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Posts Tagged ‘Superannuation’

Back in 2013, when I was still doing a “question of the week” column, I suggested that Australian was the best option for those contemplating a new home in the event of some sort of Greek-style fiscal collapse in the United States.

I pointed out that America wasn’t in any immediate danger, though I can understand why some people are interested in the question since our long-run outlook is rather grim.

Anyhow, I picked Australia for several reasons, including its geographic position (no unstable welfare states on the border, which is why I didn’t select Switzerland), its private social security system (unfunded liabilities are small compared to the $44 trillion shortfall in America’s government-run system), and its relatively high level of economic freedom.

I’m not the only person to notice that Australia is a good place to live. A recent Bloomberg column noted that millionaires are moving Down Under.

They’re all going to the land Down Under. Australia is luring increasing numbers of global millionaires, helping make it one of the fastest growing wealthy nations in the world… Over the past decade, total wealth held in Australia has risen by 85 percent compared to 30 percent in the U.S. and 28 percent in the U.K., aided by the fact that Australia has gone 25 years without a recession. As a result, the average Australian is now significantly wealthier than the average American or Briton. …At the end of 2016 individuals held about $192 trillion of wealth worldwide…, with 13.6 million millionaires holding $69 trillion of this. There were 522,000 multi-millionaires, having net assets of $10 million or more.

The number of millionaires moving to Australia is especially impressive when looking at global data.

Here’s a map showing the nations with the most incoming and outgoing rich people (h/t: Steve Hanke). Maybe it’s because there’s no death tax in Australia, but it’s remarkable that a nation with less than one-tenth the population of the United States manages to attract more millionaires.

But not everybody is cheerful about Australia’s economic position.

I’m currently in Brisbane for a couple of speeches. I spoke earlier today about how market-oriented jurisdictions grow much faster over the long run when compared to nations with statist economic policy.

But I don’t want to focus on my remarks (much of which will be old news to regular readers). Instead, let’s look at the some of the information in a speech by Professor Tony Makin of Griffith University.

Two of his slides caught my attention. Let’s start with a depressing look at how Australia has declined in the global competitiveness rankings put together each year by the World Economic Forum.

This is not a good trend.

That being said, I think Economic Freedom of the World is a more accurate measure and it shows that Australia (whether looking at its absolute score or its relative ranking) has suffered only a small decline.

Here’s another chart that is depressing as well. It shows that the per-capita burden of taxes and spending has continuously increased even after adjusting for inflation.

To be fair, the numbers aren’t quite as bad when looking at taxes and spending as a share of gross domestic product.

Nonetheless, the trend isn’t favorable, which is a point I made back in 2014.

None of this changes my view that Australia is still a good choice for emigrating Americans. But it does leave me worried about whether it will still be the top choice in 10 years or 20 years.

For what it’s worth, the main recommendation in my speech was for Australia to adopt a spending cap, similar to the ones that exist in Hong Kong and Switzerland. I also should have suggested sweeping decentralization since the government actually is open to that idea.

P.S. One of the most disappointing things about Australia is that the country’s foreign aid bureaucrats are trying to bribe/coerce Vanuatu’s government into adopting an income tax.

P.P.S. Professor Makin was the author of the report I recently cited about the failure of Australia’s Keynesian spending binge.

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As part of my “Question of the Week” series, I said that Australia probably would be the best option if the United States suffered some sort of Greek-style fiscal meltdown that led to a societal collapse.*

One reason I’m so bullish on Australia is that the nation has a privatized Social Security system called “Superannuation,” with workers setting aside 9 percent of their income in personal retirement accounts (rising to 12 percent by 2020).

Established almost 30 years ago, and made virtually universal about 20 years ago, this system is far superior to the actuarially bankrupt Social Security system in the United States.

Probably the most sobering comparison is to look at a chart of how much private wealth has been created in Superannuation accounts and then look at a chart of the debt that we face for Social Security.

To be blunt, the Aussies are kicking our butts. Their system gets stronger every day and our system generates more red ink every day.

And their system is earning praise from unexpected places. The Center for Retirement Research at Boston College, led by a former Clinton Administration official, is not a right-wing bastion. So it’s noteworthy when it publishes a study praising Superannuation.

Australia’s retirement income system is regarded by some as among the best in the world. It has achieved high individual saving rates and broad coverage at reasonably low cost to the government.

Since I wrote my dissertation on Australia’s system, I can say with confidence that the author is not exaggerating. It’s a very good role model, for reasons I’ve previously discussed.

Here’s more from the Boston College study.

The program requires employers to contribute 9 percent of earnings, rising to 12 percent by 2020, to a tax-advantaged retirement plan for each employee age 18 to 70 who earns more than a specified minimum amount. …Over 90 percent of employed Australians have savings in a Superannuation account, and the total assets in these accounts now exceed Australia’s Gross Domestic Product. …Australia has been extremely effective in achieving key goals of any retirement income system. …Its Superannuation Guarantee program has generated high and rising levels of saving by essentially the entire active workforce.

The study does include some criticisms, some of which are warranted. The system can be gamed by those who want to take advantage of the safety net retirement system maintained by the government.

Australia’s means-tested Age Pension creates incentives to reduce one’s “means” in order to collect a higher means-tested benefit. This can be done by spending down one’s savings and/or investing these savings in assets excluded from the Age Pension means test. What makes this situation especially problematic is that workers can currently access their Superannuation savings at age 55, ten years before becoming eligible for Age Pension benefits at 65. This ability creates an incentive to retire early, live on these savings until eligible for an Age Pension, and collect a higher benefit, sometimes referred to as “double dipping.”

Though I admit dealing with this issue may require a bit of paternalism. Should individuals be forced to turn their retirement accounts into an income stream (called annuitization) once they reach retirement age?

I’m torn on this issue. Paternalists sometimes do have good ideas, but shouldn’t people have the freedom to make their own decisions, even if they make mistakes? But does the answer to that question change when mistakes mean that those people will be taking money from taxpayers?

Fortunately, I don’t need to be wishy-washy on the other criticism in the study.

Australia’s system does have shortcomings. It is heavily dependent on defined contribution plans and is vulnerable to weaknesses in such programs.

I strongly disagree. A “defined contribution” account is something to applaud, not a shortcoming.

The author presumably is worried that a “DC” account leaves a worker vulnerable to the ups and downs of the market, whereas a “defined benefit” account promises a specific payment and removes that uncertainty. Sounds great, but the problem with “DB” accounts is that they almost inevitably seem to promise more than they can deliver. And that seems to be the case whether they’re supposedly based on real savings (like company retirement plans or pension funds for state and local bureaucrats) or based on pay-as-you-go taxation (like Social Security).

*Since I’m somewhat optimistic that America can be saved, I’m not recommending you head Down Under just yet.

P.S. I’m also a huge fan of Chile’s system of private accounts. At the risk of oversimplifying, Chile’s system is sort of like universal IRAs and Australia’s system is sort of like universal 401(k)s.

P.P.S. There’s much to admire about Australia, but its government is plenty capable of boneheaded policy. Heck, the government even provides workers’ compensation payments to people who get injured while having sex after work hours, simply because they were on a business-related trip. Talk about double dipping!

P.P.P.S. Here’s my video explaining why we should implement personal retirement accounts in the United States.

P.P.P.S. The death tax has been abolished in Australia, so there’s more to admire than just personal retirement accounts.

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Welcome Instapundit readers. Notwithstanding my next-to-last paragraph full of caveats, some people are saying I’m too soft on the Aussies. This previous post should disabuse people of that notion.

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The Economist magazine has a couple of good articles about Australia’s increasingly enviable economic status. Here’s a blurb from the first article, which outlines the pro-market reforms that enabled today’s prosperity.

Only a dozen economies are bigger, and only six nations are richer—of which Switzerland alone has even a third as many people. Australia is rich, tranquil and mostly overlooked, yet it has a story to tell. Its current prosperity was far from inevitable. Twenty-five years ago Paul Keating, the country’s treasurer (finance minister), declared that if Australia failed to reform it would become a banana republic. Barely five years later, after a nasty recession, the country began a period of uninterrupted economic expansion matched by no other rich country. It continues to this day. This special report will explain how this has come about and ask whether it can last. …With the popular, politically astute Mr Hawke presiding, and the coruscating, aggressive Mr Keating doing most of the pushing, this Labor government floated the Australian dollar, deregulated the financial system, abolished import quotas and cut tariffs. The reforms were continued by Mr Keating when he took over as prime minister in 1991, and then by the Liberal-led (which in Australia means conservative-led) coalition government of John Howard and his treasurer, Peter Costello, after 1996. …By 2003 the effective rate of protection in manufacturing had fallen from about 35% in the 1970s to 5%. Foreign banks had been allowed to compete. Airlines, shipping and telecoms had been deregulated. The labour market had been largely freed, with centralised wage-fixing replaced by enterprise bargaining. State-owned firms had been privatised. …the double taxation of dividends ended. Corporate and income taxes had both been cut.

This chart (click for a larger image), from Economic Freedom of the World, presents a more rigorous look at this period. It shows how Australia’s economic freedom ranking had dropped to as low at 19 (out of 72 nations measured) and now is up to 8 (out of 114 nations measured). This is akin to moving from the 74th percentile to the 94th percentile.

There is also an accompanying article about Australia’s private Social Security system. Called superannuation, these personal accounts have generated tremendous results.

…most Australian workers, over 8m in total, now have a private nest-egg for their old age. No tax is paid when members withdraw from their fund; they can take all they want as a lump sum, subject to a limit, or buy an annuity. Aussies are now a nation of capitalists. At the same time the state pension system, and therefore the taxpayer, is being progressively relieved of most of the burden of retirement provision, since eligibility for the state pension depends on both assets and income. As supers take over, the provision for old folks’ incomes will be almost entirely based on defined contributions, not defined benefits. So Australia is in the happy position of not having to worry too much about the pension implications of an ageing population… The supers…have created a pool of capital in Australia that might not otherwise have existed. Collectively worth about $1.3 trillion—much the same as GDP—they have made Australia the world’s fourth-largest market for pension savings.

Australia is not exactly Hong Kong. Marginal tax rates are still far too high. The burden of government spending is lower than in the United States, but is still far too onerous. Nonetheless, the Aussies have made impressive strides in reducing the overall size, scope, and level of government interference and intervention. And this has translated into much better economic performance.

This video uses the Economic Freedom of the World index to explain why comprehensive free market reforms (like Australia) generate the best results.

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