ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
After meltdown, who will provide for retirees?
, March 21, 2009
The Australian Government needs to conduct a full-scale examination of income support for retirees, argues Colin Teese.Superannuation - or, more properly, so-called superannuation - is under scrutiny by the government. Not much is likely to come out of it. Quite possibly, this study will look at no more than how the present system might be tweaked. That won't be nearly enough.
What's needed is a full-scale examination of the entire subject.
Call it what you like, but the inquiry needs to ask as its first question: is any system of income support for people beyond working life still possible? And if it is, what is the best kind of arrangement we can afford?
A starting point surely is to look at how we managed before the Hawke/Keating Labor Government put its unhelpful oar into the retirement income water back in 1983.
We had a kind of hybrid system. The rich, as would be expected, made their own arrangements. White-collar workers in medium to large-scale businesses were mostly covered by company-funded schemes.
Blue-collar workers, tradesmen and low-level clerical people, along with the self-employed, were mostly without cover. They generally worked on until retirement age; thereafter they relied on the age pension funded from tax revenue.
Apart from a number of informal arrangements that helped make the system a little more humane, that was the system largely in place when Labor took office in March 1983.
Hawke and Keating wanted to change it - notionally to give Australians a better retirement future. The hidden agenda was that they wanted to have ordinary Australians fund their own retirement, rather than government fund them out of tax revenue.
There is a strange contradiction attached to this policy shift. At the very time that the Hawke Government was hitting employers and employees with a new Superannuation Guarantee Levy, it was simultaneously telling manufacturing industry that its protective tariffs against imports were being withdrawn.
Thus manufacturers were immediately, and by law, made less able than before to match overseas competition - especially from overseas firms not required to carry the same obligations. But in the rush to proceed with the dismantling of the maligned system of industry protection, all of these considerations were brushed aside.
The retirement income arrangement then devised - and now essentially still in place - was for employers to be required by law to contribute 9 per cent of each of their worker's wage or salary to a fund for each individual employee.
These accumulating funds would be entrusted to private financial institutions (mostly chosen by the employer) for investment, on behalf of individual workers. The institutions chose how the funds would be invested.
In a climate of financial deregulation, by deliberate choice, little control was exercised over how the funds were invested.
It is questionable whether, in a deregulated and unprotected economy, a self-funded retirement scheme could ever be the right way to go. That having been said, a worse kind of arrangement than the Hawke/Keating scheme is hard to imagine - unless its intended primary purpose was to promote the interests of financial institutions.
Defenders of the scheme argued that it gave workers, and/or employers, choice; they could select the financial institution most suited to their needs. Quite obviously, the idea that workers, or indeed most businesses, were, realistically, in a position to judge the relative merits of institutions was ridiculous.
In effect, the financial institutions were handed a captive market and the opportunity to accumulate overly generous fees, not necessarily related to the quality or performance of their investing skills. Meanwhile, the government seemed unconcerned that these virtually unregulated institutions were playing with the savings for retirement of most of the working population.
The institutions weren't obliged to invest even part of their funds in projects that might directly benefit the Australian economy and employment. Some 30 per cent of the funds could be invested offshore, where risk was much more difficult to assess, and which generated no home-grown advantages.Misgivings
On its introduction, the Hawke/Keating scheme was warmly received by adherents of the emerging free-market economic orthodoxy and by a sympathetic media. The late Bob Santamaria, by contrast, was almost alone in voicing misgivings about the new plan. He argued, correctly, that the scheme amounted to a tax levied for the express purpose of self-funding retirement benefits.
As such, the funds should not be channelled through normal commercial investment institutions to be invested wherever, and in whatever manner, they chose. Rather, Bob Santamaria suggested, the proceeds should be exclusively directed into infrastructure projects in the service of some long-term national interest. Hardly anybody listened.
But those who thought nothing could trump the bad policy of the Hawke/Keating approach were wrong. Howard/Costello beat them hollow when they allowed retirees to invest up to A$ 1 million in pension funds, and to draw down an annual pension of between 4 per cent and 10 per cent of the earnings and pay no tax.
Among those well-off enough to benefit, the scheme was, of course, applauded, but it represented an exercise in bad policy-making. It's not among the issues under current review - understandably, because only the most courageous of governments would dare change it.
The financial meltdown and the various degrees of depression engulfing the West do, however, bring the entire superannuation question back into sharp focus.
Like it or not, Western governments, including our own, may be compelled to confront a discomforting reality: as the future unfolds, will they be able to provide any kind of retirement income for those beyond working age?Funding retirement
Here in Australia, our government will certainly have to do what Hawke and Keating should have done back in 1983. Forget about ideology and mechanisms: look at the basics. Any kind of universal retirement benefit scheme - be it self-funded (so-called) or derived from welfare (so-called) - must, in the end, be funded by savings from the income generated by the workings of the real economy.
Whether those savings are collected by way of tax or are in some way accumulated from individual savings, is, in the end, incidental. The important point is that, in order to construct any workable system, those in employment must be able to earn an income sufficiently surplus to their day-to-day needs to save whatever is necessary for retirement.
The funds needed for any retirement income arrangement must be earned and saved from our national income.
Hawke and Keating seemed to have believed, or had been persuaded, that this basic fact could be circumvented. Somehow, if the savings were invested in shares, then, by some magic process, those savings could grow faster than, and independently of, the real economy. If that proposition ever had legs, they have been kicked from under it by the current economic downturn.
If pensions can't be provided except by drawdown in some way or other from national income, then it seems fairly obvious that we cannot construct any kind of widely applicable retirement pension scheme within the framework of the economic philosophy we have followed for the last 25 years.
All of this makes clear what must be the focus of any serious examination of the retirement income problem. In even the most favourable circumstances this will be no easy task, and, as with most examinations conducted in the public domain, the examiners can expect to be sidetracked by various special pleaders.
That apart, there is also the genuinely complicating issue of an ageing population. That consideration arises from two circumstances: first, from a falling birth-rate and, second, from the simple fact that people are living longer.
Medical technology, and the associated better health arising from it, accounts for the second consideration. These two concerns also give rise to related anxieties. The most troublesome is surely whether we will be able to provide adequate medical care for an ageing population.
All kinds of data have been gathered which purport to illuminate these concerns.
That we have experienced a falling birth-rate, for whatever reason, is incontestable, though some of the recent figures suggest that the trend might be changing. Also incontestable is the fact of the ageing population; but we do seem to have difficulty in identifying its implications and how best to deal with that issue. Of course, the pension and health issues are not unconnected, though sometimes confusing.
But confusions and contradictions aside, we are left with a genuine problem about whether, in the future, the national income will be able to generate surpluses, over and above other needs, to fund a retirement pension scheme covering most workers.
We can say with some certainty that this will be impossible if we stick with the deregulationist economic philosophy our governments have followed for the last 25 years. In the name of meeting economic competition, the emphasis has been on pushing down wages (and profits) to bedrock levels to meet import competition.
With that approach, neither businesses nor workers can expect that circumstances in the market place will allow them the luxury of accumulating profits or income for future needs.
If we ever were in any doubt about this, Mark Latham, who was one of Labor's free-trade advocates, told us that our small, open economy can't grow faster than its trading partners. If he's right, we can forget about superannuation.
To create a workable system of retirement pensions, economic policy will have to be made more accommodating to community considerations than to international competition. After 25 years of conditioning, that will require something of a turnaround on the part of our political leaders.
Can we expect it? Your guess is as good as mine.
But a good starting point might be for our government to revert to calling our country the Commonwealth of Australia.- Colin Teese is a former deputy secretary of the Department of Trade.