The purpose of saving
A challenge in gathering and interpreting these differing views is that many people interchange the role of super with the role of savings. One of the primary reasons that the super system was set up was in response to the view that people tended to under-save for retirement so a compulsory system for people to save provides benefits to all. This is possibly the most highly regarded element of Australia's super system in global comparisons.
In practice, savings is broader than super. The reasons people save across different periods of their lives is more than just having income in retirement. Income doesn’t always align with desired consumption so saving enables a smoothing of consumption over time. People also save for major life milestones such as starting a family, buying a home, holidays, as well as making sure they have enough for Christmas, giving to others or just saving for a ‘rainy day’. The alternative to saving is often acquiring more debt which can be expensive to service, although unavoidable for most looking to buy their own home.
Considering a broader frame about the role of savings, it is possible to think more clearly about the role for super as part of a person’s savings overall. It can also clarify why super needs to be compulsory even though the account is personal, rather than government money.
To assist with the broader frame, consider two allegories: the corn economy and the shade of the oak tree.
The corn economy – put some savings away today, to enjoy tomorrow
The corn economy is often used in the study of economics to introduce the concept of investment and savings and how they operate in an economy over time.
The premise is simple. In a corn economy all that matters is the corn that is grown in a field and the food that it becomes after harvest. Once harvested the corn is either consumed in the current period or saved as seed for next year’s crop. The saved corn is ‘invested’ by planting next year’s crop so that there will be something to eat in the future.
If all the corn is consumed today, there will be no crop tomorrow, highlighting the need for saving and investment. The amount of corn to save depends on the ‘investment’ returns, the appetite for risks, such as crop failure due to weather and the amount of consumption desired next year.
The economy is then extended to consider multiple years of consumption, but the basic model only has two time periods, today and the future. Many simple retirement models start with the same frame, with a period of working followed by a period of retirement. The choice is how much salary to save while working so you can continue to consume (a desired lifestyle) in retirement.
The focus of the corn economy is the individual consumer. It is their preferences (along with the rates of return) that will determine the optimal amount of how much to save and invest. This can be for any consumption, not just retirement. A holiday might be considered like a planned feast. To afford the feast, savings will be increased for a year producing a bumper crop which can be consumed as part of the feast (on the holiday). Normal consumption and savings patterns can be resumed later.
The essence of savings in a corn economy is to defer consumption from today to a later date. The choice of savings will depend on the preferences of the individual consumer.
The shade of the oak tree – defer consumption today to benefit future generations
There is a saying1 that the meaning of life can only be understood by considering the old man who plants the acorn knowing that he will never sit under the shade of the oak tree that grows. This describes a motive for saving that is almost the opposite of the corn economy. Some consumption is given up now for the future benefit of someone else. This is not necessarily purely altruistic but can reflect an inter-generational transfer between the acorn-planter and the shade recipient. The concept of leaving a legacy can be important as a motivator for savings. Surveys suggest that it is important consideration for about one in four older Australians.2
The objective of super
So how does the corn economy and the shade of the oak tree relate to the Government’s proposed objective of super?
Simply, the proposed objective is that super is about the corn economy. It is a mandatory system because people don’t save enough for their own retirement. This lack of savings through earlier stages of life would otherwise lead to the government stepping into fund retirement for everyone, which becomes unaffordable as the dependency ratio deteriorates. You only need to look at this year's pension reform riots in France to see that it is difficult to take away perceived entitlements from people.3
To balance the mandatory nature of the savings and the lack of access before retirement, tax concessions are provided for super. While the concessions are not a deferral of taxes (as under an EET model) there is a cost to revenue from the (ttE) concessions.4 Considerations for the objective of super can be positioned as what savings should receive the tax concession. Taking this approach it is clear that the aim is to encourage corn economy savings through super. If there is an established oak forest the government is not keen on providing a tax concession for the shade provided to future generations. The view might be that those who want to plant an oak tree (leave a legacy) won’t need any tax concession to do so.
1 Often described as a Greek or Chinese proverb but the source is probably more modern
2 For example, 801 out of 3,345 retirees (24%) reported maintaining some or all of their capital in retirement for their beneficiaries in Hosking, D., Minney, A. and McCallum J. The evolution of retirement income: A 2022 snapshot. Canberra: National Seniors Australia and Challenger, August 2022.
3 France pension reforms: Macron signs pension age rise to 64 into law - BBC News
4 An EET (Exempt, Exempt, Taxed) model for pensions is one where the contributions and the earnings on the pension investments are tax-exempt but every dollar taken out is subject to full marginal tax-rates. Australia’s ttE super system has a tax on contributions and investment earnings in the accumulation phase but no tax on payments or earnings is the pension phase or on withdrawals. The little ‘t’ is used because the tax rate of 15% is (generally) below marginal tax rates. For more details on the tax of super see How is super taxed? – Parliament of Australia (aph.gov.au)