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2013 09

Does Compulsory Super Increasing Saving?

I have an op-ed in the Business Spectator discussing a recent CPA Australia report and its claim that “nothing has been saved during the 20 years of compulsory superannuation contributions”:

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.

posted on 24 September 2013 by skirchner in Economics, Financial Markets

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Why the Fiscal Policy Multiplier is Zero

Scott Sumner has a new paper published by the Mercatus Centre, Why the Fiscal Multiplier is Roughly Zero. The argument will be familiar to regular readers of his blog, but the paper serves as a nice summary of what has become known as the Sumner critique. As Scott would be the first to concede, this is not a new or unconventional idea, but somehow the economics profession lost sight of this basic insight into monetary-fiscal interactions during the global financial crisis.

The Sumner critique is particularly relevant to a small open economy like Australia, where the entire institutional framework for macroeconomic policy is arguably built around this insight. With a floating exchange rate and an inflation targeting monetary policy, the change in the budget balance as a share of GDP from one year to the next is a macroeconomic irrelevance by design. This allows fiscal policy to focus on microeconomic and supply-side issues.

In testimony before various parliamentary committees, former Treasury Secretary Ken Henry and RBA Governor Glenn Stevens explicitly acknowledged monetary offset in the context of the 2008-09 fiscal ‘stimulus’, but resorted to the argument that it was better to rely on a mix of macroeconomic instruments rather than monetary policy alone, citing alleged adverse side-effects from very low interest rates. In the US context, Sumner notes the real reason for such arguments: politically, the monetary authority cannot be seen to be explicitly undermining the efforts of the fiscal authority.

In Australia, it is often argued that the government should not cut government spending or return the budget to surplus because it would supposedly be contractionary for the economy. This not only ignores the role of fiscal policy within Australia’s macroeconomic policy framework. As Scott notes, the assumed underlying ‘estimates of fiscal multipliers become little more than forecasts of central bank incompetence.’

posted on 13 September 2013 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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