As you may have noticed, the nation’s economists are in a gloomy mood and warning of tough times ahead. Our standard of living stopped rising a decade ago and, they tell us, it won’t improve much in coming years unless we really lift our game.
Just this week one leading economist, Chris Richardson, predicted that real household disposable income per person – a common measure of living standards – wouldn’t get back to the temporary peak it reached in 2021 until 2037.
Why are our economists so downbeat? What’s worrying them? Well, unless you’ve been living under a rock, you’ve already heard about it – ad nauseam. The main thing that drives our material standard of living is ever-improving “productivity”.
Since the Industrial Revolution, we’ve used improvements in technology and education to make the economy’s output of goods and services grow at a faster rate that its inputs of raw materials, labour and capital. That is, we’ve made the economic machine a bit more efficient every year.
What’s worrying the bean counters is that this process of steady improvement seems to have stalled lately. There’s been no improvement in our productivity. They expect this lull to be temporary, but they have good reason to fear that the annual rate of improvement will be a lot slower than it used to be.
Whereas Treasury’s forecasts of economic growth used to assume that the productivity of labour would improve at an average rate of 1.5 per cent a year, this year the Reserve Bank has cut its assumption to 0.7 per cent a year.
In almost every sermon they preach about our need to lift our game on productivity, economists never fail to quote the American economist Paul Krugman saying that “productivity isn’t everything, but in the long run it’s almost everything”.
There’s much truth in this. But as John O’Mahony, of Deloitte Access Economics, has been the first of all Australia’s economists to realise in a paper written for the Australian National University, in Australia’s case it’s highly misleading.
Why? Because in 1992 we did something none of the big economies have done. The Keating government set up a national superannuation scheme which compelled almost all employees to contribute a certain percentage of their wage to an appropriate fund. It started out at 3 per cent, but in July reached a huge 12 per cent.
What’s unusual is that all this money doesn’t go to the government, but to non-profit “industry” and for-profit super funds, which invest it mainly in company shares. By now, the amount invested totals $4.2 trillion. O’Mahony estimates that, in about 40 years’ time, superannuation assets will be worth more than $38 trillion. (After allowing for inflation, this would be an increase of more than four times.)
If all that money was invested in listed Australian company shares, our sharemarket – and our economy – would be overwhelmed. So much of it is invested in foreign shares. This means that many dividends from foreign companies flow back to Australia, to be held in workers’ superannuation accounts. And this flow of foreign income will grow and grow in coming decades.
Because we’ve had a lot of foreign investment in Australia – including a lot of our mining companies – we’re used to shelling out a lot of dividend income to foreigners each year. But now we’ve got a lot of dividend income flowing in to help offset all the money flowing out.
Think of it this way. The introduction of compulsory super more than 30 years ago constituted a decision that working Australians would henceforth save more of their income toward their retirement, leaving less for immediate spending on consumer goods.
This meant the economy grew by less than it would have. That’s particularly the case over the past five years as, on July 1 each year, the compulsory contribution rate has been increased by 0.5 percentage points, taking it from 9.5 per cent of wages to 12 per cent.
(Legally, super contributions are made by employers, not employees. But economists have demonstrated that, in practice, employers pass that cost on to their employees in the form of smaller pay rises.)
But that’s the negative side. The positive side is that the extra money being paid into our super accounts hasn’t been sitting in a jam jar, it has been invested mainly in shares, both Australian and foreign. And those shares have been paying dividends. Those dividends coming from overseas constitute a net addition to Australians’ income, whereas the dividends on Australian shares are just a transfer from one part of our economy to another.
You may wonder what great benefit comes from those foreign dividends if they’re sitting in people’s super accounts, waiting for them to retire. But, remember, the scheme has been running for more than 30 years, with some older people retiring each year while their place is taken by younger people joining the workforce.
Remember, too, that every day, old people are dying. Increasingly, they’re dying with super balances unspent and inherited by their spouse and dependents. So, one way or another, the money from foreign dividends is spent.
Every five years Treasury prepares an intergenerational report, assessing the prospects for the economy over the following 40 years. The latest report in 2023 found that, over the 40 years to 2063, real gross national income per person – another measure of living standards - was projected to grow by 50 per cent to $124,000 a year.
But the report took no account of all the foreign income our superannuation savings would be bringing our way. When O’Mahony redid the numbers, he had real income per person 13 per cent higher. And whereas productivity improvement largely accounted for about 72 per cent of the increase since 2023, the projected growth in our foreign income accounted for 28 per cent. Who knew?
