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Seeking a fair GHG reduction target:part 6- Equitable Reduction Targets

This is the 6th sixth post in the series: " Seeking a consensus on GHG reduction targets ". In earlier posts we suggested 4 prop...

Wednesday, 25 November 2015

Australia For Sale!

The recent rejection of the proposed sale of the Kidman property exposes Australia's skittish oversight of foreign investment. The Kidman property with some 1.3% of Australia's land area was up for sale at well under $500m (see Government refuse to authorise sale of Kidman). One could project the price of the continent at a mere $50 B. A Bargain!  OK, make it $48B, and we will throw in Tasmania.

Concerned about the vocal 'special interest' portion of its support base, read Nationals, the LNP Government has taken the prudent decision that the transaction would be contrary to the 'National interest'. For the government it was fortunate that the property included an area adjacent to the weapons testing range within the Woomera protected area, so it could, sort-of, argue security reasons. 

Almost juxtaposed with the Kidman non-sale was the recent long term lease of Darwin port by the Northern Territory government, without any oversight by the FIRB. This transaction seemed to pass under the radar and was investigated, approved and announced virtually before anyone in the Federal government knew of it. I guess this is my impression, perhaps some did know and are now keeping mum 

The proximity of these two decisions exposes the vagaries of Australia's management of Foreign investments. Not a satisfactory situation given the strategic value Australia places on overseas funds.

Australia needs foreign capital

Australia has always encouraged free enterprise. As a large country with unbounded natural resources and a small capital base, it is ever hungry for investment funds. In agriculture and mining our industries have gained international prominence, no doubt assisted by foreign capital. A win-win for the investor and the country.

Nevertheless while there is widespread general acceptance that foreign investment is good for the country, from time to time some interest groups have raised issues. Be it farmers wanting to protect their market power, against a foreign owner of another Australian grown crop, or Unionists who want to ensure labour rates are not driven down by lowly paid imported labour, just to name a few. Despite these occasional vocal outcries, our limited subsidies, low tariffs and multiple free trade agreements are testimony to Australia's total commitment to free trade. 

What then is the role of the FIRB? What types of investments are not in our national interest? Why would the government ever interfere to prevent a foreign entity from purchasing an Australian asset?

So what is the national interest?

The rules whereby the FIRB gauges the national interest are intentionally vague. They give virtually total freedom for any government to reject a transaction.

As stated in the guidelines; -

"The Government determines national interest concerns case-by-case. We look at a range of factors and the relative importance of these can vary depending upon the nature of the target enterprise. Investments in enterprises that are large employers or that have significant market share may raise more sensitivities than investments in smaller enterprises. However, investments in small enterprises with unique assets or in sensitive industries may also raise concerns." - Australia's Foreign Investment Policy

The guidelines then proceed to describe the criteria by which applications are judged.

I will limit myself to just a few comments, you can read the full text here.
  • National Security - "the extent to which investments affect Australia’s ability to protect its strategic and security interests" Though not explicitly mentioned infrastructure assets essential during natural disaster or war could be regarded as strategic assets. Foreign investment into the construction or ownership of such assets could compromise the national interest. These include hospitals, fuel supplies, power, water utilities, roads, communications infrastructure, defence logistics and so on.
  • Competition -   "whether a proposed investment may result in an investor gaining control over market pricing and production of a good or service in Australia." and most importantly the " Government may also consider the impact that a proposed investment has on the make-up of the relevant global industry, particularly where concentration could lead to distortions to competitive market outcomes. A particular concern is the extent to which an investment may allow an investor to control the global supply of a product or service"
  • Other Australian Government policies (including tax) - "the impact of a foreign investment proposal on Australian tax revenues. Investments must also be consistent with the Government’s objectives in relation to matters such as environmental impact."
  • Impact on the economy and the community -  "the impact of the investment on the general economy,.. the impact of any plans to restructure an Australian enterprise following an acquisition,.. the nature of the funding of the acquisition, what level of Australian participation in the enterprise will remain after the foreign investment occurs,.. the interests of employees, creditors and other stakeholders."
  • Character of the investor - "the extent to which the investor operates on a transparent commercial basis, .. is subject to adequate and transparent regulation and supervision, corporate governance practices,..Sovereign Wealth funds' investment policy and how it proposes to exercise voting power in relation to Australian enterprises in which the fund proposes to take an interest."
  • Foreign government investors - "considers if the investment is commercial in nature or if the investor may be pursuing broader political or strategic objectives,.. the governance could facilitate actual or potential control by a foreign government , for partial government ownership..the size, nature,composition of any non-government interests, including any restrictions on the exercise of their rights as interest holders, whether foreign government investors that are operating on a fully arm’s length and commercial basis." 
  • Agricultural Investments - "the effect on the quality and availability of Australia’s agricultural resources, water, land access and use, agricultural production and productivity, capacity to remain a reliable supplier of agricultural production, biodiversity,  employment and prosperity in Australia’s local and regional communities."
  • Real Estate Investments -  there are well defined limits on when investors are required to have FIRB approval for the purchase of Real Estate whether agricultural, commercial or residential. Foreign investors are not allowed to purchase any existing residential real estate. All   All such investments are evaluated in accord with the rules above. 
These cover the, more or less, explicit rules on foreign investment.  

How have these rules been applied?

Here are some press articles/releases relating to some recent FIRB decisions;-
The vast majority of FIRB applications are approved and the most common reason for rejection is Competition.

Once a buyer and a seller have agreed on a transaction there are many vested interests to see it go through, so it takes a tough stance by any government to reject an application. Therefore every rejection seems to get far more attention than an approval. 

However not all approvals are accepted by the community. The recent Darwin port lease has had repercussions all the way to the White House, and its reverberations are still being felt in government. I would suggest "watch this space".  This however is unusual.

Most objections come from vested interests. They are often supported by a vocal outcry from the 'man-in-the-street, who does not gain directly from any sale and looks with suspicion at purchases of our daily brands by overseas interests. "Why would the overseas company buy this if it wasn't worth the money?" "We will only end up paying more for the goods."

These arguments may have an element of truth, but transactions carry a risk for the purchaser too, so as a general rule I would just let free enterprise work.

However I do perceive some problems. There are three areas where weak governments fail to reject transactions that plainly conflict with, an admittedly broader view of, our 'National Interest'.

1. Strategic Assets
The National Security criterion is not generally applied to cover assets which could be vital in the unlikely event of a significant natural disaster or even war. In such a situation Australia has to retain the means to support its citizens. This consideration should ensure that Foreign companies cannot control any component of the infrastructure required in such an event.

The recent lease of the port of Darwin is a blatant example of poor strategic thinking.

Here is another example, that may fall into this area. Consider our supply of oil, a vital commodity to keep our economy flowing. Over recent years a number of oil refineries in Australia have been closed by their foreign owners, leaving Australia dependent on imported fuel largely from Singapore. Today Australia has just 4 oil refineries with a capacity <500,000 barrels/day about 50% of the daily usage. This cannot be strategically sensible. What if something happened to disrupt the delivery of oil from Singapore. I don't know the impact of a sudden halving of oil available to Australia, but my guess is it would be severely debilitating.

Maybe this is not just the result of an FIRB problem, but I suspect it started as one a long time ago. Poor decisions to protect strategic assets have consequences many years into the future, so governments have to take a long term view. Unfortunately this is not one of their strengths.

I am not aware of other situations like this but I fear there are many.

2. Market Constriction
When a foreign company purchases an Australian producer and starts exporting product directly into their home market, it will impact his Australian competitors. It can result in 'Market Constriction' whereby the overseas market for the remaining Australian producers of the product is reduced due to the foreign owner receiving preferential market power in the home country.

Consider for example a Saudi Arabian company purchasing a large Australian live-cattle exporter. Given there are many other live-cattle exporters in Australia this transaction may not be rejected on straight-forward competition grounds. However the Saudi Arabian company could have preferential access to his home market displacing other Australian companies.

If this was proven it should be a valid argument to justify rejection on Competition (Market Constriction) grounds. This perspective can apply quite widely. Many agricultural producers have been purchased over the years by Japanese and Chinese companies. No doubt each of these companies are trying to control their supply lines to ensure quality and price continuity. But it can be against Australia's national interest if it limits access to all other Australian companies into the foreign markets.

This potential impact of an investment is specifically covered under the Competition clause above. However it is used very sparingly.

Market Constriction reduces the markets into which competing suppliers can sell product. Over time this can lead to their demise. Therefore Market Constriction should be more actively enforced when evaluating FIRB applications.

3. Reciprocity
Trade is a two way street. Any trader knows that you do not bargain away anything that has a value without gaining some pay-off from the other party. It is an item to be negotiated. Yet our trade conditions are unbalanced.

Our inclination to provide open market access to the world, has us leaning too far. We are offering countries conditions in their trade with us, that they do not offer to us. By doing so we are providing something of real value, access to our markets, without receiving access in return. This is hard to rectify after the event. What is the incentive for a country to provide access to markets to our producers if they already have access to ours.

For example we allow Chinese and Japanese corporations to purchase land assets in Australia while Australian companies do not receive the same rights in China and Japan. Of course this does not only apply for land. It applies to every market segment; airline routes, education, agriculture. Australia should restrict access to any of Australia's market segments to only those countries who provide reciprocal access to their corresponding market segment or a negotiated alternative market segment(s). It must be a two way street.

It is not in Australia's long-term national interest to give-away market access without receiving market access in return. Therefore Reciprocity should be a part of the National Interest test when evaluating FIRB applications

Summing up

It is singularly appropriate for Australia's governments to maintain the 'open for business' leaning in their evaluations of FIRB applications. This has served Australia well over the years.

However there are three areas where the rules applied more rigorously;-
  • All transactions relating to strategic infrastructure should be given extra scrutiny and from a long-term perspective. If there are any doubts at all the transaction should be rejected.
  • The impact of a transaction on competing Australian suppliers in international markets should be watched more closely. It is in Australia's national interest to ensure market power is not exercised unfairly and any transaction that would lead to market constriction should be rejected.
  • Australia should not grant access to any market segment to a company owned by a country which does not provide reciprocal access to that market segment to Australian companies
Any tightening of foreign investment rules is not easy. There are many, powerful, indeed voting, vested interests. Nevertheless without the addition of these three criteria is our National interest really protected?

Wednesday, 18 November 2015

Seeking a fair GHG reduction target - Part 5: Who is responsible?

The Paris Climate Change conference COP25 is almost upon us. So this the 5th part in our series on "Seeking a fair GHG reduction target" is especially relevant. In part 4 we presented four porpositions which form the basis of a broad consensus on climate change action.

These are ; -

1. Each country has to mitigate their own contribution to CC.

2. If global emissions are projected to produce global warming beyond the 2C degree target, then all countries have to reduce their emissions in the same proportion that they contributed to CC.

3. Developing countries are allowed a proportionate quota of 'free emissions'.

4. Countries which face the burden of climate change have to be compensated by those who caused it.

Propositions 1 and 2 recognize that those countries which have contributed most to climate chance should take the most action on abating emissions. You caused it, then you clean it up. If collective action is to be taken, then the fair distribution of effort is in direct proportion to each country's contribution to the problem.

Proposition 3 compensates developing countries for the 'Free emissions' of already developed countries. Developed countries reached their high standard of living on the back of 'free emissions' in the past. Developing or yet to develop countries have an equal right to a proportionate quota of free emissions.

Proposition 4 covers financial compensation for remediation. It recognizes that some countries who have contributed little to climate change face a disproportionate cost to mitigate its impact on their economies. The cost of such remediation should be borne by those countries that have caused the problems and in the proportion in which they contributed to the problem.

In this part of our series we focus on proposition 1 and determine which countries are responsible for the global warming we have experienced to date.

Who is responsible for our global warming?

The key measure for proposition 1 and indeed a component of each of the other propositions, is how much has a country contributed to climate change.
A country's contribution to climate change is a measure of the impact on global temperatures due to all the activities of the country including all emission and absorption of GHGs via power generation, industry and land use. It is not its current emissions rate, but its total emissions since industrialisation, and it needs to be adjusted for imports and exports. The country that imports products must bear the emissions used in their manufacture. So the measure we need is ; -

Each country's contribution to CC due to their cumulative emissions over time 
adjusted for their use of land and for the impact of imports and exports.

This is not a simple measure and it is not readily available. However there have been a number of studies which have looked at this question. Most notably the 2013 paper by Mathews et al, of Concordia University titled National Contributions to observed Global Warming. The paper does not focus on GHG emissions or indeed GHG emissions rate, measures that we have found to be misleading. The study looks at each countries' cumulative contribution to Global Warming and calculates the impact directly as a change in global temperature in degrees centigrade. The Concordia University Paper (CUP) provides a baseline set of calculations for our measure and also ranks the countries of the world as to their contribution to climate change to date.

The table below shows the ranking of countries as provided in the paper.

A key limitation of these figures is that they exclude the impact of imports and exports. This significantly distorts the contribution to CC of both exporters (eg China, Russia) and importers (eg US, Europe).

There have been a number of recent studies which have looked at this question. However their calculations are generally based on emission rates not on total emissions. Nevertheless they provide some indication of the type of adjustment that is likely when imports/exports are taken into consideration.  Boitier ,in his paper "CO2 emissions production-based accounting vs consumption: Insights from WIOD databases"  provides both a methodology for calculating the 'consumption emissions we are looking for together with tables showing the resulting changes in emission rates for arange of countries and for the years 1995,2000,2005 and 2009.

The Table for 2005 is reproduced below.

We can use these two papers to calculate the trade adjusted cumulative impact on global warming of the top emitters. In Table 3 below I have taken the results of Table 1 and adjusted it for the impact of imports and exports using Table 2.  This is of course simplistic as it uses the imports and exports at a single point in time to adjust the cumulative impact since 1800, but that is all I had to work with.
It provides a 'first estimate' showing which countries are responsible for climate change to date taking into account all the major factors.

Table 3 Top 20 countries contributing to CC

While we have now adjusted, at least approximately, for the impact of imports and exports, there are other limitations of which we should be aware. The authors of the respective papers have themselves noted a range of assumptions in determining their results which need to be revisited and refined if the resulting calculations are to receive widespread acceptance. Moreover the figures have to be brought up to date. The tables above have used figures to 2005.

Despite these limitations, we can see that in principle the relative contribution of countries to CC can be calculated and Table 3 gives a first approximation. No doubt if these measures take on greater import the figures will be scrutinized and refined. For our purposes we will use Table 3 as our measure of the relative contribution to CC of the top emitters.

A few surprises?

The conventional presentation of the top 20 emitters uses annual emission rates and ignores the impact of imports and exports.

Table 4 below shows the Top 20 emitters as 'conventionally' presented.

Comparing Table 3 and 4 we can see significant differences. Several top 20 annual emitters completely leave the top 20 contributors list (Iran, South Korea, Malaysia), and others not in the top 20 for annual emissions today have contributed significantly since industrialization (Columbia, Argentina, Thailand). China which occupies top position in the table of emitters with some 60% greater annual emissions than US, moves to 3rd position in contributors with a contribution of 70% less than the US. It is a similar story for virtually all the places.

Clearly by looking at cumulative contribution to global warming we get a different picture than if we look at just annual emissions. It is time for the global community to acknowledge that the focus on annual figures is misleading. It tends to serve the industrialized developed countries by understating their contribution to Global Warming to date. No wonder previous CC conferences have acrimonious disagreements between developed and developing countries. Perhaps a proper recognition of who has caused the problem can lead to greater consensus.

In the next part of this series we will use look at each of the 4 core propositions and derive a process for setting fair reduction targets.

Wednesday, 11 November 2015

Super solutions

The Tax Reform whack-a-mole has seen many an idea thrust into the limelight by some interest group, only to be thumped by opponents pushing their own favorite policy. Superannuation seems to be the focus, at least for a few days. So I thought I would take the opportunity to highlight the 5 reform suggestions I raised in an earlier post (Making Super work).

Don't throw the baby out with the bath water

Lets start by observing that there is a purpose for Super. It is to allow workers to save during their working life for a fully self-funded retirement. We know from previous posts (see Not so Super) that without reforms this will not happen for all but the very highest income earners.

The current focus on Super started from a tax reform perspective, and the reason the tax reform debate has turned to Superannuation is to squeeze money out of the system. Specifically to tax the rich, or more politically, to reduce the unfair tax discounts enjoyed by high income earners.

Remember from our projections that these are the only people who will live off their Super without a welfare supplement. So lets make sure that any changes to Super do not end up increasing the number of people on the aged pension.

Keep an eye on the prize

In order for a worker to be fully self-funded in retirement their Super fund balance at retirement must yield an annual income greater than the Aged Part-Pension cut-off.
Lets call this target balance the Self Funded Retirement Threshold. Today with the Aged Part Pension cut-off at just below $50,000 pa, at a yield of, say, 5% the Self Funded Retirement Threshold (SFRT) is $1,000,000. 

All superannuation policies should be focused on every retiree reaching this super balance.

5 Changes to Improve our Super

This objective leads us to consider a wide range of changes that can both lower the burden on our welfare budget and yet increase the number of workers achieving self funded retirement.

Here are 5 suggestions; -
  • Taxation discounts on super contributions should be capped. There should be NO tax discounts on super contributions if the projected balance is greater than the SFRT.
  • Super fund annual contribution limits should increase as the employee approaches retirement . There is no cost to the government in doing this as the tax discounts automatically cut off if the projected balance is greater thant SFRT
  • Retirees should not be allowed to withdraw a 'lump sum' from their Super if by doing so its remaining balance would fall below the SFRT
  • Government could issue a government guaranteed Superannuation Bond (SAB) with a fixed rate of return above inflation, say 5%.  There are two benefits to this approach. The government receives a ready source of funds in return for the tax 'discount' on super contributions. Funds that can be used for long-term infrastructure projects. At the same time the individual receives a guaranteed inflation adjusted return on at least part of their super contributions. There should be strict rules pertaining to this special purpose SAB. Here are some suggestions; - 
    • Any SAB investment cannot be withdrawn till retirement and its value at retirement is the inflation adjusted value of the sum invested, ie no capital gain. 
    • The maximum value of investment for any individual would be limited to the SFRT. 
    • The government could manage the SAB to reduce debt and to fund infrastructure projects. 
  • It could be mandatory for Super funds to purchase SAB as part of their annual contributions. This 'compulsory' contribution could be equivalent to the value of the tax discount provided on Super contributions. eg if a worker contributes $10,000 in any year to his super and has saved $1500 in tax in making this contribution he would have a mandatory contribution of $1500 to the SAB. 
The current spate of suggestions floating on the airwaves seem to be nothing more than a tax grab. Blind application of such schemes could save money but may further diminish any likelihood of the Superannuation system achieving its goals.

Saturday, 7 November 2015

The fairness test

It has been a busy week on planet Earth. Russia bombing ISIS and losing planes, chairs being arranged for the upcoming Paris Climate Change extravaganza, new 'draconian' security laws being introduced in the UK, Prime Minister Trudeau with 50% women "because it is 2015" and the steady background drone of migrants crossing borders in Greece, Serbia, Hungary, Austria and Germany.

Despite these distractions on the world stage, Australia has managed to cover topics of greater import; recovering quickly from a bad day at the World Cup with a good day at the Melbourne cup. Against 100:1 odds Prince of Penzance guided to victory by Michelle Payne, a young, pretty (dare I say that), outspoken, female jockey from a large family raised by a single Dad. It was indeed a fairy tale dream for the battler, and could not have been scripted better. The media hit the jackpot and have been milking it since the day.

But I digress. Back at the political coal face our freshly minted PM, Malcolm the optimistic, has launched the tax reform campaign with the much repeated mantra that any tax reform will be fair! (see 'Fairness is absolutely critical': Malcolm Turnbull says tax reform will be more than GST). I guess such an open and early declaration is sensible given the howls of criticism levelled at the previous leader's policies. But of course this won't stop anyone with a vested interest.

You and I, dear reader, are not subject to such earthly vices and can take a more objective look at this question. So despite all the other topics beckoning for some attention, I will focus on this one. What is Fair? By clearly nailing his colours to the fairness mast how high a threshold has our Mr T put on this tax reform? Is it even possible to create a fair set of changes? Indeed what is the Fairness Test?

Lets be clear the tax system is not fair today

At the outset we must recognise that we don't start with a level playing field. The current tax system is not 'fair' in any sense.

Consider Income Tax. The lowest earners pay no tax and receive substantial welfare payments. At the same time the top 10% of income earners pay 50% of the taxes. The following graph shows this distribution.

Table: Who is Paying Income Tax (from Fact Check)

Similarly for Company Tax, many large multi-nationals pay less tax than local companies because they manage to re-locate their profits to lower tax regions. Is this fair?

How about Payroll tax? Again states governments charge different payroll taxes in different states. What is fair about the cost of employing a person being different in one state than another?

Same with GST, it is applied to ice cream but not plain cream, to tampons but not condoms and so on. Is that fair?
Indeed with whatever definition of fairness you may care to dream up, there is nothing fair about the current range of taxes levied on individuals and businesses.

Our tax system seems to be a random concoction of rules resulting from the capitulation of governments to screeching interest groups over the decades. It sort of reminds me of the 1000 monkeys on 1000 typewriters ..

So lets be clear the current tax 'system' is not fair today.

The objective is to make the changes 'fair'

Lets take a charitable interpretation of Mr T's pronouncement, heaven knows there will be many others who wont. Lets take it that the government does not want to redress the inherent unfairness in the current system, but will ensure any changes to the system will be fair. So we need to look at the changes alone and not the sea of problems onto which they are to be applied.

Of course Mr T has not explained this and I have already heard many a call from the vested interests asking for re-dress of existing tax grievances.

What are the 'fairness' criteria?

Even with this more limited definition of fairness introducing change is not easy. Inevitably any changes to taxation rules will have both winners and losers. Any losers will immediately scream "Unfair!", as has been the case so often in the past. This can only be avoided if the 'losers' for one set of changes become winners on another. In other words there are no 'net' losers. This is no easy task when many vested interests see tax changes as a zero sum game, believing that they cannot 'gain' unless someone else 'loses'. Consider the claims by naysayers that the GST is regressive. Despite the already acknowledged low income earner compensation package that would come with any increase in GST, there are already calls for additional imposts on higher income earners through changes in Superannuation.

So this first imperative to ensure that there are no 'net' losers will not be an easy task.

But leaving interest groups 'no worse off' is not enough. Mr T and Scomo have already committed not to add to the overall tax burden. This is far less than the "we have a spending problem” mantra of earlier days. I guess our grandchildren, a demographic whose voice is weak, would be indeed worse off if the tax burden were to increase with borrowed money. Reducing or at least not increasing the overall tax burden is the second imperative.

If it were just these two criteria we could simply leave things as they are. Within our limited definition of fairness it would be 'fair'. No one would be worse off and indeed the tax burden would not have increased. But that would get us nowhere.

So we have the final fairness criterion. There  must be some benefit from implementing changes and the benefits should be greater than any compliance costs. Gains can come in many forms. They could be cost savings through increased efficiencies. eg a higher GST take requires no ongoing increase in compliance costs yet if it were to replace Payroll tax, it would eliminate compliance overheads for businesses as well as State Governments. Other reforms may modify incentives leading to more efficient use of resources, greater investment and growth in the economy. A reduction in company tax can reduce costs for consumers, increase business profits and thereby encourage greater investment. These potential benefits can be far greater than the costs of implementing them and can easily justify such reforms.

The fairness Test

So Mr T and Scomo, your challenge is to come up with a set of changes to our tax system that satisfy the Fairness Test represented by the following 3 requirements.

The Fairness Test
  • All losses by any interest group are offset by gains by that same interest group 
  • There is no increase in the overall tax take 
  • Changes are beneficial to the country through efficiency and growth and exceed any compliance costs.

Mmmm. Good Luck!

Tuesday, 3 November 2015

Making Super work

In 'Not so Super' we learnt that our superannuation system is not meeting its design objectives. Even when projected to 2050 there is no increase in the number of retirees who will be fully self funded. This is despite paying greater proportions of their income into Super for an increasing number of years. At the same time the welfare burden of pensions on our national budget will increase, in real terms.

Why is it so?

What is wrong with our Super settings that results in this undesirable scenario? Lets look under the covers.

In the following calculations I have used ASIC Moneysmart Superannuation calculator. It takes into account current tax rates and super contribution rules. It uses a range of assumptions, see Table 1 below, that can be tweaked to meet an individual's specific conditions. For our current purposes, however, I have stayed with all the defaults, including the rate of return of 5.7% for a balanced fund, except I have not built in any rise in the standard of living increase. The figures do account for inflation but the results are shown in today's dollars.

Assumptions (see note 4) Value
Contribution Fee (%) 0.00%
Management Cost 0.50%
Management cost ($/yr) $50
Advisor Service Fee $0
Insurance premium /yr $100
Salary sacrificed 9.50%
Return on investment 5.70%
Inflation rate 2.50%
Allowance for rise in living std 0

Minimum wage (note 1) $34,159
Average Earnings (note 2) $77,195
Single person pension $pa (note 5) $20,498
Single person part pension cutoff (note 3) $49,296


1. National Minimum Wage order effective from 1 July 2015 https://www.fwc.gov.au/documents/sites/wagereview2015/decisions/c20151_order.pdf
2. ABS Average Weekly Earnings Australia, May 2015 http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0/
3. Human Services - Income test for pensions http://www.humanservices.gov.au/customer/enablers/income-test-pensions%20Aus%20gov%20Human%20Services
4. Calculations using ASIC Moneysmart Superannuation calculator with all default value except std of living increase https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/superannuation-calculator
5. Current Pension rates - single person no supplements annualised http://www.humanservices.gov.au/customer/services/centrelink/age-pension

Table 1 Assumptions and Sources

I have used the calculator to project the value of a worker's Super Fund Balance for different income levels and investment periods. The income levels range from the minimum wage ($34,159) to $200,000 pa and the investment periods from 10 years to a maximum of 45 years of working life. This latter would be rare requiring a person to start working at age 20 and retiring at age 65.

Table 2 summarizes how Superannuation Grows over time for workers on various annual incomes and for various periods.

Annual income Super Fund Balance ($'000)
After 10 yrs After 20 yrs After 30 yrs After 45 years
34159 (note 1) 34 71 112 179
50,000 48 104 164 264
77,195 (note 2) 75 162 256 411
100,000 98 211 320 534
150,000 148 317 501 805
200,000 197 424 669 1,047

Table 2:  Super Fund accumulation over time

In rough terms, every decade adds the equivalent of one's annual income to the accumulated Super. A worker on $77,195, the average wage today, will grow their Super to the equivalent of roughly 4 x their annual income in 4 decades, approx $320,000. Of course different rates of investment return, inflation and contribution costs will affect these figures significantly.

The figures themselves do not tell us much. The question is how well these accumulated funds can cater for our retirement. 

This is illustrated in Table 3, which shows the annual pension that results from the accumulated funds shown in Table 2. The rate of return used in the table is the same as was used for the accumulation phase, ie 5.7% pa.

Annual income Pension income ($'000 /pa)
After 10 yrs After 20 yrs After 30 yrs After 45 years
34159 (note 1) 2 4 6 10
50,000 3 6 9 15
77,195 (note 2) 4 9 15 23
100,000 6 12 18 30
150,000 8 18 29 46
200,000 11 24 38 60

Table 3: Annual Pensions resulting from various incomes and investment periods

A person on minimum wage, after sacrificing 9.5% of their salary forr 30 years, will have a pension return of a mere $6,000 pa. This is not nearly enough to meet their living costs and well below the Single Person Aged Pension rate of  $20,498 pa. Similarly a person on average earnings will earn $15,000 pa from their super after 30 years, still below the aged pension. You have to be earning above $150,000 pa to have a Super pension be self reliant on your pension on retirement.

The table highlights in red those super returns that fall below the aged pension rate, in yellow where the super returns are above the full aged pension cut-off but still qualifying for a part pension and in green where the super returns are enough to fully sustain the worker without qualifying for any aged pension.

The sea of red tells the story. Most people will qualify for a full aged pension, a few high income earners will qualify for a part pension and only the very highest earners with longest investment periods will be totally self reliant.

Of course these figures a broad generalisations. Many factors will alter the results. Workers don't maintain the same wage throughout their life, rates of return vary and often, especially as they approach retirement age, workers make salary sacrifice contributions to top up their funds. Also these figures apply for single earners, married couples have different pension cut-offs , etc.
Nevertheless the figures do tell a story. Under current prevailing conditions of inflation, contribution rates, rates of return, most workers will have to rely on an aged pension in their retirement.
This exercise has been another way of demonstrating, under the covers so to speak, what the projections discussed in 'Not so Super' already told us. Superannuation is not working as intended.

What is the core objective of Super? 

It is obvious that we do need to make changes, but what should we change?

Before we can make suggestions in this regard we need to be clear about what we want our Super to achieve. 

We really have only a single straightforward objective; - 

The superfund balance at retirement age has to be sufficient to generate an annual pension income which is greater than the Aged Part-Pension cut-off

Let's call this target Super balance the Self-Funded Retirement Threshold, SFRT. In today's terms based on a nominal return on investment of 5.7% pa and given the Aged Part -pension cut-off at $49,296 the SFRT is $864,842. Naturally this will vary as the Aged Part-pension cut-off increases with inflation and as average investment returns change.

Nevertheless the core objective of our Super system is for employees to reach and exceed the SFRT balance in their Super Funds.

5 Changes to Improve our Super

Given this clear objective it follows that all rules governing superannuation should be focused on achieving it.

This insight allows us to consider a range of changes that can lower the burden on our welfare budget and yet increase the number of workers achieving self funded retirement.

Here are 5 suggestions; - 
  1. Taxation discounts on super contributions should apply only while the projected balance at retirement is lower than the SFRT. There should be NO discounts on super contributions if projected balance is greater than the SFRT.
  2. Super fund annual contribution limits should increase as the employee approaches retirement , without affecting the tax benefits pertaining to these contributions
  3. Retirees should not be allowed to withdraw a 'lump sum' from their Super if by doing so its remaining balance would fall below the SFRT
  4. Government could issue a government guaranteed Superannuation Bond (SAB) with a fixed rate of return above inflation eg 5%. Any SAB investment cannot be withdrawn till retirement and its value at retirement is the inflation adjusted value of the sum invested, ie no capital gain. The maximum value of investment for any individual would be limited to the SFRT. The government could manage the SAB to reduce debt and to fund infrastructure projects. 
  5. It could be mandatory for Super funds to purchase SAB as part of their annual contributions. This 'compulsory' contribution could be equivalent to the value of the tax discount provided on Super contributions. eg if a worker contributes $10,000  in any year to his super and has saved $1500 in tax in making this contribution he would have a mandatory contribution of $1500 to the SAB. Their are two benefits to this approach.  The government receives a ready source of funds in return for the tax 'discount' on super contributions. Funds that can be used for long-term infrastructure projects. At the same time the individual receive a guaranteed inflation adjusted return on at least part of their super contributions.

These are only some potential rules that could help improve our Super system. Many other options are of course possible. However they illustrate that with a clearly defined objective we can better identify the changes that enable self-funded retirement to become a reality for a majority of our workforce. And that would indeed be super!