1. Australia's "compulsory" superannuation scheme

Some news from across the Tasman:

Tuesday, 18 September 2001
The Australian Bureau of Statistics said in a report, Superannuation: Coverage and Financial Characteristics, Australia, that one in six workers aged between 25 and 54 have no superannuation. It also found that 27% of people still working between the ages of 55 and 69 had no super.

The report describes how Australians over the age of 15 were preparing for retirement through super.

It said that 82% of the people who had not yet retired had accrued some super assets and had some form of contributions.

The remainder had accrued some super assets but no contributions were currently being made.
The report also found that 78 per cent of working men had super, compared with 71 per cent of working women.

The median super balance for males was $13,400 compared with $6,400 for females."

Apparently, these participation rates are explained by the exemptions for the self-employed and contractors. There will be no prizes for predicting a rise in the proportions of the self-employed and contractors in Australia. That would reflect Chile's experience. Homo economicus at work, so to speak.

2. So tax incentives increase tax?

A surprising result has been documented in a recent study from the US . Tax favoured 401(k) retirement saving schemes in the US are subject to an EET regime. New Zealand's Minister of Finance has expressed interest in a similar vehicle.

There is no doubt that an EET regime reduces current taxes. The US study doesn't ask "at whose expense and at what regulatory or economic cost?" but it concludes:

"Assuming a 6 per cent real return on assets, we find that low- and moderate-income households actually raise their lifetime taxes and lower their lifetime expenditures by saving in a 401(k) plan ……

The picture is quite different for high-income young couples …… 401(k) participation means major lifetime tax savings."

How can this be? Tax concessions save tax by rewarding approved behaviour, don't they? Apparently not for most savers.

The answer lies in the way that the US Social Security pension becomes taxable once other taxable income plus half the Social Security Pension exceeds $US25,000 a year (single) or $32,000 (married). Social Security is not income-tested - it simply becomes partially subject to ordinary Federal income tax once the threshold is exceeded. Also, the 401(k) withdrawal is fully taxed in the year of withdrawal. The marginal rate in that year can therefore be greater than normal.

The paper describes the results of a detailed, lifetime-based analysis. The authors conclude that a couple earning $US50,000 a year and contributing the maximum allowed to a 401(k) plan will raise their lifetime tax payments by 1.1%. However, a high-earning couple earning $US300,000 a year and contributing the maximum favoured amounts to a 401(k) plan will enjoy a lifetime reduction in taxes of 6.8%. That's because they earn so much that the 401(k) concessions don't lower and then raise their marginal tax rates or raise the share of the Social Security pension that is taxable. For them, tax concessions and tax liabilities have consistent lifetime values.

So, 401(k) schemes in the US can penalise low to middle earners and favour the top earners. Is this be another example of the Law of the Unintended Consequence? I've just forgotten why our Labour/Alliance coalition government might be in favour of tax breaks for retirement saving? Can someone please remind me?

3. So, why don't households save?
Another US paper tries to explain why so many households in the US don't save . The paper uses data from the 1992 Health and Retirement Study (HRS) to look at savings in older families in the US.

The author finds that there are vast differences in wealth holdings in households near retirement. A large proportion of those US households have little or no wealth . About 15% of all households have no "conventional" financial assets - not even a savings or cheque account. Also, about 30% of households whose head is close to retirement have done little or no planning for retirement.

The paper concludes:

"Planning is shaped by the experience of other individuals: individuals learn to plan for retirement from older siblings. They also learn from the experience of old parents. In particular, unpleasant events, such as financial difficulties and health shocks at the end of life, provide incentives toward planning. In addition, planning affects wealth levels as well as portfolio choice. Individuals who plan are more likely to hold large wealth and to invest their wealth holdings in high return assets, such as stocks.

Thus, planning plays an important role in explaining the saving behavior of many households."

Only 36% of all current workers in the US have tried to work out how much they need to save for a comfortable retirement. And that is in the face of a hugely subsidised, very expensive retirement saving industry. What are all those commission driven advisers doing?

Perhaps New Zealand's government-sponsored retirement education regime is a better use of tax dollars than trying to bribe people to behave sensibly. We'll see.

Michael Littlewood, Auckland, New Zealand