A dollar of super is not a dollar saved

It’s wrong to conclude, as a new CPA report does, that nothing has been saved over 20 years of compulsory superannuation. But the contributions do have complex effects on household budgets.

Does compulsory superannuation increase saving? The answer to this question is less obvious than many people suppose.  A recent study prepared for CPA Australia, Twenty years of the superannuation guarantee: The verdict,’ claims that "nothing has been saved during the 20 years of compulsory superannuation contributions". This is an overstatement, for reasons discussed below, but the report is at least asking the right questions.

Employees receive compulsory superannuation contributions equal to 9.25 per cent of their gross earnings. Compulsory superannuation is designed to increase household saving for retirement and reduce future demands on the budget from the age pension.

However, compulsory superannuation contributions have complex effects on the work-leisure choices of households, their overall saving behaviour and on public saving via the federal budget.

The federal Treasury estimates that compulsory super has raised national saving by around 1.5 per cent of GDP. It is usually assumed that for every dollar of compulsory contributions, households on average dissave by 30 cents either by reducing other forms of saving or incurring more debt.

This offset will be smaller for those households that are financially constrained and spend all their disposable income because compulsory contributions add to those constraints. For higher income households with a significant capacity to borrow, the offset could be much larger, if not 100 cents in the dollar.

The CPA report argues that households anticipate the tax-free benefit they will receive from their superannuation account balance on retirement by increasing their current levels of borrowing and consumption. This increased borrowing is claimed to have fully offset the increased saving via compulsory superannuation contributions. Hence the report’s conclusion that "superannuation savings minus household debt effectively equals zero".

This surprising result reflects a questionable feature of the report’s methodology. The report counts borrowing for housing on the liabilities side of household balance sheets, but does not count housing equity on the assets side. The report defines household saving as household financial wealth less debt, including housing debt.

The report defends this approach on the basis that few retirees access housing equity to fund their retirement, whether through reverse mortgages, downsizing or relocating the family home. As the report notes, the means test for the age pension encourages the movement of financial assets into the home rather than taking equity out of the home. Stamp duty on property transactions is another factor discouraging the realisation of housing equity.  Whereas mortgage debt in retirement needs to be serviced, the value of the family home does not directly affect the cost of living in retirement.

In fact, it is always possible to change the incentives that currently discourage households from realising housing equity for the purposes of funding retirement.  In principle at least, housing equity is available to fund retirement, even if this is not a popular choice. We should not completely discount the role of housing equity as a source of retirement saving when it is such an important part of household net worth.

The CPA report paints a picture of households living large in the present at the expense of their future retirement, whereas most modelling of compulsory super suggests that it constrains current living standards for the benefit of the retirement years, but with only modest net benefits over the life-cycle.

Reserve Bank data paints a more optimistic picture of rising household net worth relative to disposable income, at least up until the onset of the global financial crisis and the European debt crisis. Before these shocks to housing and financial markets, growth in value of financial and non-financial assets relative to income rose more strongly than household debt.

Household net worth took a hit from the global financial and European debt crises, but household saving has also increased and the growth in debt relative to income has stabilised. It is not correct to conclude that nothing has been saved over 20 years of compulsory superannuation, although the contribution made by the superannuation guarantee is hard to quantify.

The CPA report indirectly highlights the importance of housing as a saving vehicle for most households. Because saving via owner-occupied housing is tax free and these tax arrangements are politically stable, it should be no surprise that housing features so prominently in household saving.

While many commentators bemoan this emphasis on saving via housing, it highlights the way in which the tax system can be used to create positive incentives for increased saving and self-provision for retirement via other saving vehicles, including superannuation.

The tax-free status of saving via owner-occupied housing is model tax policy from the perspective of promoting self-provision for retirement. It is a model from which the taxation of superannuation could usefully borrow.

Dr Stephen Kirchner is a research fellow at the Centre for Independent Studies.