’s.

In the 1970s, Australia became one of the few rich countries to abolish death duties (state and federal). People were so happy to see the end of them that death duties have become one of the bogeymen of federal politics.

Want to start a scare campaign? Spread a rumour that the other side has a secret plan to reintroduce death duties. Want to oppose limits on share franking credits? Claim it’s a form of death duties.

This is why, compared with other countries, we have little information – and even less reliable figures – on the size and dispersion of inheritances. The pollies fear that if they let the bureau of statistics ask people questions about their wealth, their opponents would jump to conclusions.

This explains why last week’s report from the Productivity Commission was “the first comprehensive research report on wealth transfers” and was initiated by the commission, not requested by the government.

The report explains that rising house prices are just the main reason inheritances are getting bigger. Another is that, with superannuation having been compulsory for about 30 years, more people are dying with unspent super balances. And, of course, family sizes are getting smaller.

The report finds that each generation has been wealthier than the previous one, though Baby Boomers have done particularly well. It found that $120 billion was transferred in 2018 – 90 per cent as inheritances and 10 per cent as earlier gifts – which was more than double that in 2002.

The average inheritance, we’re told, was $125,000. But that included a few large inheritances plus many much smaller ones. The average inheritance received by the wealthiest 20 per cent of recipients was $121,000, and by the poorest 20 per cent was about $35,000. Or so we’re told.

Not surprisingly, the children of rich parents received much bigger inheritances than the children of poor parents. Nor is it very surprising that the children of rich parents tend also to be rich, while the children of poor parents tend also to be poor.

But this may surprise: if you switch from focusing on absolute dollars to looking at relative size, you find that the smaller inheritances received by people without much wealth increase that wealth by a much higher percentage than the larger inheritances increase the wealth of already-rich recipients. The same thing can be seen in other countries’ figures for wealth transfers.

So, to a small extent, the growing prevalence of inheritance is reducing the gap between rich and poor. And, as the report’s authors stress, inheritance isn’t the main reason the children of the rich are also rich and the children of the poor also poor.

No, monetary inheritances explain only about a third. The rest is explained by “all the other things parents give their children – education, networks, values and other opportunities”. And remember, IQ is mainly genetic. Luck is another factor.

Did you notice how little of the wealth transfers gifts accounted for? The authors say they couldn’t find strong evidence of larger transfers from the Bank of Mum and Dad “despite popular belief”.

Sorry, not convinced. By their own admission, the data they’ve been using are “somewhat limited”. My guess is that more people receive inheritances than their figures show. The size of inherited amounts seems very low. As for parents having to cough up to help their kids buy a home, it’s become a big deal relatively recently.

So if the statisticians can’t find much evidence of it, that’s probably because they haven’t been asking the right questions.

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Monday, June 7, 2021

Morrison needs the guts to save business (and the unions) from folly

Talk about don’t mention the war. The great and good – who miss jetting off overseas several times a year – keep telling us the economy won’t recover until we’ve reopened to the world. Seems they just can’t bring themselves to focus on the obvious: it’s wages, stupid.

It’s self-evident that, ultimately, it would be bad for our economy for us to stay a hermit kingdom. But these worthies are wrong if they imagine that re-opening our borders would immediately strengthen the recovery.

It’s true that our airlines won’t recover until the borders open, and our universities will remain crippled. But because Aussies normally spend far more on touring overseas than foreigners spend touring here, our tourism industry (including every country town) has been doing nicely thank you from the temporary ban on Aussies doing their touring abroad.

Our econocrats have been busy extending the fiscal stimulus to get unemployment down and skill shortages up, in the hope this will bid up wages, and so give the nation’s households more to spend through our businesses.

Trouble is, business has grown used to covering shortages of skilled labour by importing workers on temporary visas, thus avoiding pushing up wage rates (and training costs). Get it? The real reason they want the borders re-opened ASAP is so they can go on playing this game.

But it’s just one of many stratagems our businesses have been using to keep the lid on wages: increased use of part-time and casual employment, labour hire companies, discouragement of collective bargaining and greater use individual contracts, evading labour laws by pretending workers are independent contractors, and even wage theft.

Little wonder “most Australians have not had a meaningful pay rise for almost a decade” and “living standards have stagnated”, as Brendan Coates, of the Grattan Institute, reminds us.

And little wonder the economy’s growth was so weak before the arrival of the pandemic, and threatens to go back to being weak once last year’s massive fiscal stimulus has dissipated.

Market economies are circular – the money goes round and round. And nowhere is this clearer than in the two-sided nature of wages. Wages are both the chief cost faced by most businesses, and the chief source of income for their customers.

See the problem? The more success the nation’s businesses have in keeping the lid on wage costs, the less money the nation’s households have to spend on all the things business wants to sell them.

When the two sides of the wage coin get out of whack, so to speak, business starts strangling the golden goose. Efforts to achieve a healthy rate of economic growth – and rising living standards – won’t be sustained.

This is a form of market failure called a collective action problem. What seems to makes sense for the individual business is contrary to the interests of business as a whole. But no business wants to be the first to stop skimping on wage costs for fear of losing out to its competitors.

The solution to collective action problems is for some authority to come in over the top and impose a solution on all players, thus leaving none at a competitive disadvantage and all of them better off in the end because their customers have more money to spend.

In other words, the only way for us to escape an anaemic, wage-less recovery is for Scott Morrison to intervene in the economy to get wages up.

Since the Fair Work Commission’s annual minimum wage case affects the wages of one worker in four, he should have intervened in the case – as has always been the feds’ right – to encourage the commission to give a generous increase after last year’s miscued pandemic minginess.

He should be trying to set a higher wage “norm” for private sector employers by giving his own federal employees a decent, 3 per cent annual pay rise, and pressuring the premiers – Labor and Liberal – to do likewise.

He should be legislating to protect Australian workers – and his own tax collections - from the ravages of the “gig economy”, which tries to hide its evasion of our labour laws behind its genuine and welcome technological innovation.

And the very least he should be doing is to beef up the Fair Work Ombudsman’s staffing and ability to stamp out wage theft which – purely by mistake, you understand – has become endemic. This outbreak of utterly unAustralian illegal behaviour tells us a lot about the ultimately self-destructive, anti-wage mania that is gripping the nation’s business people.

The obvious problem is that doing anything to increase wage rates is totally foreign to a Liberal politician’s every instinct. The Business Council would be incandescent. Nixon going to China is one thing, but a Liberal putting up wages? Never.

Sorry, but the world turns, and successful leaders must turn with it. We used to have a chronic problem with inflation; now it’s chronic spending weakness. The unions used to have too much power; now they have too little.

Even so, there’s one thing a Liberal Prime Minister could be doing to help without giving offence to Liberal sensibilities. It would actually be a blow against his union and Labor enemies that would do a lot to strengthen the economy’s prospects over the next four years, should he have the strength to put the economy ahead of his own political discomfort.

It would save Australia’s workers from the self-interest of the union elite and the mindless tribalism of Labor (not to mention the bullying of a certain former Labor prime minister), which is happy to give their unions mates what they demand because the Libs want to destroy industry super (which is true, but not a good enough reason to oppose a change that would leave workers and the wider economy better off).

The strange thing about last month’s budget is that, though it sees the econocrats’ wage-lifting strategy getting unemployment down to 4.5 per cent by about the end of 2023, it sees no growth in real wages for the next four years.

In evidence to a Senate committee last week, Treasury secretary Dr Steven Kennedy was obliged to explain this discrepancy. It’s because, starting next month, legislation requires compulsory employer contributions to their workers’ superannuation to be increased by 0.5 percentage points for five Julys in a row, until they reach 12 per cent of wages in July 2025.

Relying on strong empirical evidence, Treasury has assumed that employers will cover 80 per cent of the cost of this impost by raising wages by that much less. The nation’s workers will thus be forced to save rather than spend a significant portion of what would have been their future pay rises.

The nation’s greedy, ticket-clipping super-fund managers play on everyone’s instinctive fear that they aren’t saving nearly enough to provide for a comfortable retirement. It suits the union elite (and their gullible Labor mates) to go along with this deception, even though Grattan’s Coates (and Treasury before him, and the recent Retirement Income Review since him) has demonstrated that, after including a part-pension, most workers will have plenty.

So the Labor tribe wants to force the nation’s employees to live on less during their working lives so they can live like royalty in retirement. Why doesn’t Morrison seek to reverse this Labor-initiated legislation? Because he fears he’d lose votes in the labour movement’s ensuing fear campaign.

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Tuesday, March 9, 2021

Stuck with crappy aged care because Morrison won’t ask us to pay

I’m sorry to be so pessimistic but I fear that, in just its first week, the likelihood of the aged care royal commission’s report leading to much better treatment of our elderly has faded.

Within a day or two, Scott Morrison and his Treasurer, Josh Frydenberg, made it known they had “little appetite” for the commission’s plan to use an “aged care improvement levy” of 1 per cent of taxable income to cover the considerable cost of the reforms it proposed.

Morrison wants to be seen as delivering lower – not higher – taxes. I suspect the pair have realised that announcing an increase in tax on all income earners wouldn’t fit well with the costly third stage of their tax cuts, due in 2024, which will go mainly to high income-earners (like my good self).

Rather, the pair are murmuring about making the elderly contribute more from their own retirement savings towards the cost of their care by tightening the means-testing of aged care benefits. Maybe there’d be more and bigger “refundable accommodation deposits”.

Making the better-off old cover more of their own costs – including by taking account of the much-increased value of their homes – would be very fair. Too fair, you’d have thought, for the Liberal Party and its heartland.

Remember how the party’s “base” revolted against Malcolm Turnbull’s measures to restrict tax concessions to just the first $1.6 million of superannuation balances? Remember how hard well-off retirees fought against Labor’s plan to limit dividend franking credits at the last election, with the Libs egging them on?

Can you imagine how keen Morrison would be to have the tables turned in the coming election? He’d be the one seeking support for what Labor would quickly label his “retirement tax”.

Implementing the commission’s report would cost a minimum of $10 billion a year and probably a lot more. It’s impossible to imagine this government having the courage to raise anything like that much by tightening the means-testing of its own well-off supporters.

The commission’s report has been pushed aside before we’ve had time to understand what it’s proposing and why it would be so expensive. Whereas the present Aged Care Act was designed to help the government limit its spending, the report goes the opposite way, proposing a new act which enshrined every person’s statutory right to aged care of decent quality, with reasonable choice.

This would remove the government’s ability to limit the number of people receiving care, making access to free aged care “universal” – just as access to free public schooling has long been universal and, since Medicare, access to free care in public hospitals is universal.

In this context, “free” means the cost is covered by general taxation, not by user charges or means-tested charges. (Note that the freedom from direct charging would apply only to aged care proper. People’s food and accommodation costs would be means-tested. But refundable accommodation deposits would probably go.)

The report found that the root cause of the (often literally) crappy treatment of people in age care was the inadequate number, training and pathetic pay of aged care workers (almost all of them women). Properly done, almost all the increased cost of aged care would end up in the hands of these women.

In principle, it would be perfectly fair to cover the cost of better, universal aged care with a tax levy paid by all income-earners. We’d be paying for aged care the way we’ve always paid for the age pension and much else – by a “generational bargain”.

It’s fair to ask the present generation to pay for the retirement costs of the older generation because the present generation will be old themselves soon enough. When they are, their retirement costs will be paid for by the generation coming behind them. In the end, every generation pays and every generation benefits.

But that’s just in principle. In practice, the Grattan Institute has shown that successive governments – particularly the Howard government – have reneged on the intergenerational bargain by changing the tax and welfare system in ways that favour the old and penalise the young.

Tax concessions on super are now so generous that few retirees pay any income tax, no matter how well-off. As my colleague Jessica Irvine has shown, tax and welfare concessions to existing home owners have made homes such a desirable investment that a growing proportion of the young will never be able to afford to join the charmed circle.

The young bear the brunt of our willingness to live with high unemployment and underemployment and our unwillingness to regulate the gig economy. And the young pay far more for their higher education than earlier generations (and now those with the temerity to do an arts degree pay double).

In the face of this unfairness, the Grattan Institute’s Brendan Coates has sensibly proposed that the cost of fixing aged care be covered by reducing super concessions to higher income-earners, but I doubt Morrison’s game to try that one on his base – or the voters.

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Wednesday, February 10, 2021

Canberra's latest innovation: politics without policy

The most remarkable development since we returned to work this month is Scott Morrison’s barefaced announcement that the government has enough on its plate rolling out the virus vaccine and getting unemployment down, and so there’ll be no attempt to deal with any of our many other problems before the election late this year or early next.

There could be no franker admission that we live in an era of leaders who lack the ambition and courage to lead. Only on those problems so acute the mob is baying for the government to “Do Something!” will something be done – or grand announcements made that give the appearance it’s being done.

It’s Prime Minister as odd-job person. You don’t look for ways to secure our future, you sit there waiting for pressing matters to turn up: a light bulb that must be changed, a dripping tap that needs a new washer. Acute problems, yes; chronic problems, through to the keeper.

It’s the confirmation of what all but the rusted-on voters have long suspected: that our politicians are motivated far more by the desire to attain and retain office than by any great desire to make the world a better place for us to live and bring up our kids.

The opposing political parties continuously accuse each other of being “ideological” – of being mad free-marketeers or tax-and-spend socialists – but this serves mainly to con along their side’s true believers and conceal from the rest of us the political class’s overriding objective: to win the next election by fair means or foul.

It’s not hard to decipher Morrison’s thinking. Like the premiers, his popularity has soared following our successful containment of the pandemic, so his prospects of re-election are high – provided nothing goes wrong between now and then.

That does mean he must ensure there are no major glitches in the rollout of the vaccine – to which he will have to pay much attention – but he needs no further achievements to improve his chances of winning.

Indeed, anything else he attempts to fix offers more chance of losing the votes of the disaffected than of adding votes to his existing pile. According to informed sources (aka well-briefed gallery journalists), there’s little enthusiasm for “reform” of taxation, religious freedom, industrial relations or superannuation.

The government’s existing proposals for modest changes to industrial relations rules – about which the unions are making such fuss at present – will be put to the Senate next month but, should they fail to pass, will be dropped.

Some Liberal backbenchers’ urgings that the legislated phased increase in compulsory employer super contributions from 9.5 per cent of wages to 12 per cent be reversed (which I support) and the success of the non-profit industry super funds be sabotaged in other ways (which I don’t), have yet to be decided on, but will probably be rejected.

We’re told that Morrison’s thinking in turning away from any further policy improvement is that, after all the upheavals of 2020, the voters just want everything to calm down for a while. But that’s probably always true of many politician-weary voters. Sounds to me like a convenient rationalisation for a deeply cynical and self-serving political calculation.

You might expect this to hugely disappoint a policy wonk like me, but I confess my feelings are divided.

Morrison’s decision strike cuts both ways. He won’t be doing many things he should, but he won’t be doing many things he shouldn’t. The need for tax reform, for instance, is always with us – and urgent only in the minds of tax economists, who think of little else, and those well-to-do urgers hoping it will involve them paying less while others pay more.

There are, of course, many big problems he’ll be doing nothing to improve: the misregulation of aged care, the need for better-considered mental healthcare, the way the universities have been hung out to dry during the pandemic, the neglect and destruction of technical and further education, the many respects in which governments help oldies (including their parents) screw the younger generation.

The most urgent and important area of neglect is, of course, our response to climate change. But the federal Coalition is so deeply divided on the issue – and Morrison so hog-tied by loudmouth Liberal backbenchers and the Neanderthal Nationals – that it’s a delusion to expect genuine progress without a change of government.

And maybe not much then. As we speak, Labor is working on how many of its own policies to throw overboard. As Labor was reminded by its shock defeat in 2019, the trouble with policies is that they’re much harder for you to sell than for your opponents to misrepresent.

A big part of the reason politicians have become so lacking in policy courage is the way election campaigning has become so negative. After last time, the coming election is shaping as the battle of the scare campaigns.

Bulldust will fly on both sides. Both sides are readying themselves by having as few policies as possible. An unthinking electorate is being rewarded with policy-free elections. How edifying.

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Monday, February 10, 2020

Unions conspire with bankers to make you pay more super

When is big business most successful at "rent-seeking" – winning special favours – from government? Often, when it’s got its unions on board. That way, both the Coalition and Labor are inclined to give it the privileges it seeks.

Despite the decline in the union movement’s power and influence in recent decades – and all the nasty things the bosses continue saying about unions – it’s very much a product of the capitalist system.

Over the decades, its greatest success has come in industries with some form of pricing power that’s allowing businesses to make outsized profits. The union simply applies pressure for the workers to be given their share of the lolly.

What kept Australia’s manufacturing industry heavily protected against competition from imports for most of the 20th century, before the Hawke-Keating government pulled the plug in the 1980s, was the manufacturing unions’ strong support for the manufacturers’ success in getting the Coalition committed to protection.

In the end, however, the manufacturing unions got screwed. While being protected in the name of preserving jobs, the manufacturers began automating and shedding many jobs. Turns out protection is better at protecting profits than jobs.

In last year’s election campaign, some part of Labor’s ambivalence on the question of new coal mines in North Queensland is explained by the support the Construction, Forestry, Maritime, Mining and Energy Union, one of the few remaining powerful unions, has thrown behind the foreign mine owners.

At present, however, there’s no more significant instance of the unions being in bed with the bosses than their joint campaign to have the government increase compulsory employee superannuation contributions.

When it comes to government-granted favours to business, there aren’t many bigger than the one that compels almost all the nation’s workers to hand over 9.5 per cent of their wage, every year of their working lives, to financial institutions which will charge them a small fortune each year to "manage" their money, until the government thinks they’re old enough to be allowed to get their money back.

I’ve supported compulsory super since it began because, when it comes to saving for retirement, most of us suffer from myopia. But it does leave the government with huge obligations to ensure the money’s safely invested, ensure super tax incentives aren’t biased in favour of the highly paid (such as yours truly) and ensure the money managers don’t abuse the monopoly they’ve been granted by overcharging the punters.

And, since most of us also save for retirement in ways other than super (such as by buying a house and paying it off), governments have an obligation to ensure that workers aren’t compelled to save more than needed to live in reasonable comfort in retirement.

Compulsory super is such an easy money-maker for the for-profit financial institutions (mainly bank-owned) that it’s not surprising they’ve gone for years trying to con governments into increasing the percentage of their wages that workers are compelled to hand over. They’ve done this by exploiting people’s instinctive fear that they aren’t saving enough, using greatly exaggerated estimates of how much they’ll need to be comfortable.

What’s harder to understand is why the non-profit "industry" super funds – with union officials making up half their trustees and the employer reps not taking much interest – go along with the for-profit industry lobby groups’ self-interested empire-building.

The main reason compulsory super isn’t a particularly good deal for most union members is that when forced to pay super contributions, employers reduce their workers’ pay rises to fit. This has been understood from the outset, but last week’s report from the Grattan Institute convincingly demonstrates its truth.

The second reason is that, by design and above certain limits, super savings reduce workers’ eligibility for the age pension. Treasury and independent analysts have repeatedly discredited the industry’s claims that the present contribution rate is insufficient to provide workers with a reasonably comfortable retirement.

The present legislated plan to raise the contribution rate to 12 per cent represents the industry funds’ gift to the army of ticket-clippers making their living off the super industry. It’s origins lie in the Rudd government yielding to industry fund pressure because it believed the huge cost to the budget would be more than covered by its wonderful new mining tax.

But, as an earlier Grattan report has shown, raising the contribution rate as planned would force many workers to accept a lower-than-otherwise standard of living during their working lives so their living standard in retirement could be higher than they ever were used to when working.

This is the union movement protecting its members’ interests? Sounds to me more like union officials expanding the union institution at the expense of their members – and delivering for the banks’ "retail" super funds while they’re at it.
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Saturday, February 8, 2020

Sorry, the government can't make the boss pay for your super

When the government compels employers to contribute to their employees’ superannuation, it seems obvious that it’s forcing the bosses to give their workers an extra benefit on top of their wage. Obvious, that is, to everyone but the nation’s economists.

They’re convinced it’s actually the workers themselves who end up paying because employers respond to the government’s compulsion by giving their workers pay rises that are lower than they otherwise would have been.

But can the economists prove their intuition is right? Not until this week.

The argument about who ends up paying for compulsory employee super is hotting up. The Hawke-Keating government’s original scheme required employers to make contributions equal to 9 per cent of a worker’s pay. But when former prime minister Tony Abbott took over from Labor in 2013, he inherited a law requiring the contribution to be gradually increased to 12 per cent.

The Coalition has never approved of compulsory super, which began as part of the union movement’s Accord with the Labor government. By the time Abbott got around to it, the contribution rate had crept up to its present 9.5 per cent, but he managed to persuade the Senate to delay the next (0.5 percentage point) increase until July next year, with the 12 per cent to be reached in July 2025.

Everything about this scheme’s history says Prime Minister Scott Morrison wouldn’t want the contribution rate to go any higher. It’s likely he’s hoping the looming inquiry into super will recommend this, and so help him persuade the Senate to change the law accordingly.

The superannuation industry has been campaigning for years to convince you and me that 9 per cent or so isn’t sufficient to pay for a comfortable retirement, and to get the contribution rate greatly increased. In this, the non-profit “industry” super funds (with much union involvement) are at one with the largely bank-owned, for-profit part of the super industry.

Apart from some important reports by the Productivity Commission, the most authoritative independent analysis of super comes from Brendan Coates of the Grattan Institute. Grattan has argued that raising the compulsory contribution rate would be contrary to employees’ interests, forcing them to live on less during their working lives so their incomes in retirement could be higher than they were used to and more than they needed.

To strengthen the case for continuing to raise the contribution rate, the industry funds have commissioned a couple of studies purporting to show that the conventional wisdom is wrong and contributions do indeed come at the employers’ expense.

So this week Grattan issued a paper providing empirical evidence supporting the economists’ conventional wisdom that, in the end, workers have to pay for their own super.

If the notion that employees pay for employers’ contributions strikes you as strange and hard to believe, it shouldn’t. Consider the goods and services tax. Have you ever sent the taxman a cheque for the GST you pay? No, never. The cheques are written by the businesses you buy from. So, does that mean they pay GST but you don’t? Of course not. Why not? Because the businesses pass the tax on to you in the retail prices they charge.

Economists have long understood that the “legal incidence” of a tax (who’s required to write the cheque) and the “economic incidence” or ultimate burden (who ends up paying the tax) are usually different.

It’s convenient for the government to collect taxes from a smaller number of businesses rather than from a huge number of consumers or employees. Economists know that businesses may pass the burden of the taxes they pay “forward” to their customers or “backward” to their employees. Only if neither of those is possible is the ultimate burden of the tax passed from the business to its owners.

Naturally, the business would like to pass the burden anywhere but to its owners. But whether it’s passed forward or backward (or some combination of the three) will be determined by the market circumstances the business finds itself in.

That is, the question can’t be answered from economic theory, but must be answered with empirical evidence (experience in the real world). Theory (using the simple demand and supply diagram familiar to all economics students – see page 12 of the Grattan report) can, however, clarify the exact question.

Theory suggests that the ultimate destination of the burden depends on how workers and employers respond when super is increased. There are two “effects”. First, when workers value an extra dollar of super, even if they value it less than an extra dollar of wages, then some (but not all) of the cost of super will come out of their wages.

Second, if workers’ willingness to work doesn’t vary much when wages change – that is, if labour supply is relatively “inelastic” – then they’d be expected to bear a larger share of the cost. Similarly, if employers’ willingness to hire people doesn’t vary much when wages change – labour demand is inelastic – then more of the cost will fall on the bosses.

Most overseas studies have confirmed the economists' conventional wisdom. But what about us?

Coates and his team examined the details of 80,000 federal workplace agreements made between 1991 and 2018. They found that, on average, about 80 per cent of the cost of increases in compulsory super was passed back to workers through lower wage rises within the life of an enterprise agreement, usually two to three years. (This leaves open the question of how much of the remaining 20 per cent was passed forward to customers in higher prices.)

Only about a third of workers are covered by enterprise agreements. For the many wages linked to the Fair Work Commission’s annual adjustments to award wages, it has said explicitly that when super goes up, award wages grow more slowly. As for workers covered by individual agreements, it’s a safe bet which way the employers will jump.

Whatever it suits the superannuation industry to claim, increased super contributions are no free lunch.
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Monday, October 7, 2019

Why we don't get more joy out of our super

When one of our top econocrats gives a speech about behavioural economics, you know we’re making progress. Take the ever-present problem of income in retirement. “BE” explains both why it’s a major area of government intervention in our lives and how that intervention can be made more effective.

One of the greatest limitations of conventional economics – based on the “neo-classical” model, which focuses on how prices are determined by the interaction of supply and demand – is its assumption that people are unfailingly “rational” – calculatingly self-interested – in their response to the prices they face.

Behavioural economics accepts that we’re not the financial automatons the model assumes us to be, and uses insights from the more empirical sciences of psychology and sociology to gain a much more realistic picture of the many non-monetary factors that also affect our behaviour in economic matters.

Behavioural economists draw on the long list of “heuristics” – mental shortcuts or biases in the way we think – developed by cognitive psychologists. In a recent speech, Dr David Gruen, top economics guy in the Department of Prime Minister and Cabinet, outlined the cognitive biases that limit many people’s ability to make adequate provisions for the income they’ll need in retirement.

For more than a century the government has provided the age pension, of course. But in the 1990s people began to worry that it wouldn’t be sufficient to meet the aspirations of the rising generation. So the Keating government introduced compulsory employee superannuation.

In those days before the spread of BE, most economists accepted the imposition of compulsory saving as a correction to the “market failure” of “myopia” – most of us are too short-sighted to save enough towards our retirement.

The BE way of putting it is that we suffer from “present bias” – we overvalue the present relative to the future. Gruen takes the idea further, noting that “while choosing a retirement plan is likely to influence literally decades of our lives, many of us spend little time – sometimes less than an hour – choosing our plan”.

Then there’s “confirmation bias” – we tend to remember events that confirm our existing views, but forget developments that cast doubt on those views. Gruen uses this to explain why many of us spend what little time we have set aside to choose a retirement plan looking for one with an investment strategy that supports our existing investing approach.

And “cognitive overload”. This occurs when people find it too hard to process a mass of information in order to make decisions. In the context of planning for retirement, it leads many of us to stick with choices we have arrived at by default.

“Together, these cognitive biases create a big gap between our intentions and our actions: although people intend to save for their retirement, they often don’t translate that into action. For most people, how much to save, and in what form, are difficult cognitive problems – because of both our limited calculation powers and the apparent enormity of the task,” Gruen says.

When the compulsory super system was first set up, the government adopted the conventional economics view that savers were rational economic agents who knew their own business best. So all it had to do was require the super funds to reveal relevant information about their investment options, and diligent savers would do the rest, ensuring they picked the option that best suited their circumstances.

Yeah sure. At the time of a review of super in 2009, 80 per cent of super fund members were invested in the default fund chosen by their employer. Of that 80 per cent, anecdotal evidence suggested that only about 20 per cent explicitly chose the default option, with the rest making no active choice whatsoever.

“When complicated decisions are required, people often stick with the status quo and take no decision at all. In that case, the default option becomes very important,” Gruen says. (This is actually one of the key “insights” of BE.)

So the review panel recommended creating a default option – called MySuper - with features that would promote the wellbeing of those who didn’t actively choose another option. MySuper funds must be simple and cost-effective, with a diversified portfolio of investment.

Of course, there are remaining challenges in the compulsory super system, which the latest review of retirement incomes, instigated by Treasurer Josh Frydenberg, will consider. Let’s hope it takes full advantage of the behavioural insights available to it.

As Gruen says, BE allows all government policymaking to be improved by starting with a richer understanding of human behaviour and building this into the design of measures.
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Wednesday, July 31, 2019

Higher super: good for fund managers, not for workers

Do you have trouble understanding superannuation? Some government backbenchers are urging Scott Morrison to abandon or at least postpone the plan to phase-up the compulsory employer contribution from 9.5 per cent to 12 per cent of salary over the four years to July 2025. Good idea, or another attempt to cheat the worker?

One new backbencher has proposed that, since many low income-earners have a lot of demands on their budgets, super should be voluntary for everyone earning less than $50,000 a year. Whaddaya reckon?

You could be forgiven for being unsure. Super is complicated. You have to understand how it’s taxed and how it interacts with the age pension and its income and assets tests. I sometimes think that, with super, nothing is as it appears.

Take the notion of “employer contributions”. The government is forcing your boss to contribute to your retirement savings on top of the wage you’re paid. You beaut. Bring it on. The more the better.

Trouble is, economists believe that, in the end, it’s not the boss who pays, it’s the worker. How could that happen? Easy. Every time bosses are compelled to increase the rate of their contribution to their workers’ super, they compensate by granting ordinary pay rises that are smaller than they would have been.

After almost 30 years of playing the compulsory super game, that’s what the figures say has happened.

And ask yourself this: if employers really do foot the bill for their contributions to their employees’ super – if they come out of profits rather than wages – why isn’t business complaining loud and long about the plan to greatly increase those contributions?

Once you accept that employees end up paying for “employer” contributions, the question of whether they should be increased can be restated as: would you be happy for your pay to rise by about 2.5 per cent less than it would have over the four years to July 2025? And, ignoring other developments, stay that much lower every year for the rest of your working life?

The rational answer to that question is yes - provided the eventual improvement in my retirement income is sufficient to compensate me for the loss of the other things I could have done with all that money.

Before we consider answering that, here’s another thing that may not be as it appears. Compulsory super is a creation of Labor (and, if you hadn’t noticed, Paul Keating) and the unions. This was done in the belief that future generations would want more than the pension to live comfortably in retirement. Most people would live on a combination of age pension and super.

The Liberals opposed it from the start, saying they didn’t agree with compelling people to save. The Howard government scuttled Keating’s plan to increase compulsory contributions beyond the original 9 per cent.

Then, in 2013, the new Abbott government intervened to delay Kevin Rudd’s plan to get contributions up to 12 per cent by July 2019 – that is, now.

We’re asked to believe that the backbenchers are revolting because Morrison is refusing to abandon or further delay the already-legislated phase-up to 12 per cent by July 2025. But why would he reverse the Libs’ long-held opposition to compulsory super (which, by the way, delivers billions of dollars into “industry” super funds, in which half the trustees are union officials)?

I don’t believe it. Treasurer Josh Frydenberg is preparing to announce a wide-ranging inquiry into the interaction of super, the age pension and taxation. Since the next increase won’t happen until mid-2021, I think Morrison would simply prefer to announce a further curtailment of Labor’s plans in the context of the government’s response to that inquiry.

But why might an independent inquiry recommend against any further increase in the rate of compulsory contributions? Because, despite all the urging from the finance sector-types who make their high-paid living by taking a small annual bite out of every dollar the government forces us to leave in their care, in an unholy alliance with the union movement, the case for higher contributions is weak.

Recent detailed modelling by Brendan Coates, of the Grattan Institute – a non-aligned think tank that’s done much research into super – has found that the planned increase would leave many workers poorer over their entire lifetimes.

They would sacrifice a significantly increased share of their lifetime wages in exchange for little or no increase in their retirement income. Overall, and measured in today’s dollars, the typical worker would lose a cumulative total of about $30,000 over their lifetime, Coates estimates.

He finds that the lowest-paid 20 per cent of employees would be better off, the middle 50 per cent would be worse off, and the highest-paid 30 per cent would be better off.

Why? Partly because super tax breaks are still a lot greater for high income-earners, but mainly because, for workers in the middle, the operation of the age pension assets test would leave them sacrificing immediate income to increase their super payout, only to have their pension chopped back in consequence.

These results make me doubt the wisdom of making super voluntary for low income-earners. Many people are on low incomes not because they’re poor, but because their career is just getting started. It would work against the push for women to end their careers with more super than they do at present.
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Wednesday, March 27, 2019

Generational conflict comes to a polling place near you

The most memorable news photo I’ve seen in ages is one from the first School Strike 4 Climate late last year. It shows a young woman holding a sign: MESS WITH OUR CLIMATE & WE’LL MESS WITH YOUR PENSION.

One minute we oldies are berating the younger generation for their seeming lack of interest in politics (although, having arrived on the scene at a time when our politicians are behaving so badly, who could blame them?), the next we’re criticising them for missing a day of school.

When you remember how many days of uni the baby boomers missed with all their marches against the Vietnam war, the odd day off school hardly signifies. (Not that I’d want to discourage the ageing climate-change deniers from criticising the school-dodgers. When you’re growing up, defying adult authority is a big part of the motivation.)

Whenever I get the chance, I have a simple message for youngsters: you’d better start taking an interest in politics because it’s the people who aren’t watching that the pollies end up screwing.

The truth is our young people are interested in political issues, but that interest is unfashionably idealistic. They really care about fairness to the LGBTI community, climate change and the environment more broadly.

They’re not yet sufficiently old and cynical to have realised that politics has devolved into a self-centred free-for-all, where you jump into the ring to advance and protect your own interests at the expense of those with less muscle.

When last my colleague Jessica Irvine expressed support for Labor’s plan to end the refunding of unused dividend imputation credits to all except those receiving an age pension or part-pension, an angry reader accused her of “continuing to fuel the fire of inter-generational envy”.

Sorry, that argument doesn’t wash. It’s one the well-off and their champions have used for ages. What it’s really saying is, “it’s a sin for you to envy the fruits of my greed”.

When people accuse others of “the politics of envy” or inciting “class warfare”, their true message is: I’m winning, you’re losing, so why won’t you just accept it? Just be nice and stop trying to make things fairer.

(Speaking of sin, when last I supported the reform of imputation credits, a reader accused me of “preaching”. Sorry, when your father spent his life preaching two sermons a Sunday, it’s only to be expected. And I’m old enough to regard being likened to my father as a compliment, not an insult.)

Stripping away the religious overtones, there is, always has been and probably always will be plenty of scope for conflict between the generations. The solution is for the generation presently in power
to put its children’s interests ahead of its own (see climate change above).

Almost all of us do this in our private lives (it’s clear a lot of the well-off retired fighting to retain imputation credits are motivated by maximising their kids’ inheritance, and we’re happy for the bank of mum and dad to help our children into home-ownership), but when it comes to public policy we’re easily seduced by politicians seeking our votes with promises of short-term gain for long-term pain.

Not enough people realise that our system of taxes and benefits is explicitly designed to move money between the generations.

People – mainly younger people - with jobs and no kids pay a lot more in taxes (all taxes) than they get back in benefits (whether in cash or kind, such as education and healthcare), whereas families with kids get back a lot more than they pay. Couples whose kids have grown up but who are still working pay more than they get back, and then the retired get back a lot more than they pay.

Since almost all of us will progress through each of these stages, this money-shifting should pretty much even out over our lives. So, until relatively recently, it’s been seen as fair. It’s the basis for the oldies’ eternal sense of entitlement: “I’ve paid taxes all my life . . .”

But this has changed. As our leading independent think tank, the Grattan Institute, has demonstrated, tax changes over the past two decades have been “hugely generous” to older Australians.

“Older households pay $7500 [a year] less in income tax in real terms today than older households 20 years ago, despite high increases in average incomes,” it found. “Taxes on working-age households have risen over the same period.”

Most of this is explained by changes made by John Howard to benefit the alleged “self-funded retirees” (including making unused imputation credits refundable) and similar changes to superannuation tax breaks made by Peter Costello.

Add in Howard’s more favourable tax treatment of negatively geared property investments, and the young are dead right to believe the tax system has been biased against them and in favour of the better-off old (including me).

They’d also be right to see the looming federal election campaign as a battle between one side seeking to reduce the system’s bias against the young and the other fighting to protect the recently conferred perks of the well-off aged.

But a note to outraged Millennials: Howard is no baby boomer and the intended beneficiaries of his munificence were his own and earlier generations. Only some of the world’s evils were installed by my privileged generation.
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Wednesday, February 20, 2019

If only the Indigenous had the worries of the well-off aged

One thing I hate about elections is the way politicians on both sides seek to advance their careers by appealing to our own self-centredness. I suppose when they know how little we respect them for their principles, they think bribing us is all that’s left.

The federal election campaign hasn’t started officially, but already the one issue to arouse any passion is the spectacle of the most well-off among our retired screaming to high heaven over the proposal that, though granted the concession of paying no tax on income from superannuation, they should no longer receive tax refunds as though they were paying it.

We teach our children to respect the needs and feelings of others, and to take turns with their toys, but when it comes to politics you just get in there and fight for as much lolly as you can grab. And if my voice is louder and elbows sharper than yours, tough luck.

When someone at one of those rallies of the righteous retired had the bad manners to suggest that the saving would be used to increase spending on health and education (and increase the tax cut going to those middle-income families still required to pay tax on their incomes) they were howled down. Health and education? Don’t ask me to pay.

You gave me this unbelievably good tax deal, I paid the experts to rearrange my share portfolio so as to fully exploit it, and now you tell me you’ve discovered you can’t afford it and other people’s needs take priority. It so unfair.

Meanwhile, at the other end of the income spectrum, Scott Morrison delivered a Closing the Gap report to Parliament last Thursday. It was the 11th report since the practice began, following Kevin Rudd’s National Apology in 2008.

Morrison was the fifth prime minister to have delivered the report. The fifth obliged to admit how little progress has been made in achieving the seven targets we set ourselves.

The original targets were to halve the gap in child mortality by 2018, to have 95 per cent of all Indigenous four-year-olds enrolled in early childhood education by 2025, to close the gap in school attendance by 2018, to halve the gap in reading and numeracy by 2018, to halve the gap in year 12 attainment by 2020, to halve the gap in employment by 2018, and to close the gap in life expectancy by 2031.

As you see, four of the seven targets expired last year. None of them was achieved. They’re being replaced by updated – and more realistic – targets.

In his progress report, Morrison was able to say only that two out of the seven targets were on track to be met.

The first of these is the goal of having 95 per cent of Indigenous children in early childhood education by 2025. This was achieved in the latest figures, for 2017, with NSW, Victoria, South Australia, Western Australia and the ACT now at 95 per cent or more.

The other is halving the gap in year 12 attainment by 2020. Morrison says this is the area of biggest improvement, with the Indigenous proportion jumping by 18 percentage points since 2006.

With the key target of life expectancy, the figures show some improvement for Indigenous people from birth, but associate professor Nicholas Biddle, of the Centre for Aboriginal Economic Policy Research at the Australian National University, warns that the figures are dodgy.

So why have we been doing so badly? Biddle and a colleague argue that the original targets were so ambitious they couldn’t have been achieved without radically different policies, not the business-as-usual policies that transpired.

That’s one way to put it. It’s common for politicians to announce grand targets that make a splash on the day, without wondering too hard about how or whether their successors will achieve them. And no one was more prone to such “hubris” (Morrison’s word) than Kevin07.

A second reason, they say, is that successive governments’ policy actions haven’t always matched their stated policy goals. Their employment target, for instance, hasn’t been helped by the present government’s abolition of its key Indigenous job creation program, the community development employment project.

Then there’s the present government’s soft-target approach to limiting the growth in government spending, which has involved repeated cuts to the Indigenous affairs budget, particularly in Tony Abbott’s first budget.

The most significant Indigenous policy initiative in ages, the Northern Territory Intervention – which preceded Closing the Gap, but has been continued by governments of both colours – may have directly widened health and school attendance gaps.

As well as disempowering Aboriginal people in the territory, the immense amount of money and policy attention devoted to the Intervention “could have been better spent elsewhere”.

Third, they say, measures intended to achieve the targets have rarely been subject to careful evaluation and adjustment.

Morrison professes to have learnt these lessons. But, the authors say, if his “refreshed” approach “does not put resources – and the power to direct them – into Indigenous hands, the prospects for closing socio-economic gaps are likely to remain distant”.
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Wednesday, November 7, 2018

Don’t worry, you’ll have plenty in retirement

Some years ago I went to an investment adviser, gave him my financial details and asked if I had enough super to do me in retirement. He didn’t answer, just laughed. I think he thought that someone with my amount of savings shouldn’t have needed to ask.

Truth is, no matter how high or low the standard of living we’re used to, just about all of us worry that we haven’t saved enough to keep it going in retirement. No matter how much we’ve put away, it’s only human to feel a twinge of guilt that we could have saved more. And how much is enough?

The superannuation industry has spent decades convincing us our savings are inadequate, and pressing the government to raise the rate of compulsory super contributions. The “retail” super funds run by the banks keep doing this, but so do the not-for-profit industry funds.

It was they who persuaded the Rudd government to phase the rate up from 9 per cent of wages to 12 per cent by 2025.

But now, at long last, a report by John Daley and Brendan Coates, of the Grattan Institute, has hit the headlines exposing the Great Super Lie. In the words of its title, Money in retirement: More than enough.

The report’s careful and detailed analysis finds that, contrary to everything we’ve been told, the vast majority of retirees today, and in future, are likely to be comfortable financially.

The institute’s own modelling shows that, even after allowing for inflation, most workers today can expect a retirement income of at least 91 per cent of their pre-retirement income. This is way above the 70 per cent level that the Organisation for Economic Co-operation and Development recommends its member-countries aim for.

But how can reality be so at variance with our perception of it? Because the super and investment-advice industries have laboured long and hard to convince us we should be saving more.

Why have they done this? Because every extra dollar we save through super, whether voluntarily or compulsorily, is a dollar they get to take a small bite out of – every year until we eventually take it and spend it.

They call it “clipping the ticket”. The financial services sector abounds with people who’ve thought of another reason to clip our ticket. That’s why its top people are the highest paid of them all, the envy of medical specialists and barristers.

How have they misled us? As the report explains, by exploiting our inability to anticipate how much we’ll need to last us in retirement.

ASFA – the Association of Superannuation Funds of Australia – is the chief offender. It publishes and updates a measure of the minimum amount you’ll need at retirement to live at a “comfortable” standard. If you don’t have that much then, by implication, you’ll be un-comfortable.

Trouble is, it’s designed to reflect a lifestyle typical of the top 20 per cent of retirees today. So, in truth, it’s telling the bottom 80 per cent they haven’t saved nearly enough to have in retirement a standard of living far higher than they ever enjoyed while working.

Obviously, when estimating how much you’ll need, you have to allow for inflation over the likely period of your retirement. Some in the industry exaggerate this by using the expected growth in wages – rather than prices – as their inflation measure, knowing that wages grow faster than prices and living standards rise over time.

After being misled for so long, you probably find it hard to believe your savings are – or will be – more than adequate, so let me explain.

First, most people will have more income than they realise. Most people will be eligible for a full or part age pension, which is increased in line with wages rather than prices, meaning it grows faster than inflation over time.

By now, most people are retiring with a significant amount of super saving. It was always envisaged that most people would retire with some combination of age pension and super.

About 80 per cent of people over 65 own their own home (a huge saving) and most have savings and investments outside the super system.

Second, people spend less money in retirement than they used to, and than they expect to. That’s why the OECD says you need only 70 per cent of your pre-retirement income to be comfortable.

The retired pay less income tax on the same income, whatever it is. They don’t make super contributions, they don’t have mortgages (though those who rent privately are the big exception to the rule) and they don’t have kids to support.

They eat out less (partly because they have more time to cook), drink less alcohol, spend less on transport (no trips to work) and replace clothing and furniture less often. Medical costs are a lot higher, but are largely covered by the government.

And it’s not just that when you’re retired you have less need to spend than when you’re working. It’s also that you spend less as you get older. Spending tends to slow when you reach 70, and decreases rapidly after 80.

Still not convinced? Get this: surveys show the retired worry less than the working about paying bills, many actually save some of their income and often leave a legacy almost as large as their nest egg on the day they retired. Sounds comfortable to me.
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