Why we've become good savers

Who would believe it? Australia is turning into a nation of savers. We've already lifted our rate of saving - we save more than people in other developed countries - and we're likely to increase our saving rate further.

Who would believe it? Australia is turning into a nation of savers. We've already lifted our rate of saving - we save more than people in other developed countries - and we're likely to increase our saving rate further.

This the surprising message in this year's budget statement 4 - otherwise known as Treasury's sermon. The facts and figures that follow come from there.

Expressed as a proportion of gross domestic product, gross national saving fell significantly from the mid-1970s until the early 1990s. Between 1992-93 and 2004-05, it was fairly steady at 21 per cent. It began to rise in 2005-06 - well before the global financial crisis - and since the crisis it's shot up to reach almost 25 per cent last year.

This is well above the average for the developed economies of less than 19 per cent. Now, their saving rates are down because they're still trying to put the Great Recession behind them and it's arguable that some part of our increased saving since the crisis is also a passing reaction to the uncertainty it continues to cause. But we were well above them before the crisis.

The nation's rate of saving is the sum of the saving done by the three sectors of our economy: the households, the companies and the governments.

Households save when they spend less than all their income on consumption. Companies save when they retain part of their after-tax profits rather than paying all of them out in dividends. Governments save when their revenue exceeds their recurrent spending.

Most of the reason for the increase in national saving - and most of the reason for expecting it to increase further - rests with households.

The household saving rate declined steadily from the mid-1970s to the mid-noughties but then it increased significantly and is now 11.5 per cent of GDP, up from a low of just under 6 per cent in 2002-03.

One reason for this turnaround is the maturing of the compulsory superannuation system. Award-based super was introduced in 1985 but the scheme really got going in 1992, when they began phasing up employer contributions to 9 per cent of ordinary-time wages by 2002.

The value of Australia's super savings is now as much as $1.3 trillion, equivalent to 95 per cent of annual GDP (compared with the average for the developed countries of 68 per cent). Treasury estimates the scheme now makes a gross contribution to national saving of 1.5 percentage points.

Treasury says the more recent increase in household saving is likely to reflect a combination of increased consumer caution following the crisis and a return to more sustainable rates of consumption growth.

To the extent it's a return to more normal rates of growth in consumer spending, it's likely to be lasting. To the extent it's just caution, retailers and others can hope it will go away as all the upheaval stemming from the global crisis is resolved, people become more confident and lower somewhat the rate at which they're saving.

Now, no one can say how much of our higher household saving rate comes from lasting ''structural change'' and how much comes from passing caution. Until more of history unfolds, we can only make guesses.

But my guess is most of it is structural and not much of it is passing. In any case, I can't see the global economy becoming a much more placid place any time soon. Europe's weakness could roll on for a decade.

I think the econocrats are holding out false hope to retailers and others with their talk of ''the cautious consumer'', implying the tough times will end as soon as shoppers cheer up. It would be better to encourage the retailers to get on with adjusting to the new world they live in.

Treasury says the fall in household saving up to the mid-noughties primarily reflected a prolonged, but essentially one-off, structural adjustment to financial deregulation from the early '80s and the transition to a low-inflation (and hence low nominal interest-rate) environment from the early '90s.

Easier access to credit and lower rates led to greater borrowing, rising house prices, high levels of confidence and - thanks to big capital gains - people reducing their saving rate and allowing their consumption spending to grow faster than their incomes.

This adjustment process is likely to have been a significant driver of change in household saving. From the second half of the noughties, however, households began to slow their accumulation of debt and, as a result, the household saving rate began to rise.

With this process now likely to have been completed, households as a whole can be expected to consolidate their financial position over coming years by returning to more normal levels of saving and borrowing.

That's a quick explanation of why we've gone back to being good savers. But why expect our saving rate to go on rising? Partly because our (largely foreign-owned) mining companies are retaining a high proportion of their huge after-tax profits (which they're using to help finance their investment in additional production capacity).

Partly because the federal politicians (and their state counterparts) are struggling to get their budgets back into operating surplus, meaning governments are shifting from dissaving to saving.

But mainly because the compulsory super scheme will soon begin phasing up the contribution rate from 9 per cent of wages, reaching 12 per cent in 2019-20. Treasury estimates this will make a further gross contribution to the national saving rate of 1.5 percentage points of GDP over the next 25 years, with most of that expected to occur over the next decade.

Just as every punter knows in their gut that deficit and debt are always and everywhere a bad thing (it ain't true), so everyone knows saving is always a good thing. But what's so good about it?

The main reason people save is to smooth their consumption over time. For instance, you consume less while you're working so you can have a higher standard of living when you're retired. You can even use saving to pass some of your income on to the next generation. And saving makes you more resilient by providing a buffer against unexpected adverse events.

At a national level, borrowing less and saving more makes us more resilient to possible external shocks. And it helps moderate inflation pressure and so allows interest rates to be lower.

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Why the pollies will keep fiddling with super forever

Have you noticed? Our guardians in the superannuation industry have come out swinging to defend us against the changes to superannuation announced in the budget. Mark Payne, a partner in the legal firm Hall & Wilcox, says "anyone that has turned 50 can feel dudded".

The changes "will be costly to administer, bring little revenue for the federal government and are a real disappointment for the over 50s, who will need to reassess their retirement strategies", he says.

According to John Brazzale, a managing partner of the accountants Pitcher Partners, "there's now less incentive to put money into super, particularly [for] those earning more than $300,000. They would be looking at how to get a better tax return by investing outside of super in, for example, businesses and managed funds etc".

One of his partners, Brad Twentyman, agrees.

"Superannuation at higher incomes has become very marginal and there is nothing compelling to drive self-sufficiency in retirement," he says. "This is not the system we should be aiming for. We need to be encouraging higher income earners to save for their retirement as well as lower income earners."

David Anderson, the managing director of Mercer, a financial services provider, warns that "continual changes to superannuation will unfortunately create a wave of uncertainty, confirming the commonly-held view that superannuation is an irresistible honey pot".

"There is a risk that further complicating and continually changing the rules in superannuation will reduce investor confidence in super and that would be a most unfortunate outcome," he says.

Sorry, but most of all that is self-serving tosh. For someone who's turned 50 to feel "dudded", they also need to be earning more than $300,000 a year (putting them into the top 1 per cent of taxpayers) or to have a super account balance of less than $500,000 and have been in a position to sacrifice salary of up to $25,000 a year.

The two decisions they're complaining about are to reduce the tax concession on super contributions by people on more than $300,000 from 31.5? in the dollar to 16.5? and to defer for two years the promise to raise the limit on concessional contributions from $25,000 a year to $50,000 for people over 50 with balances of less than $500,000. Few people on middle incomes could have afforded to take advantage of the higher limit.

The media have a tendency to quote uncritically business spokespeople who want to have a crack at the government of the day. But most of them are wolves in sheep's clothing.

They claim to be speaking in the interests of their customers but, for the most part, they are, in the money market phrase, "talking their book" - that is, offering advice that serves their own interests.

Even when measures have been carefully targeted to hit only the well off, they'll be shedding bitter tears and predicting dire consequences. Why? Partly because they're very highly paid themselves but mainly because they make more money out of the rich than the poor.

The guys who run super funds are in the ticket-clipping business. They take a tiny nick out of every dollar that passes through their hands and, since our super savings total $1.3 trillion, those tiny nicks add up to very big bucks.

The super industry - which includes not just the fund managers but also the (often union) trustees and the myriad outfits providing advice to them - is among the most lucrative in the country. These guys pay themselves extraordinary salaries.

And it's not just that clipping tickets is such a deceptively cheap way to make a fortune. It's also that, by compelling all employees to save 9 per cent of their wages, the government has delivered them a huge captive market.

Not content with that, however, after years of agitating they've finally persuaded the Labor government to phase up their monopoly from 9 per cent to 12 per cent - at a huge and ever-growing cost to budget in tax revenue forgone.

When this and other favourable changes were announced in 2010, no one in the industry was claiming continual changes to super were discouraging people from saving through super. They trot out this old favourite only when governments make changes that hit the industry's revenues.

Contrary to the claims we've heard, few people will need to "reassess their retirement strategies". And even for the very highly paid, the tax-effectiveness of saving through superannuation remains considerable, not "very marginal".

The proposition that the highly paid need to be bribed by tax concessions to put money aside for their retirement is laughable. Why would they be planning to live only on the age pension? And even if they do turn away from super to other ways of saving, why's that a problem for anyone but the super ticket-clippers?

When you combine this government's plan to ramp up super with the changes Peter Costello announced in 2006 - to make super payouts tax-free for those 60 and over; to sanctify the salary-sacrifice loophole and to ease the assets test on the age pension - you see it's not adding up.

The annual cost of super tax concessions is now growing so fast it's projected to equal the annual cost of the age pension by 2015-16. Such growth is simply unsustainable.

Now add the fact that these concessions go disproportionately to high-income earners, as well as advantaging the retired generation over the working young. The old don't pay income tax but the young do.

Get it? Barring the unlikely event of any politician summoning the courage to fix the whole unfair, unaffordable mess in one go, the pollies will go on fiddling at the edges of the super arrangements in just about every budget.

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