October 8th 2016

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Articles from this issue:

COVER STORY Reaper mows down first child in the Low Countries

CANBERRA OBSERVED Coalition still gridlocked despite foreign success

EDITORIAL Trump v Clinton: choice between bad and worse

GENERATION RENT The economics behind political unrest

SAME-SEX MARRIAGE Kevin Andrews: defend marriage on principles

WA DRUG POLICY Forum told intervention works with cannabis, ice

OPINION "Deconstruction" fosters contempt of its object

POPULATION POLITICS Philanthropy as a weapon of mass destruction

SUPERANNUATION Take away the number you first thought of ...

HISTORY Germany and its long history of immigration

CINEMA The online madding crowd: Nerve

BOOK REVIEW Tale of forestry dynasty not quite pulp quality

BOOK REVIEW Roman refresher


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Take away the number you first thought of ...

by Colin Teese

News Weekly, October 8, 2016

The word “superannuation” is a bit of a puzzle, but the concept has been with us as long as human life. Essentially, it relates to how we look after the aged.

In earlier times anything relating to care for the aged was provided within the family, or not at all.

When the Industrial Revolution introduced capitalism, the situation actually did not change much – except perhaps for the few better off among the new band of wage earners. Among those, some were able and willing to nurture ageing parents within their modest family homes. Outside that category, the old were left to rely on the mercy of charity – largely supplied by church-inspired organisations.

The Count steps in

The Industrial Revolution, in those countries able to embrace it, may have introduced its own set of miseries, but it also provided greater prosperity for all classes than any known before.

Notwithstanding, government-inspired, universally available age pensions were not among the advantages capitalism brought with it. For those we had to await the inspiration of the Chancellor of Germany, Count Otto von Bismarck, in 1889. Bismarck’s modest pension was available to males over the age of 65 years.

Was the super egg addled at conception?

The Chancellor, a notably strong conservative, is said to have agreed to its introduction, less over concern for the ageing poor than as part of an attempt to counter the threat of socialism.

Interestingly, other industrialising countries were in no hurry to follow Bismarck’s example. But it might be said that a combination of Bismarck and the Industrial Revolution ultimately pushed governments in the direction of government-funded age pensions. Certainly, by the middle of the 20th century, most of the wealthier nations of the world had some kind of aged pension.

For all that, pensions, as a policy commitment of governments, were to enjoy a very short period of widespread acceptance. Thirty years later, in what was now called the West, a new market-based economic philosophy was emerging. Individual responsibility and self-interest rather than a sense of an interacting community were at its base.

The new philosophy coincided with a period in history when the aged were living much longer. It was therefore possible for governments embracing the new philosophy to maintain, though based on dubious reasoning, that universally available government pensions were no longer affordable. Those working would have to save from their earnings to support themselves in retirement. At least, that was the assertion.

More about that later.

Before that assertion, modest, universally available pensions had been government funded. In the industrial and prosperous countries, from around the beginning of the 20th century, other, better pensions, were also available to a select few. Mostly these applied only to permanently employed government officials and some others in large organisations. At the time that benefit made these jobs most sought after and prestigious.

Participants were required to make regular contributions into a fund, topped up by the government. In return, on retirement, usually at 65 years of age, they would be entitled to a fairly comfortable pension for the rest of their lives.

The overall benefits of this arrangement far outweighed any question of disadvantage for those who died soon after retirement compared with those living longer. Especially was this so as most pensions flowed on to the surviving spouse.

Of course, the fact that the length of life in retirement was unpredictable and compared with later, relatively short, made the system actuarially viable. At the time, however, governments, quite properly, were not much concerned about actuarial considerations. They just paid the surviving recipients for as long as was needed.

As capitalism developed, superan­nuation, along the same lines, was also provided by many big companies for their permanent staff. Although not widespread, this benefit was highly sought after. Indeed, companies using it emphasised the availability of the benefit as a means of attracting the best staff.

At least in Australia, since the change in economic philosophy referred to earlier, this type of superannuation – both for governments and companies – has largely disappeared. What has replaced it now varies widely in both form and advantage.

Nowadays, employees joining an organisation will have pension arrangements but they will be very different from the past. Only the better educated or wealthier of the retiring aged are in a position to manage the new arrangement successfully. At best it is a construct to serve, not the retiring workforce in its old age, but the emerging political and economic ideology of the time.

In the early years of its first term of office the Hawke/Keating government introduced the changes in Australia with quite a fanfare.

I’m paraphrasing, but it went something like this: “For the first time all Australians will be able to face retirement in the certain knowledge that they will have enough to live on. And this is an initiative designed specifically for Australians by the Hawke/Keating government.” It was also said to be part of the government’s so-called plan for “revitalising” the economy in line with contemporary needs.

But those able to disregard the rhetoric would have immediately discerned the underlying agenda. It was Finance Minister Peter Walsh who, either unwittingly or because he couldn’t help himself, let the cat out of the bag.

The accountants step in

He went public to say that the current pension schemes (he meant the age pensions maintained by both the Commonwealth and state governments) were unaffordable – in the sense that they were an “unfunded future liability”. He went on to say that this meant they were a burden for future generations whose taxes would have to support them.

This was a new and interesting economic concept from a wheat farmer turned politician. These schemes had been operating since Federation in Australia without difficulty and now, suddenly, the finance minister was telling us they could not continue on the same basis on which they had been supported for more than 80 years.

Walsh didn’t advance this notion as an actuarial opinion. In fact it was an assertion of the emerging Western economic and political consensus about deregulation, unrestrained markets and small government. Governments were like households, it was said. They could not spend more than they earned in taxation. The claim was that budgets had to be balanced.

This made no sense at the time and still doesn’t. Robert Gordon Menzies was Prime Minister for 16 years and in only one year of his term did he deliver a budget surplus; in every other year he ran deficits.

Nobody could say Menzies acted imprudently or governed badly; but he did spend or save according to what circumstances demanded. He wasn’t captured by some ideological concept.

But that is another subject.

The Hawke/Keating lot wanted working people to pay for their own retirement. The government was telling us that, with an ageing population and a shrinking workforce, spending on social services and pensions had to be reined in. (This, at a time, remember, when the same Finance Minister was preparing us for a huge reduction in company tax and for changes to labour laws that would have the effect of holding wages down.)

The real reason for all of this was copycat ideology. The incoming Labor government had been captured by the new economic and political ideology called small government (which included low taxation and deregulation of labour markets). Into this mix its principal ideologues, Treasurer Paul Keating and Finance Minister Walsh, announced their bold new plan for superannuation for all. Actually, it wasn’t theirs and it wasn’t new. And it was done in the worst possible way.

They could have followed Singapore and had a government-managed fund into which workers contributed with the benefit of payouts on retirement. Instead, they followed the U.S. model. Workers and employers had to contribute to a fund not administered by the government. Contributors had two choices: funds operated by private investment providers or industry-backed funds. As it turned out most workers chose industry funds. Common sense favoured them.

The association of high fees and poor returns on the part of private providers has plagued the private funds from the start – to the chagrin of the conservative side of politics. The fact is that the industry-operated funds have delivered the better outcomes and lower fees. (This writer has personal knowledge of a contributor who shifted from a private to an industry fund and got better returns and saved $24,000 annually in fees.)

Tinkers’ delight

This flawed superannuation arrangement, for which so much was claimed and from which so little has been delivered, has been the object of constant tinkering by succeeding governments of both political persuasions. The most damage was committed by the Howard government when, incomprehensibly, it made earnings from superannuation incomes tax free. Our government is wrestling with the political consequences of that mistake in the present Parliament.

Much is still wrong with both the policy and the detail of the scheme, and 30 years of experience expose some inescapable and uncomfortable facts. Nothing has changed since 1898; workers on low incomes are not and will never be able to save enough to support themselves in retirement. More so than ever with government policies aimed at keeping wages down.

Universally available government pensions will be unavoidable if low-wage earners are not to live out their final years in financial distress.

And, for the record, Hawke/Keating’s 30-year experiment is bad economics. It cannot help growth to channel consumer spending from low-income earners into the hands of the financial sector with no influence over where and how it is invested.

Colin Teese is a former deputy secretary of the Department of Trade.

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