Monday, October 03, 2011

Tax reform (Part 2)

The smh yesterday had an article written by Michael Pascoe on the pending fiscal doom of Australia.
The demographic shock of the retiring baby boomer horde, the soaring health inflation rate, the urgent need to lift our education investment to at least the OECD average and bringing our transport infrastructure up to speed all require someone to pay for them. And, no, there actually isn't a Hockeynomics Magic Pudding that will provide for everything by cutting back on a few existing government programs.

Read more:

What is curious about this article is the lack of inclusion of Australia's super wealth in the whole doom and gloom. Australia currently has one of the largest pools of superannuation in the world with $1.34 Trillion according to APRA. I thought this money was for people's retirement income. When you look at the nitty gritty detail of pensions and standards of living it becomes very complex. For some reason, people are retiring in Australia at 57 or 58 but have very small super funds to do so. These people won't qualify for the pension until they're 65 so why are they doing this?

However, a macro policy debate has to be based off macro data and if you think that this $1.34 Trillion barely existed 30 years ago and is expanding every year then surely some of the fiscal strain of the baby boomers is removed. It seems however that the debate never considers that an eventual draw down on this lump sum is a favourable thing whereas my view would be this was the whole reason for it. As more and more baby boomers retire, more and more of them will start to draw down on their super and with less work force adding to the number, the total value will decline. Any decline in the value of super through this process is a direct positive to the fiscal situation which would have made up this gap if the money didn't exist.

The total paid in pensions in 2011 is $40.7bn. So, it would be possible to pay this amount out every year for 30 years and still have money left in the kitty even if no further payments were made into super and no income from that super was obtained. This would take us up to 2041. The fact that more super contributions are going to be made and that income will be made (hopefully) on the money invested means that it is theoretically possible to pay the current pension out of super reserves for the next 50 years. The pension however, is expected to double over this time period. So we could theoretically maintain the current level provided by the government and draw down the rest through super. 

Unfortunately, superannuation has not provided the answer as this $1.34 Trillion is not evenly distributed across the population (check out the median versus mean in this publication by the ABS) and is a large contributor to what will become a worsening Gini Coefficient unless of course the government in 20 years time decides to tax this pot of gold and re-distribute it to those who did not accumulate super from those who did. Hmmm sounds like there is a magic pudding for the offering.

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