Why on earth do we need compulsory super? Economists will tell you it's because we are dumb, if they think we need it at all.
Many think we don't need it. They say there's ample evidence that we save about what we should, given our circumstances. It's true that in China people save more. But the circumstances there are different. There are no pensions or unemployment benefits. The Chinese probably save about what they should given their circumstances, as we save about what we should given ours.
Change a Chinese family's circumstances by taking it out of China and its savings rate will drop. A survey of immigrants from China to Canada finds their savings rates are at first lower than those of Canadians, adjusting over time to the Canadian average. The message is that circumstances rather than cultures determine saving, suggesting we are not dumb but quite sophisticated in the way we adjust our budgets.
And we are not low savers. Both before and after the introduction of compulsion, Australia's national saving rate has been close to the international average.
But as one part of saving (compulsory super) grew another part (personal saving) dropped. A Reserve Bank study finds that more than one third of the first lot of increases in compulsory super were offset by cuts in other forms of savings or increases in borrowing. It makes sense to borrow more knowing there's super behind you and it makes sense to save less.
It's sophisticated, but it might still be wrong. That's what the economists who think we are dumb suspect. They say we are still not saving enough.
Enough for what? For what the Association of Superannuation Funds calls a "modest" retirement. It puts a figure on it. It says we need $33,664 per year for a modest retirement. To retire "comfortably" it says we need $58,128 a year, a sum it calculates by including overseas travel and kitchen or bathroom renovations.
Most Australians don't earn $58,128 a year. The so-called median wage, below which half the population earns less and above which half earns more is around $50,000. Many Australians don't get to live "comfortably" before retirement. They would be unimpressed by a suggestion that they should make themselves even worse off in order to live better in retirement than they had while working.
And they mightn't be too keen on the so-called "modest" sum of $33,664 either. It includes $96.15 per week for spending on travel, which is quite a lot for someone who no longer goes to work. It includes $73.78 per week for "leisure".
They might take the view that an annual pension of $19,916 is good enough.
Or they might be dumb - specifically they might be irrational in the way they value the future. Most of us value the present more than the future. We are keener to receive $100 today than to get it next week. Economists call the rate at which we discount the future our "discount rate".
Discount rates are everywhere. Construction projects use them. Buildings and roads aren't built to last forever because the future is judged to be less important than the present. They are one of the reasons we have interest rates.
Discounting becomes irrational if it is "hyperbolic". Here's an example. If I ask you whether you would rather sacrifice money today or next week you would probably opt for next week. But if I asked instead whether you would rather sacrifice money in a year's time or in a year and one week you probably wouldn't bother to ask for the extra week. An extra week matters when it's an extra week from now, it doesn't matter much if it's in the future.
Hyperbolic discounters are happy to save so long as it is in the future. "Now" is never the right time. Compulsory super is said to help them.
But so too can cleverly constructed programs, without coercion. One is called "Save More Tomorrow" developed by the US economist Richard H. Thaler. Entirely voluntary, the program allows employees to direct a set proportion of every future pay increase into a superannuation-style account. It works because they are asked to sign up today to something that isn't going to happen until the future. Being hyperbolic discounters they don't mind. And although they can withdraw in the future, 80 per cent of them don't.
Compulsory super isn't going anywhere. We've had it for 22 years. But the arguments for it are weaker than they seem. The arguments for lifting it further are weaker still.
Peter Martin is economics editor of The Age
Twitter: @1petermartin
