The Financing and Costing of Government Superannuation Schemes
III NATIONAL INTEREST
The arguments so far have examined the position from the point of view of the individual employers and employees involved. However there are some broader considerations of the national interest which are also relevant. Some of these considerations have led to the introduction of the Superannuation Guarantee legislation under which a certain level of superannuation provision is mandated for all employees (other than those on extremely low incomes).
Equity Between Generations
It is desirable that each generation should provide for its own retirement and not be dependent on succeeding generations to support it. In an absolute sense this is of course impossible. Retired people are inevitably dependent on younger people for many of the services they require such as medical and nursing care. However it is possible and desirable in a financial sense - if each generation saves sufficient during its working life then the drawings made on the production of the country by that generation when it is retired, will not impact adversely on the prosperity of the succeeding generation of the working population. This implies a need for an appropriate level of national saving, but not necessarily specific funding for specific retirement provision. Thus, Australia, in common with many other countries, provides an old age pension out of general taxation on a pay as you go basis. This pension is not funded: no advance provision is made for it, but in the past the general level of national saving has been sufficiently high that the increasing prosperity of the country has been able to support both an increase in number of pensioners and increases in the amount of the pension in both monetary and real terms.
National Saving
There are other reasons for seeking a high level of national saving. In general, the countries which have had the most sustained prosperity have been those with high rates of national saving. The Fitzgerald Report ("National Saving A Report to the Treasurer" by Dr V W Fitzgerald, June 1993) identified the importance of national saving, and also some of the ways in which national saving can be increased. Two of the major items identified by Dr Fitzgerald are Government saving, and funded superannuation. The two are related because national saving is the aggregate of public and private saving. Thus the tax concessions afforded to funded superannuation reduce public saving and this reduction in public saving needs to be taken into account in assessing the impact of funded superannuation on national saving. For example, the superannuation guarantee will have a relatively small impact on nationals saving over the next decade or so, but the effect increases thereafter. (Fitzgerald Report p53). If an increase in funded superannuation is also associated with an increase in the extent of Government borrowing then this will further reduce the impact on national saving. In the extreme position if the Government were to fund its superannuation schemes but increase its borrowing in order to do so then there would be no increase in national saving at all.
The Ageing Population
In common with most of the industrialised world, Australia is likely to see a significant shift in the age distribution of its population. The Table below shows the proportions of older people in the main industrialised countries over the 40 years from 1985 to 2025.
| Proportion of population in 1985 |
Proportion of population in 2025 |
Increase in proportion of |
||||
| old (over 65) |
very old (over 85) |
old (over 65) |
very old (over 85) |
old (over 65) |
very old (over 85) |
|
| % |
% |
% |
% |
|||
| UK |
15.1 |
3.1 |
18.7 |
4.0 |
24% |
29% |
| Italy |
13.0 |
2.5 |
19.6 |
4.3 |
51% |
72% |
| W. Germany |
14.5 |
3.2 |
22.5 |
5.3 |
55% |
66% |
| France |
12.4 |
3.2 |
19.3 |
3.8 |
56% |
19% |
| US |
12.0 |
2.6 |
19.5 |
4.8 |
63% |
85% |
| Canada |
10.4 |
2.0 |
18.8 |
3.7 |
81% |
85% |
| Japan |
10.0 |
1.7 |
20.3 |
4.9 |
103% |
188% |
| Australia |
10.1 |
1.7 |
15.9 |
2.9 |
57% |
71% |
Source: "Pay-as-you-go Funding Stability: An Age of Eligibility Model" by Robert L Brown, Transactions of the 24th International Congress of Actuaries, 1992
Note: The proportion of old people includes the proportion of very old people.
These projections show that even in 2025 Australia is projected to have a smaller proportion of old people than other industrialised countries. However, the demographic shift in Australia is of similar magnitude to the other countries - with an increase of 57% in the proportion of old people and of 71% in the proportion of very old people. While there may be a simultaneous reduction in the proportion of children in the population, the Government expenditure on each child is less than the Government expenditure on each old person (particularly each very old person), so if no policy changes are made the effect of this ageing of the population will be a significant increase in Government expenditure, ie the proportion of the country's production that is reallocated through the process of taxation and benefit payment will be significantly increased.
This raises the political question of whether such an increase will be acceptable to the country (in particular to the working population of the country) and the economic question as to whether such an increase will be affordable. These are not questions which can be answered definitively now, as the answers will depend on future circumstances. Certainly the last one hundred years has seen a very large increase in the proportion of the country's production that is reallocated through the system of taxation and benefit payments. However this increase has been achieved most easily either under the influence of national emergency (ie war) or when the prosperity of the country was rapidly increasing. The problem of the ageing population is therefore best provided for at the present time by doing everything possible to ensure that the prosperity of the country continues to increase as rapidly as can reasonably be achieved. The major step that can be taken towards this end is an improvement in the rate of national saving.
On national interest grounds, therefore, the question of whether and how to finance the Commonwealth superannuation schemes resolves itself into the question as to which method would be the most effective in improving national saving performance. In some countries (notably Singapore) the Government has played a significant role in improving national saving - they have raised money from their people and contributed most of it towards national saving rather than current expenditure. However, in most other English speaking countries (including Australia) the tradition has been that Governments are spenders of money rather than savers: ie money raised by the Government whether by borrowing or taxation, is generally used for consumption rather than saving. One reason for this is that the effectiveness of national saving in improving the prosperity of the country depends not only on the level of saving but on the efficiency of its deployment.
The basic philosophy in Australia and similar countries has been that the most efficient deployment of savings will be achieved by the use of market mechanisms, rather than Government direction. It is consistent with this general philosophy that the Government has generally not funded the superannuation schemes for its own direct employees. If these schemes were funded the amount of the funds would be very large (over $60 billion) compared with total superannuation assets of $170 billion and total assets in financial institutions of $830 billion. The efficiency of the investment of this $60 billion would have a major impact on the performance of the economy generally. While various structures could be devised which would be designed to secure the efficiency of such an investment fund, their effectiveness is not assured. There is clearly a risk that the public sector would obtain an inordinate influence over investment markets.
Partial Funding
The decision on whether to fund the Commonwealth Government schemes is not a straight choice between no funding and full funding. Various partial funding approaches are possible. Thus of the current main government schemes the DFRDB is wholly unfunded while the MSBS, the CSS and the PSS have the member contributions and the employer productivity contributions funded. In addition, a number of GBEs (such as Telecom) have established separate funds for their employees. The Government requires that these schemes be fully funded in respect of accruals since their establishment. The CSS pays transfer values to these new schemes in respect of CSS accruals prior to their establishment. These transfer values are paid when members leave the service of the GBE, whereas in the CSS the benefit would not have become payable until retirement. There is therefore some advancement of the funding of the previous CSS accruals following the establishment of the new GBE schemes. Some other GBE schemes, such as Qantas, have been fully funded for many years.
This has enabled a partial funding of the Government's superannuation liability, but on a dispersed basis remote from direct government control.
The above arguments suggests that the appropriate level of funding should be determined primarily on the basis of achieving the best result for national saving, taking account not only of the amount of such saving but also the efficiency of its use.
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