Higher super: good for fund managers, not for workers

Do you have trouble understanding superannuation? Some government backbenchers are urging Scott Morrison to abandon or at least postpone the plan to phase-up the compulsory employer contribution from 9.5 per cent to 12 per cent of salary over the four years to July 2025. Good idea, or another attempt to cheat the worker?

One new backbencher has proposed that, since many low income-earners have a lot of demands on their budgets, super should be voluntary for everyone earning less than $50,000 a year. Whaddaya reckon?

You could be forgiven for being unsure. Super is complicated. You have to understand how it’s taxed and how it interacts with the age pension and its income and assets tests. I sometimes think that, with super, nothing is as it appears.

Take the notion of “employer contributions”. The government is forcing your boss to contribute to your retirement savings on top of the wage you’re paid. You beaut. Bring it on. The more the better.

Trouble is, economists believe that, in the end, it’s not the boss who pays, it’s the worker. How could that happen? Easy. Every time bosses are compelled to increase the rate of their contribution to their workers’ super, they compensate by granting ordinary pay rises that are smaller than they would have been.

After almost 30 years of playing the compulsory super game, that’s what the figures say has happened.

And ask yourself this: if employers really do foot the bill for their contributions to their employees’ super – if they come out of profits rather than wages – why isn’t business complaining loud and long about the plan to greatly increase those contributions?

Once you accept that employees end up paying for “employer” contributions, the question of whether they should be increased can be restated as: would you be happy for your pay to rise by about 2.5 per cent less than it would have over the four years to July 2025? And, ignoring other developments, stay that much lower every year for the rest of your working life?

The rational answer to that question is yes - provided the eventual improvement in my retirement income is sufficient to compensate me for the loss of the other things I could have done with all that money.

Before we consider answering that, here’s another thing that may not be as it appears. Compulsory super is a creation of Labor (and, if you hadn’t noticed, Paul Keating) and the unions. This was done in the belief that future generations would want more than the pension to live comfortably in retirement. Most people would live on a combination of age pension and super.

The Liberals opposed it from the start, saying they didn’t agree with compelling people to save. The Howard government scuttled Keating’s plan to increase compulsory contributions beyond the original 9 per cent.

Then, in 2013, the new Abbott government intervened to delay Kevin Rudd’s plan to get contributions up to 12 per cent by July 2019 – that is, now.

We’re asked to believe that the backbenchers are revolting because Morrison is refusing to abandon or further delay the already-legislated phase-up to 12 per cent by July 2025. But why would he reverse the Libs’ long-held opposition to compulsory super (which, by the way, delivers billions of dollars into “industry” super funds, in which half the trustees are union officials)?

I don’t believe it. Treasurer Josh Frydenberg is preparing to announce a wide-ranging inquiry into the interaction of super, the age pension and taxation. Since the next increase won’t happen until mid-2021, I think Morrison would simply prefer to announce a further curtailment of Labor’s plans in the context of the government’s response to that inquiry.

But why might an independent inquiry recommend against any further increase in the rate of compulsory contributions? Because, despite all the urging from the finance sector-types who make their high-paid living by taking a small annual bite out of every dollar the government forces us to leave in their care, in an unholy alliance with the union movement, the case for higher contributions is weak.

Recent detailed modelling by Brendan Coates, of the Grattan Institute – a non-aligned think tank that’s done much research into super – has found that the planned increase would leave many workers poorer over their entire lifetimes.

They would sacrifice a significantly increased share of their lifetime wages in exchange for little or no increase in their retirement income. Overall, and measured in today’s dollars, the typical worker would lose a cumulative total of about $30,000 over their lifetime, Coates estimates.

He finds that the lowest-paid 20 per cent of employees would be better off, the middle 50 per cent would be worse off, and the highest-paid 30 per cent would be better off.

Why? Partly because super tax breaks are still a lot greater for high income-earners, but mainly because, for workers in the middle, the operation of the age pension assets test would leave them sacrificing immediate income to increase their super payout, only to have their pension chopped back in consequence.

These results make me doubt the wisdom of making super voluntary for low income-earners. Many people are on low incomes not because they’re poor, but because their career is just getting started. It would work against the push for women to end their careers with more super than they do at present.

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Memo PM: governing goes better with a sharp public service

For good or ill, much of the attitudes and strategies of the modern Liberal Party have been shaped by its greatest leader since Menzies, newly turned octogenarian John Howard.

After Bob Hawke defeated Malcolm Fraser as prime minister in 1983, Howard, his treasurer, reflected unhappily on how little the Fraser ministers had achieved during their seven years in office. Why was that? Because, Howard concluded, the public servants had kept talking them out of doing what they’d intended to do.

So when Howard became prime minister in 1996, he resolved not to let that happen to his government. He began with a “night of the long knives” in which he sacked the heads of six government departments.

When Tony Abbott took over from Labor in 2013, he repeated the process with a “night of the short knives” in which the heads of four departments got chopped.

Nothing could be better calculated to send a message to top public servants that survival in their jobs rests on the continuing approval of the prime minister and his ministers, and that any frank and fearless advice they offer will be at their own risk.

We can be reasonably confident that, by now, it would be rare for ministers to be given unwelcome advice.

Which doesn’t sound smart to me. No leader has all the answers. The manager who surrounds themselves with Yes-persons is more likely to fall in a hole than achieve great things.

Last week Scott Morrison did what’s become the accepted practice of prime ministers from both sides and moved to install his personal choice to head his department and, in effect, be boss of the other department heads.

He shifted a former chief-of-staff of his private office, Phil Gaetjens, from Treasury to Prime Minister and Cabinet. Gaetjens’ replacement at Treasury is Dr Steven Kennedy, a Treasury-trained and highly experienced macro-economist, with much experience in other areas. His appointment suggests a step back from the politicisation of Treasury.

Asked about public servants’ role in giving advice, Morrison said “it is the job of the public service to advise you of the challenges that may present to a government in implementing its agenda. That is the advisory role of the public service. But the government sets policy. The government is the one that goes to the people and sets out an agenda, as we have”.

Get it? He sees the bureaucrats’ role as to implement the government’s policy. If they see any problems during that implementation, they are free to draw them to their masters’ attention. But, by implication, they’re not invited to suggest items that need adding to the policy agenda.

It should go without saying that the government sets policy and the public service puts it into practice. Feeling you have to say it suggests a lack of confidence and a fear of having to debate with people who know more about the topic than you do.

But if the Morrison government used the recent election to set out a busy agenda of reforms, I must have missed it. Makes you suspect the agenda for the next three years will just be responding to problems as they arise. Policy without having a policy, perhaps.

But the Abbott-Turnbull-Morrison government’s seeming antipathy towards public servants runs deeper than that. I get the feeling ministers and their staffers regard them as class enemies. People who vote for the other side and so are neither likeable nor to be trusted.

This government took years to reach enterprise agreements with many of them. And though the disaster of Abbott’s first budget killed off almost all the Coalition’s enthusiasm for cutting government spending, it remains strong in two (not particularly big) areas.

It’s willingness to cut spending on public administration is exceeded only by its annual “crackdowns” on benefit payments to the disadvantaged. It knows there’ll be no objection from voters generally, while its heartland supporters will be much gratified see the leaners and loafers get their comeuppance.

The annual cuts to departmental admin budgets – laughably known as the “efficiency dividend” – long ago degenerated into rounds of redundancies that have significantly reduced the size of the public service.

Thus has the public service become less efficient – including taking longer to get things done – and lost much of its corporate memory, plus most of its policy experts.

So it may be just as well the Libs think they don’t need policy advice from public servants. When they do need it, they pay megabucks to the big four accounting and consulting firms. What would they know about public policy? A fair bit now they’ve hired many of the policy experts the government let go.

The great advantage of using private-sector consultants, of course, is that they invariably give the paying customer the advice they think it wants to hear. Good luck, Scott.

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Money is created by the banks, not the government

Just for a change, let’s talk about money. What? Don’t economists always talk about money? Well, yes, in the sense that almost all the things they talk about are valued in monetary terms. But otherwise, no, they rare talk about money as such.

Sometimes I think economics is about finding a host of synonyms for the word "money". Why do you go to work? To make money, of course. But economists prefer to say you earn a wage. Or, if you’re a big shot, a salary.

Businesses sell us things to get money, but economists prefer to say they make sales to generate turnover which, after they’ve paid out a lot of money on wages and rent and many other expenses, leaves them with money called income or profit.

Economists do talk specifically about money, but they define it much more narrowly. Consider this: how would you like to live in a barter economy, where you’re paid with some of whatever it is you’ve helped produce, then have to exchange those things with other people for some of the things they’d help produce?

It would be a hugely cumbersome and time-consuming business. Which is why, a long time ago, someone invented money. We get paid with money, which we use to buy the things we need. Much simpler and easier.

That’s what economists mean by money – a means of paying for things; a "medium of exchange". To an economist, money has little intrinsic value. It’s the things it buys that are valuable.

Economists mainly focus on those valuable things – what’s happening to them and how they work - and ignore the money used to buy and sell them.

It’s true, of course, that economists and the rest of us put dollar values on all those things – prices of the goods and services we buy, the value of the houses and other assets we sell.

Expressing the value of so many and varied things in dollars makes it easier to compare them, add and subtract them. So another part of economists’ definition of money is that it’s used as a "unit of account".

(This, however, exposes a big limitation of economics. There are a lot of important things in life and the economy whose value or cost can’t be reduced to a dollar figure. Things like love, trust, honesty, anxiety and stress. Economists are always forgetting to take account of factors than can’t be measured in dollars.)

Of course, not all the money than comes our way is spent immediately. Some of it we save to spend later – sometimes much later. Which means the third requirement money must fulfil is to be a good "store of value".

That’s why we need to keep the rate of inflation low and steady (and why Bitcoin doesn’t rate as money).

But now we’re clear on what money is, the big question is: where does it come from? How is it created?

Well, we know that coins and banknotes come from the government. Notes are printed in Melbourne by the Reserve Bank; coins are made in Canberra by the Royal Australian Mint. The Reserve sells to the banks all the notes and coins they want.

But notes and coins account for less than 4 per cent of all the money in circulation. Most of us hold most of our money on deposit with the banks.

In principle, the Australian dollar is a creation of the Australian government. Like almost every currency these days, it’s a "fiat" currency – meaning it has no intrinsic value: notes are just pieces of paper, and the metal used to make a $2 coin is worth a small fraction of $2. An Australian $50 note is worth $A50 purely because the government says it is.

This also means the government could print – or credit to people’s bank accounts – as many dollars as it wanted to (though not without ramifications).

But here’s the trick: although that is true in principle, in practice money is created by the banks. As Emma Doherty, Ben Jackman and Emily Perry explained in the Reserve Bank’s Bulletin last year, money is created when banks make loans.

The bank either puts the loan money directly into its customer’s deposit account, or pays it into the account of the business selling whatever it is its customer needed the loan to buy. Either way, since money is notes and coins ("currency") plus bank deposits, the amount of money in circulation has just increased.

Amazing, eh? But before you run away with the idea that a bank could create as much money as it wanted to, there are two further points to understand.

First, there are obvious limits on how much money the banks can create. For a start, they’re not giving it way, they’re lending it. They must have a customer wanting to borrow at the interest rate charged, and likely to be able to repay it.

And the banks also need to be in a position to make the loan. They must keep a sufficient share of their assets in liquid form (cash) to be able to meet any withdrawals the new borrower makes from their account, as well as to meet any withdrawals by existing borrowers.

This pretty much means they need to attract more cash deposits to support the loan they just made. The banks’ loans need to be backed up by enough capital, supplied by shareholders, in case borrowers can’t repay their loans or other bank assets fall in value.

All this is necessary to ensure the banks don’t collapse. So these factors imply that creating money comes at a cost to the banks, which limits the extent to which they can increase their loans.

Second, an individual bank can’t create money in this way, only the banking system as a whole can. That’s because the bank that initiates the loan can’t be sure that all the loan money spent comes back to it as deposits. Some of it will, but most may go to other banks.

Next week it’s back to talking about the things we do with money.

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Want the jobless to find jobs? Then increase the dole

It’s so familiar a part of political economy you could call it Galbraith’s Law, after John Kenneth Galbraith, the literary Canadian-American economist who put it into words. As the late senator John Button paraphrased it: the rich need more money as an incentive and the poor need less money as an incentive.

Consider the first actions of the re-elected Scott Morrison and his government. First, pushing through its three-stage tax plan, which in time will cut the income tax of those on the minimum wage by 1.5¢ in every dollar, those full-time workers on the median wage by 2.4¢ in every dollar, and those on $200,000 a year by 5.8¢ in the dollar.

Second, steadfastly resisting the ever-mounting calls for a rise in the single dole of $278 a week (less than 38 per cent of the minimum wage), which hasn’t been increased beyond inflation since 1997, making it now about $180 a week less than the pension.

It’s true that, until very recently, Labor was just as opposed to raising the dole as the Coalition has long been. Why? Because both sides know that doing so would displease many of their supporters.

As everyone knows, the dole is paid to lazy youngsters, who much prefer surfing to looking for a job – which, if only they’d get off their arses, they’d soon find. (Never mind that the number of unemployed vastly exceeds the number of job vacancies.)

Even so, the number of those calling for an increase is mounting rapidly. Apart from the welfare groups, it has long included the Business Council, which has now been joined by various economists – including those working for two of the big four accounting firms, plus someone called Dr Philip Lowe – and backbenchers from both sides, including Barnaby Joyce, who says the dole isn’t high enough for country people to afford the travel to job interviews.

Even John Howard, the man who initiated the freeze in real terms, now says it’s time for it to end.

Morrison, however, is unmoved. He argues the dole is better than it's been painted. It’s increased twice a year in line with inflation, and 99 per cent of recipients get other payments.

True. But what the 99 per cent get is the “energy supplement”, which is worth 63¢ a day and doesn’t change the claim that the dole amounts to about $40 a day.

About 40 per cent of singles on the dole get rent assistance – of up to $9.80 a day – provided they’re paying rent of more than $21.40 a day which, rest assured, they are. Much more.

There are 722,000 people on unemployment benefits. Half of them are over 45 – strange to think how sure people are that employers discriminate against older job applicants, but don’t ever imagine them being on the dole.

Similarly, more than a quarter of recipients have an illness or disability, but are on the dole because they’ve been denied the disability support pension. These people, along with more than 100,000 single parents, face challenges and discrimination in finding paid work.

Another argument ministers use is that the dole was only ever intended to be a temporary payment while people find another job and, indeed, two-thirds of people going on to it move off within 12 months.

But get your head around this: accepting that’s true, it’s also true that, at any point in time, two-thirds of people on the optimistically named Newstart allowance have been on it for a year or more. These are the long-term unemployed who, presumably, include many of those with particular challenges.

I agree with Morrison that “the best form of welfare is a job”. It’s true, too, that in recent years many additional, full-time jobs have been created. But it’s equally true that many of those jobs have gone to immigrants and other new entrants to the labour force, meaning the rate of unemployment hasn’t fallen below 5 per cent. That’s acceptable?

The truth is that, even in the city, the meanness of the dole makes it hard for people to afford the transport and other costs needed to search for jobs. The notion that poor people will seek work only under the lash of poverty is heartless nonsense.

Other facts are that the economy has slowed sharply since the middle of last year, employment is growing more slowly and unemployment is now rising.

This is why Reserve Bank governor Lowe has twice cut the official interest rate and is begging the government use its budget to do more to stimulate the economy. It partly explains his support for an increase in the dole – an extra $75 a week is the popular proposal – which, as a stimulus measure, has the great virtue of being likely to be spent fully and quickly by its impoverished recipients.

So why the refusal? For the reasons we’ve discussed but also because, having given up tax revenue of $300 billion over 10 years, Treasurer Josh Frydenberg now insists he can’t afford a dole increase costing a whopping $39 billion over 10 years. Too much threat to his promised return to budget surplus.

Strange logic. Should the economy’s slowdown not be reversed, unemployment – and the budgetary cost of the dole – will go a lot higher, and hopes of budget surpluses will evaporate, replaced by angry people accusing the government of economic incompetence.

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Despite the photo-op, RBA knows we need fiscal stimulus

Never fear, Reserve Bank governor Dr Philip Lowe may have stumbled on the optics of agreeing to a photo-op with Treasurer Josh Frydenberg the other week, but the Reserve’s independence remains intact and our weak economy remains in need of budgetary stimulus.

Politicians have damaged our trust so badly that they like having respected econocrats appearing beside them to bolster their credibility. But central bank governors who wish to preserve the authority of their office don’t oblige, just as Lowe’s predecessor, Glenn Stevens, declined to be used as a prop by Kevin Rudd.

That’s the trouble, of course. There’s nothing wrong with treasurers and governors having private meetings – the more the better – but once the media are invited in the pollies will always be playing their own game, and it’s always one that puts their political standing ahead of the economy’s interests.

I suspect the message Frydenberg wanted to convey to viewers was that the economy was going fine and he had no intention of allowing fiscal stimulus to jeopardise the budget’s predicted and glorious return to surplus, which would make his name as a treasurer.

He and his Treasury officers had spent two hours explaining this to Lowe, and Lowe had accepted their arguments.

I very much doubt that’s what really happened. Nor do I except the media interpretation that, pressured by Frydenberg, Lowe went on to repudiate all he’d been saying about the economy’s weakness and why he’d needed to cut the official interest rate two months in a row.

Why then did Lowe say “I agree 100 per cent with you [Frydenberg] that the Australian economy is growing and the fundamentals are strong”?

Well, for a start, no one denies that the economy is still growing. And “the fundamentals” is such a vague concept it could be taken to mean lots of things. Presumably, Lowe doesn’t include wages among the fundamentals, because annual growth of 2.3 per cent is not what I’d call strong.

I think all he was trying to say was that he was confident we aren’t heading into recession.

But there’s a deeper point to understand: central bankers see it as an important part of their job to exude calm and confidence. No matter how worried they are, they take pride in never showing it.

They’re like a duck: moving serenely above the water, paddling furiously underneath. Lowe has spoken several times recently about the need to preserve stability and confidence.

So never hold your breath waiting for a Reserve governor, Treasury secretary or, let’s hope, treasurer  to be the first to warn that recession is possible. They’ll be the last to admit it.

Like Paul Keating on the day he tried to conceal his failure by bulldusting about “the recession we had to have”, they don’t use the R word until the figures make it impossible to deny.

And that is just as it should be. Why? Because – particularly when it’s negative, and when sentiment is wavering – what they say has too much influence over what the rest of us think and do. Too much risk of their prophesies becoming self-fulfilling.

That’s why, as a mere media commentator, it’s my job to be brutally frank, and theirs to be circumspect.

And that’s why it’s wrong to claim Lowe has suddenly changed his tune about the economy’s prospects. Those who think otherwise are like the people in the famous psych experiment who were so busy counting points in a basketball match they didn’t notice a gorilla run across the court.

In his announcement of the second rate cut – as in almost all his recent public utterances – Lowe insisted that “the central scenario for the Australian economy remains reasonable, with growth around trend expected”.

The significant change has been the Reserve’s revised judgement that the “non-accelerating-inflation rate of unemployment” has fallen from about 5 per cent to 4.5 per cent or lower. Lowe has used this as his justification for cutting interest rates.

“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy” and “will assist with faster progress in reducing unemployment . . .”, he said in the announcement.

It’s a lovely thought, but I fear the immediate challenge is not to get unemployment lower, but to stop it continuing to rise. And the latter risk fits better with Lowe’s repeated calls for more help from the budget – for it to be pointing in the same direction as monetary policy (interest rates), not the opposite direction, as at present.

Frydenberg’s photo-op made it clear his answer is no. Perhaps at their next two-hour meeting Lowe should explain to him how the budget’s “automatic stabilisers” work, and may well wash away his promised budget surplus.

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Change is inevitable. If we embrace it we win; resist it we lose

Will Australia’s future over the next 40 years be bright or pretty ordinary? It could go either way, depending on how we respond to the challenges facing us. So what do we have to do to rise to the occasion?

The challenges, choices and likely consequence we face are spelt out in the report, Australian National Outlook 2019, produced by the CSIRO in consultation with 50 leaders from companies, universities and non-profits. The group was chaired by Dr Ken Henry, former Treasury secretary, and David Thodey, former boss of Telstra.

The report identifies six main challenges we face between now and 2060. First is the rise of Asia and the way it is shifting the geopolitical and economic landscape.

Asia’s middle class is growing rapidly, but unless we improve our ability to compete and also diversify our exports, we risk missing out on this opportunity and will be vulnerable to external shocks.

Next is the challenge of technological change, such as artificial intelligence, automation and biotechnology, which is transforming existing industries and changing the skills required for high-quality jobs.

Third challenge is climate change, the environment and loss of biodiversity. These pose a significant economic, environmental and social threat to the world and to us. We could be on a path to 4 degrees global warming by the end of the century unless significant action is taken.

Then there’s the demographic challenge: at current growth rates Australia’s population may approach 41 million by 2060, with Sydney and Melbourne housing 8 to 9 million people each. At the same time, ageing means the population’s rate of participation in the workforce could drop from 66 per cent to 60 per cent. (I don’t accept that such a rate of population growth is either inevitable or desirable.)

The fifth challenge is that trust in governments, businesses, other organisations and the media has declined. Without a lot of trust, it will be much harder to agree on the often-tough measures needed to respond to all these challenges.

Finally, measures of social cohesion have fallen in the past decade, with many Australians feeling left behind. Inequality, financial stress, slow wage growth and poor housing affordability may be contributing to this.

The report develops two plausible but opposite scenarios of how things may develop over the next 40 years. The “slow decline” scenario is the muddle-through future, in which we resist change for as long as we can. In the “outlook vision” scenario we agree to bite the bullet, resist the lobbying of declining industries, make the needed policy changes and exploit the benefits of new technology and trading opportunities.

Under the low-road scenario, real gross domestic product grows at an average rate of 2.1 per cent a year, whereas under the high-road scenario it grows by 2.8 per cent. This would cause average real growth per person to be 39 per cent higher than under the low-road.

Real wages would be 90 per cent higher in 2060 than today, compared with 40 per cent higher under the low-road.

The low-road approach would allow cities to continue to sprawl, whereas the high-road would involve increasing the density of cities by about 75 per cent compared with today. This would keep our cities highly liveable.

Urban congestion could be reduced by higher density. Vehicle kilometres per person would fall by less than 25 per cent under the low-road, compared with up to 45 per cent under the high-road.

Net carbon emissions would fall by only 11 per cent under the low-road, with total energy use increasing by 61 per cent on 2016 levels, and only a modest improvement in energy productivity (efficiency).

By contrast, net zero emissions would be reached by 2050 under the high-road, with a doubling of energy productivity per unit of GDP and total energy use increasing by less than 45 per cent.

Whereas returns to landowners would increase by about $18 billion a year under the low-road, they’d increase by up to $84 billion a year under the high-road.

There’d be minimal environmental planting in 2060 under the low-road, but between 11 to 20 million hectares under the high-road, accounting for up to a quarter of intensive agricultural land. This “carbon forestry” explains why net zero emissions could be achieved without significant effect on economic growth.

More biodiverse plantings and better land management could help restore our ecosystems. And low-emission, low-cost sources of energy could even become a source of comparative advantage for us, with exports of hydrogen and high-voltage direct-current power.

The report says we need to achieve five key shifts to get us on to the high road. First, Industry. We need to allow a change in the structure of our industry, by increasing the adoption of new technology and so increasing productivity. We need to invest in the skills of our workers to keep their labour globally competitive and ready for the technology-enabled jobs of the future.

Second, urban sprawl. We need to plan for higher-density, multicentred and well-connected capital cities to reduce sprawl and congestion. We need to reform land-use zoning, so diverse high-quality housing options bring people closer to jobs, services and amenities. We must invest in transport infrastructure, including mass-transit, autonomous vehicles and "active transit", such as walking and cycling.

Third, energy. We must manage the shift to renewable energy, which will be driven by declining technology costs for generation, storage and grid support. We need to improve energy productivity using new technology to reduce the waste of power by households and industry.

Fourth, land. We need to use digital and genomic technology to improve food technology and to participate in new agricultural environmental markets to capitalise on our unique opportunities in global carbon markets. This will help to maintain, restore and invest in biodiversity and ecosystem health.

Finally, culture. We need to rebuild trust, encourage a healthy culture of risk-taking and deal with the social and environmental costs of reform policies.

Trouble is, a public that’s willing to re-elect the reactionary Morrison government seems more likely to settle for the low-road than strive for the best we could be.

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