Statement 4: Building Resilience Through National Saving (Continued)
Australia's gross saving rate (gross national saving as a proportion of GDP) fell significantly from the mid‑1970s to the early‑1990s, reaching a low of 18.4 per cent in 1991‑92. The gross national saving rate remained broadly steady between 1992‑93 and 2004‑05 at around 21 per cent, before beginning to rise in 2005‑06. The advent of the GFC resulted in a sharp increase in the national saving rate, which reached 24.2 per cent in 2010‑11 (Chart 1).
The net national saving rate (which is gross saving less depreciation) has followed the same trend and is currently around 9 per cent of GDP, up from around 5 per cent of GDP in the early 2000s.
Chart 1: Net and gross saving
Source: ABS cat. no. 5260.0.
After being below average for much of the 1990s, Australia's gross national saving rate in calendar year 2011 (24.8 per cent) was significantly above the advanced economy average (18.5 per cent) and slightly above the world average (24.0 per cent) (Chart 2).
The recent decline in advanced economy saving rates largely reflects cyclical economic weakness in other countries since the GFC. It is notable, however, that a significant gap between saving rates in Australia and other advanced economies had already opened up prior to the GFC. This suggests the difference in national saving trends has in part been due to other factors, including the long history of prudent fiscal policy outcomes and the maturation of Australia's compulsory superannuation system.
Chart 2: International comparison of gross national saving
Note: All data based on calendar years.
Source: ABS cat. no. 5206.0 and IMF World Economic Outlook April 2012.
The increase in saving has had important benefits for the economy. For example, in the context of an economy with low unemployment and a massive pipeline of mining investment, had the rise in national saving not occurred, tighter monetary policy would have been required to maintain macroeconomic stability.
Saving by households and corporations (which together make up private saving) accounts for the bulk of national saving. In particular, household saving has been the major driver of shifts in national saving over the past several decades. The household saving rate declined steadily from the mid‑1970s to the mid‑2000s, although this fall was exaggerated by the shift to incorporation of small businesses during this period (Chart 3).
In the second half of the 2000s, the gross household saving rate increased significantly and is currently 11.5 per cent of GDP, up from a low of 5.8 per cent in 2002‑03.
The compulsory superannuation system has made an important contribution to household saving since it began to be phased‑in from the mid‑l980s. More recently, the increase in household saving likely reflects a combination of increased consumer caution following the GFC and a return to more sustainable rates of consumption growth, after a 30‑year period in which declining saving rates and strong credit growth meant that consumption grew faster than incomes.
Chart 3: Gross private saving by sector
Source: ABS cat. no. 5206.0, 5232.0, 5204.0 and Treasury.
Superannuation and demographic changes have boosted national saving
The introduction of award‑based superannuation in 1985 and Australia's compulsory superannuation guarantee system in 1992 represents a key structural driver of Australia's national saving rate.
The three‑pillar structure of the Australian retirement income system — the age pension, compulsory saving through the superannuation guarantee and voluntary superannuation saving — is unique among developed countries, but has considerable strengths.1 In particular, it provides a system that satisfies the needs of all older Australians, provides the capacity for individuals to enhance their retirement income, and spreads risks between the public and private sectors in a fiscally responsible way (Australia's Future Tax System 2009).
The introduction of the superannuation guarantee required employers to make superannuation contributions on behalf of their employees. The minimum contribution rate was increased gradually from 3 per cent in 1992 to 9 per cent over 10 years. This policy has significantly increased retirement income adequacy for Australian workers and boosted national saving — underscoring the importance of the compulsory superannuation system as a major long‑term economic reform (Box 1).
Box 1: Compulsory superannuation — a major long‑term economic reform
The compulsory superannuation system has driven a strong rise in superannuation assets through growth in employee coverage and a gradual rise in contribution rates. At the end of 2010‑11, total superannuation assets, arising from both compulsory and voluntary superannuation contributions, were around $1.3 trillion, or about 95 per cent of annual GDP.
Australia's superannuation assets as a proportion of GDP substantially exceeded the OECD weighted average ratio of 67.6 per cent in 2009 (OECD 2011). Taking into account changes to the superannuation system, superannuation assets are projected to rise to almost $7 trillion (130 per cent of GDP) over the next 25 years (Chart A).
The accumulation of superannuation by a person on median wages who starts with superannuation guarantee contributions at age 20 in 1992 and who retires at age pension age of 67 in 2039 will have almost $440,000 (in 2011 dollars) when they retire at age pension age (Chart A). The superannuation system is providing a significant boost to retirement incomes for Australian workers.
Chart A: Superannuation assets and superannuation accumulation
The most recent Melbourne Mercer Global Pension Index, which assessed Australia's retirement income system against more than 40 indicators covering adequacy, sustainability and integrity, found that Australia's system ranked second (behind only the Netherlands) among a range of developed and emerging economies (Mercer 2011).
The Government's decision in 2010 to progressively increase compulsory superannuation contributions from 9 per cent to 12 per cent by 2019‑20 will further support the shift in household behaviour towards higher saving. That increase, in conjunction with the maturing of the existing superannuation system, is projected to add 1.5 per cent of GDP to national saving over the next 25 years with most of this increase expected to occur over the next decade (Chart 4).2
Chart 4: Estimated contribution of compulsory superannuation to national saving
Note: Estimated contribution in history has been smoothed. Estimated contribution starts to decline approaching mid‑century due to the indirect effects of population ageing. The 9 per cent line incorporates the gradual phase‑in from 3 per cent in 1992 to 9 per cent in 2002‑03, while the 12 per cent line incorporates the gradual increase from 9 to 12 per cent by 2019‑20.
Today, Australia's pool of superannuation savings stands at over $1.3 trillion (around 95 per cent of GDP), and is projected to rise to almost $7 trillion by 2037 (around 130 per cent of GDP). This significant increase in Australia's national saving will help build economic resilience by reducing reliance on external financing, and help create room for the terms of trade and investment boom in the resources sector.
The increase of the superannuation guarantee from 9 per cent to 12 per cent, the revenue cost of which is funded from the proceeds of the Minerals Resource Rent Tax, will significantly increase the future retirement incomes for many Australian workers. For example, a 30 year old today earning average full‑time wages will have around an extra $118,000 (in real terms) in retirement savings. In this way, government policy is distributing the benefits of the mining boom more equitably.
Demographic factors are also likely to have contributed to higher household saving over recent years. Most members of the post‑war 'baby boomer' generation are currently in the peak life‑cycle period for saving as they near the end of their working lives. It is appropriate that household saving be higher over the period before the major part of this group retires and labour force participation starts to fall, which is expected to occur from around the end of the current decade (Australian Government 2010).
By building a stock of income‑producing assets, higher saving will help households maintain future living standards in the face of prospective declines in labour force participation. Combined with the effect of the baby boomers' saving over their remaining working lives, increases in the superannuation guarantee will help maintain retirement incomes at a significantly higher level than would otherwise occur.
The Budget measure reducing the tax concession received by very high income earners on their superannuation contributions is expected to have only a small effect on national saving but will increase the fairness of the superannuation system.
The rise of the cautious consumer
While household saving began to recover in the early‑2000s, the largest increase in the saving rate occurred during the GFC, and has been reinforced by ongoing global uncertainty.
During the early to mid‑2000s, rapid increases in asset prices, particularly property prices, made households feel wealthier and as a result, they used debt to fund increased consumption (Chart 5). Prior to the GFC, capital gains were consistently positive, albeit much more volatile than net disposable income.
However, the GFC resulted in households suffering capital losses of nearly 100 per cent of annual net disposable income over the two years 2007‑08 and 2008‑09. Therefore, the recent increase in household saving is likely to reflect an attempt by Australian households to offset the impact of asset price falls on their balance sheets and as a precaution against further external shocks. These wealth losses may also explain households' reluctance to take on debt since the GFC.
As the persistently strong capital gains seen in the pre‑GFC period are unlikely to be repeated in the near future, it seems unlikely that households will revert to the very low saving rates seen in the first half of the 2000s (Freestone et. al. 2011). Bouts of global instability and ongoing global uncertainty may continue to reinforce cautious household behaviour for some time. However, if global instability moderates households may begin to feel more secure, which could lead to some decline in household discretionary saving.
Chart 5: Net saving plus capital gains and losses
Source: ABS cat. no. 5204.0 and Treasury.
The high terms of trade has boosted incomes and saving
The unprecedented rise in the terms of trade, which began in the mid‑2000s, is likely to have also contributed to an increased saving rate. This rise in the terms of trade has boosted Australia's national income and resulted in a period of above‑trend growth in household income.
Strong demand from Asia is expected to support the terms of trade remaining at high levels over a long period, however, the terms of trade are expected to decline gradually over time as new sources of supply come on stream here and abroad. As a result, the current boost to income should be expected to raise the rate of national saving for both consumption smoothing and precautionary reasons.
A measure of the income gain from the terms of trade is the difference between cumulative growth in real incomes and cumulative growth in real GDP. Growth in real household disposable income from the start of the mining boom in 2002‑03 to 2010‑11 has exceeded growth in real GDP by 17 percentage points, while real consumption growth has exceeded real GDP growth by only 4¼ percentage points. This implies a significant proportion of the additional income from the mining boom has been saved (Chart 6).
Part of the rise in saving has also occurred because the high terms of trade have resulted in strong growth in profits, particularly in the mining sector, allowing mining companies to finance high levels of investment through retained earnings. This factor has been largely responsible for the recent rise in the corporate saving rate. With commodity prices expected to fall only gradually across the forward estimates, mining profits should continue to support a relatively high corporate saving rate for some time.
Chart 6: Household real disposable income and real consumption gain
Note: The lines represent the cumulative difference between growth in these variables and growth in real GDP since 2002‑03.
Source: ABS cat. no. 5206.0 and Treasury.
The structural adjustment to financial deregulation and low inflation may have come to an end
The fall in household saving up to the mid‑2000s reflected primarily a prolonged, but ultimately one‑off, structural adjustment to financial deregulation from the early‑1980s and the transition to a low inflation and interest rate environment from the early‑1990s.
The combination of these two factors led to greater access to credit, rising house prices and high levels of confidence, all of which allowed households to borrow more, both to finance purchases of housing and financial assets, and to bring forward consumption.
As a consequence, from the early‑1990s up until the mid‑2000s, households increased their accumulation of debt (Chart 7), which was used in part to help fund strong growth in consumption. This led to a significant fall in the household saving rate (net household saving as a share of disposable income) from around 5.5 per cent in the early‑1990s to 0.5 per cent by the mid‑2000s.
This adjustment to financial deregulation and lower borrowing costs is likely to have been a significant structural driver of change in household saving. From the second half of the 2000s, however, households began to slow their accumulation of debt, and as a result the household saving rate began to rise. With its likely completion, households in aggregate can be expected to consolidate their financial position over coming years by returning to more normal levels of saving and borrowing (Stevens 2011). However, government policy plays an important role in securing this transition.
Chart 7: Contributions to changes in household net saving
Change relative to 1989‑90
Change relative to 2002‑03
Note: Components may not add to net saving as errors and omissions are excluded. Increased net incurrence of liabilities is shown as a negative.
Source: ABS cat. no. 5204.0 and Treasury.
1 The retirement income system in many Organisation for Economic Cooperation and Development (OECD) countries provides a taxpayer or contribution funded retirement income based on a proportion of an individual's pre-retirement income. These countries also provide a minimum retirement income to alleviate poverty for those with a limited working life.
2 The estimates assume that governments adhere to the medium-term fiscal objective so that the budgetary costs of superannuation are offset elsewhere in the budget (Gruen and Soding 2011).
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