A super way to turn a vicious circle into a virtuous one
Long overdue, “super-choice” finally arrived on July 1. Of course the overarching goal of superannuation is to constrain choice.
In Homer's Odyssey, Odysseus, sailing past the Isle of the Sirens, had himself lashed to the mast and his crew's ears filled with wax. That way he could hear the song which had lured other sailors to their death and yet live to tell the tale. In embracing self-constraint, Odysseus saved himself.
Our super system lashes some of our savings to the mast as we pass our own Isles of the Sirens. Plasma screen or home extension anyone?
But pity that generation of 20 and 30 somethings increasingly resentful at the way we 40, 50 and 60 somethings have bid up the housing market. When they’re madly saving their deposit, we force them to save another 9 per cent of their earnings and invest it elsewhere. And isn’t it odd that even as our leaders exhort us to “lifelong learning” they won’t let us draw on superannuation savings to fund a spell of study.
Within the Central Provident Fund - Singapore’s equivalent of our super system - superannuation savings are used to fund both home ownership and education. But where our superannuation system is still underdone, Singapore's CPF is paternalistic overkill. Against our 9 per cent, Singapore’s compulsory contributions are 40 per cent of earnings - down from 50 per cent two decades ago.
We shouldn’t copy Singapore, but its example does suggest that we’ve got ourselves into a bit of a vicious circle.
At 9 per cent of earnings, compulsory super still falls well short of meeting our retirement needs. So policy makers are rightly cautious about burdening it with additional tasks to fund. But no one is falling over themselves to increase compulsory super because in an impatient world with a three-year electoral cycle, its costs are immediate for most, and its benefits far away.
But a vicious circle is often just a virtuous circle in disguise. Increasing the flexibility in how we use super savings should make it politically easier to expand. And expanding super enables us to fund greater flexibility in the use of super savings. So that’s our way out.
First, tight targeting can reduce the drain that greater flexibility has on the super savings pool. We could limit pre-retirement access to super savings for appropriate purposes to some specific figure - say $20,000.
Some would reduce savings effort running down their super instead. But offsetting this, super flexibility would bring forward the date on which many bought homes and thus took on the higher savings rates that mortgage repayments often involve.
It’s true that many spend too much on their houses. But there are huge social and economic benefits from expanding home ownership among those of modest means. Home-owners enjoy lower living costs and greater security - fantastic assets in old age. And natural incentives to look after their properties cut out agents’ inspections and commissions. That’s efficiency.
We should keep cranking up compulsory super, which would be relatively painless if done as we used to - a per cent or so, every couple of years. But, since progress on this front has stalled along with most other economic reform that doesn’t involve giving money away, we should experiment with smarter alternatives.
First, we could require those accessing greater flexibility in the use of their super savings to commit to higher contributions. Second the new field of “behavioural economics” tells us that in situations of great uncertainty - like figuring out how much we should save now to fund a retirement that is several decades away - we look around to see what others do. (Terror of deviating from “normality” is one reason investment managers so rarely outperform the market.)
So, as US Bureau of Economic Research economists argued in their aptly titled paper Passive Decisions and Potent Defaults (which was picked up recently in an excellent book by four young Australians, Imagining Australia), we can influence savings by influencing people’s conception of what is “normal”. That’s easier from government, but it can even be done by an opposition - by simply making increasing your super contributions a talking point.
Our leaders could try making it normal for people to salary sacrifice an additional 1 per cent this year, 2 per cent next year and so on until total contributions are - say - 15 per cent of earnings.
And there’s something much more powerful than talk - inertia. We can establish a system whereby a progressively increasing portion of our own wages are automatically deducted from our pay packet and paid into super. You could still elect to contribute less - completing a form declaring you understand what you are doing and electing to reduce your non-compulsory contributions as much as you wanted.
But by tilting the burden of inertia and the frame of “normality”, we’d trigger a healthy amount of doubt in people’s minds before they unshackled themselves from the mast. If they did end up saving too little, they’d have done so by design rather than default.
To the extent these reforms succeed they’d yield a double dividend: solving the problems we face now, while minimising the degree of compulsion required in the future.
It’s an idea worthy of the wily Odysseus
