Does the Superannuation Guarantee discourage private saving?

Hello everyone, welcome to Retirement Puzzle brought to you by Monash Center for Financial Studies. In this podcast, we look at current critical trends in the pension sector and how the impact does all. My name is Bay Tui, a researcher with the center. I'm one of the three hosts of Retirement Puzzle, along with Dr. Nafong and Dr. Umurusba. In this episode, I discuss with Naf and Umurus an important opportunity they were given in 2019, Bell's Trillion Treasury. They presented their research on the impact of the superannuation guarantee on household savings, which was part of the review into Australia's retirement income system. Naf has a Ph.D. and is a charter holder with the CFA Institute. Her research interests include ESG, which stands for Environmental, Social, and Governance. She also researches shareholder activism, pensions, and superannuation. She has worked for the International Finance Corporation, which is part of the World Bank Group. My other colleague, Umur, has a Ph.D. from MIT and has worked for the World Bank. She researches sustainable finance and retirement planning. Today, we discuss their findings in more depth. Hi, Nanomal. Could you please tell us why you think that retirement income review considered the effect of superannuation guarantee on household savings is a very important issue? Um, thanks, Bay, for the question. Um, yeah, I think ESG are superannuation guarantee and household savings and the interaction between them are quite important. ESG or superannuation guarantee plays an important role in national savings and in the retirement income system of Australia as well. Our superannuation guarantee is mandatory super savings. Currently, it is 9.5 of wages, which is relatively high compared to the world. Uh, while some, some body may argue, uh, that it should even be higher. But if we look around for the UK, it is 8 percent. For Canada, it is 7.9 percent. And for the US, it is only 2.5 percent. Now, thanks to the accumulation of compulsory supercontributions over time, the value of Australia's super assets has grown from just over $73 billion, um, to over $3 trillion last year after about, you know, 30 years. So that was an increase of 40 times, um, during the last 30 years. And that means, um, it has a compound annual growth rate of 13 percent per year. In Australia, the fourth largest private pension system in the world, even when we have such a modest population. Okay, now, so what can we see at a household level? Does super-guarantee promote household savings in superannuation? Well, yes, at the household level, we also see a very good picture. We have seen, um, that over time, the average value of super asset tripled from about $80,000 to more than $240,000 during the last 20 years. And that represents more than a quarter of the household's network. Super assets have become the second largest asset on, um, the household's balance sheet, just after property. So maybe after about 30 years, since the introduction of superannuation guarantee, superannuation has become a major savings vehicle for Australian households. That is super savings. What about household private savings outside the super system? Uh, well, that is something that we are not sure, and that's, that motivated us, uh, to do this research. Because the main observation is that together with the accumulation of super asset over time, we also have seen a decline in the net household saving rates. The net household saving rate has reduced to just around 3% of disposable income in, um, you know, 2020. And it used to be about 8% just a decade ago. So while this is similar to the UK, and our saving rate is still higher than the US, um, our rate indeed is quite low compared to other developed countries. For example, friends or Singapore, um, both say for more than 10%. And Japan or Korea or Germany say from about 5 to 8%. Sure. Now, so it means that the mixed international evidence leads you to the question whether, you know, savings and a mandatory superannuation guarantee has reduced private savings outside Australians. Um, I think this is maybe one of the reasons that the retirement income review wanted to investigate as well. Um, and from what you said just now, now, the primary purpose of increasing superannuation guarantee is to grow, um, compulsory retirement savings. Um, but as far as I know, um, there are still some different views on whether it should be increased gradually, um, the current rate for the superannuation guarantee, um, is 9.5%. And the government legislated to grow the rate to 12% by 2025. And so, um, from your research, would you find about the impact of the increasing superannuation guarantee on household savings? Um, does that have any compulsory savings make people save more? Uh, no way. It doesn't. In fact, we found that it makes people save less. For example, when the superannuation guarantee went up from 9% to 9.25% in 2013, savings rate declined by 6.3%. And when it went up further to 9.5%, the following year, private household savings declined by 6.1%. However, from this finding, it is not possible to answer your question whether the superannuation guarantee rate should be increased from 9.5% to 12%. So you mean that when the superannuation guarantee rate increases, people actually have less incentive to save than themself? Uh, yes, but you got it correct. Okay. Um, it means that superannuation guarantee crowds out private savings. Um, do you know how big the substitution is, um, does it end to all the savings generated by superannuation guarantee or just a part of it? Um, now would you like to address this? Um, yes, thanks, babe. Yeah, we, we found a significant substitution between compulsory employers super contributions and household savings, but this substitution is not one to one. So basically, what we mean is, you know, when employers super contribution increases by one dollar, um, people reduce, um, their private household saving, but by less than a dollar and to be exact, each dollar of employer contribution reduces private household saving by 43 cents. Now, this basically means that compulsory super crowns out some private household saving. So the net effect on SG or on superannuation guarantee on saving is positive. And I would like to add here that about 24 cents out of this 43 cents. So more than half of this decline in net household saving came from increased mortgage repayments to buy property. Um, this means as, uh, employer contribution to super increases, more people borrowed to buy property and that leads to higher mortgage repayments. And therefore they have lower household saving. So, but also it means that households are not consuming all of this 43 cents. They are investing part of that in property and that in the long run increases their assets and add to the national wealth. Oh, thanks, now, um, you know, households are different in their level of wealth. Does your research have any evidence of the substitution in facts, accounts of different household households? Um, yes, we do, and we do look at the circumstances of the household. So in our sample, approximately 64% of household owned their home, including those with mortgages and 48% of households were classified as financially constrained. So what we found, we found evidence that the substitution effect is bigger for homeowners than renters. But meaning that home owners actually reduce private savings more, perhaps due to the impact of them taking on home mortgages. However, in terms of financially constrained households, there was no significant difference between the substitution effect for financially constrained households and those that are not. That means that financially constrained households do not reduce their savings more than non-financial constrained households. And this is consistent with prior behavioral literature, um, because financially constrained households would find it difficult to borrow at any time, and therefore they are less inclined to substitute the extra savings with higher consumption. Oh, thanks, now, um, so far, the household you were talking about are those who are legible to supernation guarantee. However, please bear in mind that not all australians are legible to supernation guarantee. So I'm very curious to know whether supernation guarantee has effect on savings for those household who cannot get access to supernation guarantee. Uh, yes, it does be. And this is another piece of interesting finding from our research. Uh, generally, one would not expect the supernation guarantee to affect the behavior of households who do not receive it right. But in our research, we find that the supernation guarantee affects the saving behavior of both groups, those who have access to it and those who don't. Both groups reduce their savings when the supernation guarantee rate went up. However, there are some differences. We find that the reduction in savings is bigger for those not eligible for super guarantee. Does it make sense, um, uh, I think it does. Uh, first of all households who do not have access to supernation guarantee are usually the low income owners, right? And the savings should be less than the high income households. Second, uh, the link between supernation guarantee and savings of these households, uh, it lies in how it affects their wages. As increase in supernation guarantee, slows wage growth, which other studies have found, the savings rate of low income households, uh, even if they are not affected by employer contribution can go down as well. Thanks, Umau. From your findings, we have shown that the, uh, supernation guarantee indeed play a very important role in household savings, no matter whether they have access to supernation guarantee. Um, but you also mentioned that in your research, household balance sheet has shifted over the year 15 years. And you also show that this was due to the accumulation of the compulsory super savings. Um, so Mo, could you like explain to us what these shifts are now and how big they are? Uh, yes, by sure. As now has already mentioned that even though there was some substitution between savings in super and savings outside super, households asset as a whole more than doubled in the last two decades, when we looked into the different components of their assets, we actually found that they showed a clear preference for some forms of assets over others. On average, in a four-year period, for each dollar their employer put in their super, the net will increase by two dollars and 21 cents. And the share of superannuation wealth in these was a dollar and 51 cents. And there was no increase in other forms of financial assets. Um, wow. So over the years, household had built up a good wealth in supernation, but now in other assets, is that right? But not exactly way they did not build up other forms of financial assets, such as bank savings or stock investment, but we observed a big increase in property in their portfolio, which was mainly the residential home. We find that one dollar increase in employer contribution was associated with one dollar 21 cents increase in property assets. One little secret I can share with you, Bay, is that we found these patterns first, while we're looking into the different components of household wealth in the Hilda data. And that led us to investigate the different components of their expenditure. Only then we found out that they were making larger mortgage payments as well. And at the end, it all added up. Umu, you just mentioned that the superannuation guarantee increases households debt, and at the same time the investment in property. Um, why do household's particular favor, favor property over other form of assets? We think there are two forces are at play here, Bay. One is how one can use the savings in superannuation upon retirement, and the second is how primary residence is treated in the whole retirement system. Under the current system, our retiree can withdraw all their superannuation savings as a lump sum when they retire, and they can then use it to pay off their leftover mortgages. I guess the knowledge that I have this part of savings growing in my super, which I can take out in 10 or 20 years to pay off my current debt, will certainly give me some confidence or incentive to borrow more in this specific case to take bigger mortgages. And that is the case for a large number of Australians. So, um, this explained the larger debt, but it doesn't answer the other part of the question. Um, why do they borrow money to invest in property? Well, I think the answer to this part of your question lies in the other feature of our retirement income system, um, which is how the H pension system treats the primary residence. So in the eyes of our H pension system, um, the different kinds of assets someone owns are not the same. So, some assets are excluded when the central link calculates the amount of H pension or retiree receives. And residential home is one of those assets. It is excluded in estimating the amount of H pension ones gets, whereas the other financial and non-financial assets such as superannuation, bank savings and other investments are part of that calculation. So, if you, if people think about way to park the money without affecting their eligibility for H pension in retirement, the best assets is the home. So, the residential home is not counted in asset test. So what about investment properties now? Um, yeah, that's a very good question. Other investment property will be counted in the asset test. It is just the residential home that is not counted. So, this makes the residential home a very attractive form of assets compared to others. It does not matter how big and invaluable your residential home is. It does not affect your eligibility for the H pension or the amount that you can get. Um, these two features of the system together provide very strong incentive to invest in residential property. This is what we found in the data households pay higher mortgages and have more assets in property when they have accumulated a bigger super balance. Okay, we have learned that the superannuation guarantee generates new savings and you know a partial relocation of a household wealth into property. What we now know is that for every dollar increase in compulsory superannuation, the associated decrease in private savings is less than $1. This suggests that the compulsory superannuation system in Australia generates a net overall savings increase. Thank you again, Nguyen Umo for sharing with us insights from your research. You have been listening to retirement parcel from the Monash Center for Financial Studies. If you have enjoyed it, please tell your colleagues and friends about us. You can subscribe to our show and don't get to leave us a review. If you want to collaborate with us on retirement related issues, please get in touch with us at [email protected].