How will Aggregate Superannuation Flows and Private Saving be Affected?


Other things being equal, the two key recent policies, when fully implemented, directly add around $2 billion dollars of government money annually to the superannuation system, about $1 billion for each policy. These additions to superannuation are fully preserved to the preservation age of the owners; accordingly the earnings on the funds will be also added on average for many years.

Perhaps the more interesting question is how much additional private savings will be generated. Considering the surcharge first, the high income earners previously paying the surcharge are generally already undertaking some private saving. With the policy change, the relative concessionality of superannuation has been greatly increased at a time when it is generally expected that medium term capital gains in the residential housing market will be low to moderate, thus making negatively geared housing investment appear less attractive than previously. We expect a sharp increase in flows into superannuation of, say, $1 billion or more annually, around a one percentage point increase in the average proportion of salary saved in superannuation by this group (which is currently around 11%). Previous analysis (Reserve Bank, 2004) indicates that the offset for voluntary saving is around 100 per cent which, on the face of it, implies minimal increase in private saving from the behaviour change. However, as noted above, superannuation contributions are preserved, while most alternative investments are not, so after a few years we would expect some net improvement in private saving. Further, the dramatic reduction in the rate to zero in the same year as significant income tax cuts may bring about some genuine additional voluntary saving.

The costing estimates for the co-contribution policy have assumed significant take-up from new persons previously not making member contributions; an IFSA survey of intentions also indicated very substantial behavioural change. As the base saving rate for those in the relevant low to middle income range is low and the incentive structure is so strong, the offset from other voluntary saving is expected to be quite low; perhaps 70% of the extra saving may be additional saving. The earlier analysis in this paper demonstrates the excellent benefits available from taking up the co-contribution. This has been reflected in initial experience from the 2003-04 year, when the co-contribution was only dollar for dollar, which shows strong take-up, slightly greater than was assumed in the costing5. As a very broad estimate, additional private saving of about $250 m a year may flow from this source.

Putting the components together, an initial estimate is that there is likely to be around $3.5 billion additional flow into superannuation resulting from the policies. This compares with a base of about $40 billion a year of superannuation contributions. While some reductions in other forms of private saving will occur, most of the additional flow will be a net addition to private saving. This increase in private saving will combine with the strong preservation imposed within superannuation, to bring about, over time, a significant growth in the wealth and spending power of retirees.

5 The Treasury costing estimated co-contribution payments of $275m during 2004-05. For the period up to 31 March 2005, actual co-contribution payments of $291m have been paid to over 540,000 recipients. The next quarter payments will be much less than pro-rata, as the vast majority of likely payments have already been processed.