Enhancing Savings in the Asia Pacific - 9 March 2005
2005 MELBOURNE FINANCIAL SERVICES SYMPOSIUM
‘ENHANCING SAVINGS IN THE
9 MARCH 2005
The subject is savings in the Asia Pacific. And perhaps the place to begin is to first examine the large macro economic and trade picture, so we have some idea of the larger influences at work.
The Pacific is now dominated by trade between
Lower trade and non-trade barriers have promoted ever increasing market penetrations of goods and services.
The effect of these massive trade flows has been to set up a stock of financial imbalances on a scale not previously seen. And the satisfaction of these imbalances has, in turn, promoted a flow of savings on a massive scale.
The huge current account and budget deficits run by the United States and the large current account deficits run by countries like Australia and the United Kingdom are a reflection of the surplus savings of the rest of the world. These imbalances are now of substantial proportions. To repair them a couple of things need to happen: a reduction in aggregate demand in deficit countries like the
This would have or induce two effects: a reduction in demand would provide a larger exportable surplus as domestic demand switches product to exports thereby reducing the call on overseas savings; and a depreciation of the real exchange rate would make imports more expensive and exports more competitive, accelerating the switch from higher to lower domestic demand.
This group has been termed the informal or shadow dollar area, which includes among them, countries like China and Japan, which spend a large part of their huge foreign reserves buying US dollars, attempting to thwart the natural fall in the US dollar. In
These heavy exchange rate interventions by the Bank of Japan and the People’s Bank of China have the effect of blocking the natural corrective qualities that a real depreciation of the US dollar would bring. A large part of the world economy is now in this shadow dollar area, which means the burden of adjustment falls on those not seeking to strike some dollar parity or heavily intervene in their forex markets. In the main, this weight is carried by
All these currency links or foreign exchange interventions lead to the central banks of these countries buying US securities thereby underwriting the growing and continuing imbalances of the
In other words, massive surplus savings are slopping into the
Were the Government of China to unhook the renmimbi from its US dollar peg, and let the currency drift upwards, less investment in
But while ever the Bank of China and the Bank of Japan fall over themselves to buy dollars, US policy-makers will give the rest of the world second best policy settings, and second best outcomes.
What we have to keep our eye out for is a sharp or catastrophic fall in the US dollar. Such an event would turn
The fact is, the
Foreign holdings of US Treasury bonds is now over 50% for the first time ever. In the 1990s it averaged 20%.
And all this is compounded by the fact that the
The savings of the savers – is offset by the disaving of the disavers.
And at a time when demographic changes are forcing more Americans into retirement relying for income support on the public pension.
The next change came in September 1985, which was to extend superannuation to workers in
It took just on six years for that 3% to go into place and then as Prime Minister, in 1992, I introduced the Superannuation Guarantee Charge legislating a mandatory 9% of wages to be put away as savings into individual savings accounts to be privately managed. When we began the changes in 1984, there was $42 billion in superannuation fund assets. Today the pool stands at about $700 billion.
The reforms put
But not as well set up as it should be.
The problem is that the 9% is not enough to sustain workers in retirement without resort to the public pension.
The Government I led planned in 1995 to move superannuation contributions for all workers from 9% to 15% by paying tax cuts off the budget as savings – preserved to age 60 - and by a co-payment from workers themselves.
The current Government rescinded that policy, with the result that retirement income mandatory provisioning is today stalled at 9%.
It is true that many people elect to salary sacrifice and devote more discretionary income to superannuation. Some will even be contributing at 15%, but not the majority.
The trick now is to build on the current scheme and improve it, especially when we are relying heavily on overseas savings to fund our current lifestyle and living standards.
At the moment the Australian current account deficit is financed overwhelmingly by borrowings by our four major banks. In the past it was financed by direct capital investment and portfolio investment. These days the four banks hold these Australian dollar liabilities, in the main, in maturities of less than 12 months. A higher level of domestic savings will diminish our overall call on overseas saving and lessen the vulnerability to the way it is financed.
In 1985, as Treasurer, I introduced in
The removal of the double tax on dividends completely changed a company’s capacity to save. Now with a 30% corporate rate, a company can retain 70% of earnings in the business. Before the 1985 changes, that was 22%.
And now, if a business wishes to pay dividends, the shareholder enjoys a tax credit against his or her personal tax up to the level of the corporation tax paid - hence the phrase imputed credits.
The interesting thing for an audience of this kind is to realise that in 1987, dividend imputation was extended to superannuation funds. A superannuation fund can reduce the tax liability on its fund earnings by streaming imputed credits into its accounts or, put another way, by buying equities. This policy has had remarkable consequences:
(1) superannuation funds are more directly involved in capital formation
(2) it has put real pressure on managements and boards of directors to pay their full corporation tax and fully frank their dividends
(3) it has put pressure on managements and boards to declare dividends – where in the past this was much more a matter for the discretion of managers and boards
(4) it has tipped the balance of power within companies – public companies – much more in the direction of shareholders providing some real equilibrium
(5) and most importantly, it has produced a fashion for dividends in the Australian stockmarket which has set yields such that the amplitude within which stock prices rise or fall is much diminished when compared with comparable bourses.
The thick rope of dividends which now runs through the Australian stockmarket has given us a much less volatile market. And superannuation is the flag carrier of this system. It is unique in the world.
It has set
In a 5 to 6% world, obviously fees of 2% to 3% will no longer wash. No-one is going to watch a third of their income swallowed up in fees. For, if such were to be the case, income adequacy in the longer term would suffer. Choice and efficiency in delivery will, I hope, make the system more peppy and competitive.
Perhaps I could sum up.
As a savings deficit country,
While in absolute dollars, compared with, say, the United States, this is not, in world terms, a dislocating sum, but with Australia at $700 billion of GDP it amounts to around $35 to $40 billion of new debt per year.
This was the essence of the Reserve Bank’s message last week.
But we have to do more than that. We have to structurally add to savings, before harder assessors begin examining the growing stock of our external liabilities.
There will be no prizes for being out there with the savings begging bowl if and when the surplus countries decide to change tack.
Superannuation is our most successful mandated savings scheme.
It is imperative, in national savings and retirement income terms, that we move the system to greater adequacy.
We should be putting in place, now, the steps to take superannuation contributions to a mandatory 15%.
By building this savings buffer we will underwrite a larger share of our own capital formation while providing for those in retirement, other than by a greater burden on our children.