Peter Dunne's recent proposal for a more flexible government superannuation scheme has some merit. At least it shows a willingness to confront the elephant in the room. This Government has deliberately ignored the issue which is fundamental to our future prosperity as a nation. The lack of leadership on such a crucial issue is alarming.
The flaws in Mr Dunne's proposal are that it is fiscally neutral so doesn't address the overriding issue of the sustainability of the system. Providing a low budget early retirement option also locks some of our most vulnerable citizens into retirement poverty. Yet the concept of flexibility in incentivising those who can to keep working rather than accept a benefit, has considerable merit.
There are a number of myths surrounding retirement savings and the affordability of Government superannuation.
Myth number 1: The affordability of universal superannuation depends on whether the Government has the money to fund it.
The truth is that the Government could print the money if it needed to. The affordability of Government superannuation depends on our rate of economic growth over the next few decades. A nation's prosperity depends on its output of saleable goods and services. Money is simply a claim on this output. As a greater proportion of the population retires they become dependent on those who are still working to produce the goods and services for them to consume. This is why Mr Dunne's proposal of offering a higher rate of superannuation to those who choose to defer accepting the pension, and keep working, has merit.
Myth number 2: Those who choose to work beyond retirement age are shutting younger workers out of the job market. This is called the "lump of labour fallacy". It assumes there is only a fixed number of jobs in an economy. The reality is that those older workers will be spending their incomes in some way and creating more demand and employment in the economy.
Myth Number 3: We all need to save more for our retirement. This approach may work for individuals but not for a nation. The crucial issue is not the level of national savings but rather the quality of investment. Productive investments in new businesses or skills or infrastructure provide more output and higher incomes in the future. This is what will allow us to fund our retirees as a nation. If our savings are channelled into non productive investments which don't increase output or incomes this does nothing to enhance our national prosperity.
Myth Number 4: Investing in housing is a form of savings. This may be true for an individual but not for a nation. If we all intend funding our retirement through rental properties we need to ensure we have tenants who can pay a decent rent. This depends on their incomes which are ultimately determined by economic growth. Using savings or borrowed money to bid up the prices of our existing housing stock is not productive use of savings for an economy.
Myth number 5: Funding government superannuation depends entirely on tax revenue. This is partially true but only to the extent that tax revenues depend on the level of economic growth. This is why the affordability of superannuation depends on the appropriate education and skills that we provide to younger generations. Their productivity will determine our future prosperity. Those who fail to acquire the necessary education to succeed often become net drains on society. Those who succeed are the ones that will help fund the retirement of the generations in front of them.
Myth Number 6: Government superannuation is an entitlement for those who have paid taxes all their working lives. Old age pensions were initially designed to provide financial assistance for those too old to work and unable to provide for themselves. The taxes that we pay are not ring fenced for specific uses.
There is something vaguely grotesque about someone over 65 on a high salary also receiving a government benefit. Mr Dunne's proposed flexi-superannuation scheme could provide the solution to this dilemma. The crucial issue is to encourage people to keep working while they still can, but not to penalise them compared to others who choose to retire earlier.
Peter Lyons teaches economics at Saint Peters College in Epsom and has written several economics textbooks.