On March 5, Investment &
Technologyand investment administration softwareprovider, SimCorp, held a
roundtablediscussion on last November’s “economists’open letter” to the Rudd
Government.Signed by eight of

Australia’s
leading economicminds, the letter advocated a shorttermreduction in the
superannuationguarantee to 6 per cent, and a relaxing ofsuper access rules, as
an economic stimulusduring this financial crisis. The letter wenton to advocate
a gradual increase in theSG as

Australia’s
economy recovered, to aproposed 12 per cent by 2015.

Last month’s discussion
included fourof the economists who signed that letter.The debate covered both
their specificproposal dealing with the financial crisis,as well as the idea
that responsibility forsetting the level of SG should permanentlybe taken from
Government hands, andplaced with an independent agency suchas the Reserve Bank,
to create a new, nonpartisanlever of fiscal policy.

Participants in the
roundtable wereas follows:•
Michael Bailey,
Editor, Investment& Technology Magazine• Tony Cole, Business Leader,Mercer
Investment Consulting Asia-Pacific• Rod Dew, Sales Manager, Sim-Corp Asia•
Robert Goodlad, ManagingDirector,

State
Street Global AdvisorsAustralia• Dr. Nicholas
Gruen, CEO,Lateral Economics• Tony Harris, former Auditor-General of NSW• David
Mackaway, General ManagerInvestment Operations, Challenger• Nick Quin, Director
of Sales and Marketing, SimCorp Asia• Fiona Reynolds, CEO, Australian
Institute of SuperannuationTrustees• Dr. Don Russell,
Global InvestmentStrategist, BNY Mellon AssetManagement and Chair, State SuperNSW•
Colin Tate, Executive Director,Conexus Financial (publisher of Investment&
Technology)• Trevor Thompson, President,
Institute
of
Actuaries of Australia• Pauline
Vamos, CEO, Associationof Superannuation Funds ofAustralia• Garry Weaven,
Chair, Industry Funds Management
Michael Bailey:
If the boldness ofan idea can be measured by speed anddegree of reaction to it,
then last November’sproposal by eight economists- four of whom are with us
today – that the superannuation guarantee (SG)level be temporarily reduced and
accessrules to super relaxed to stimulate the economy, certainly qualifies as a
boldidea.

At least a couple of industry associations- also represented here
today- immediately dismissed the notion. Ithink ‘short-termism’ and
‘retrograde’were terms used at the time. And theSuperannuation Minister, Nick
Sherry,wasn’t far behind. “We won’t be raidingsuper to fix short term economic
issues”was his quote. But we at Investment &Technology think the
economists’ proposaldeserves more debate. How well,for example, did a similar
ploy reallywork in

Singapore
on the two occasionsits government has tried it. Also, let’snot forget that the
proposal also callsfor SG to be put back up again as theeconomy recovers, to a
proposed rate of12 per cent by 2015.

Four months onfrom the economists writing
that letterto the PM, we should also rememberthat the Rudd government has
rackedup a significant budget deficit on variousstimulus measures. But if
furtherpump priming proves necessary tosave jobs, do we let that deficit growlarger,
or should we at least consider theeconomists’ SG proposal as a plan B? Ithought
today that apart from debatingthe economists’ immediate proposal onmoving the
SG down and up again, itwould be also good to look at the meritsof a structural
change whereby the SGbecomes a permanent structural featureof economic policy.

It’s hard to denythat the SG has to some degree becomepoliticised – it got to
the Keating 9 percent and then nowhere for a decadeof the Howard Government. So
isthere merit in having the SG set by anindependent body such as the ReserveBank,
and taking it out of arguablymore partisan hands. So to kick thingsoff I
thought I’d ask Nick Gruen, thecatalyst somewhat of that original openletter to
Kevin Rudd, to talk about thereactions the economists received totheir
proposal. And whether it has anytraction whatsoever in

Canberra to date.

Nicholas Gruen: I started
thinkingabout doing this with one thingon my mind, which wasn’t directly thesuper
thing initially, but – this was atime when it was clear that what wasgoing on
in

America
was very serious, it wasn’t just another recession. And thegovernment was still
playing footsieswith the question of whether we wouldrun a deficit.So I thought
that I would try anddo Kevin Rudd a favour, and try to show that it was very
respectable tobasically just regard the deficit, particularlyin the financial
circumstancesof the government’s balance sheet, asquite a small matter compared
with theenormity of the tasks that would comeupon it.So I then set my mind to
the armsof policy that might be used.

And theSG proposal was one of them. I’vetalked
about this kind of thing for quitea long time. As you were introducingus,
Michael, I thought how ironic itwas that the people who came out andaccused us
of short term thinking did sowithin about twenty five minutes of thestatement
going public.They focussed on the short termdownsides of the proposal from
theirpoint of view, and not the fact that itwas a long term plan very much in
thedirection they felt themselves to befighting.

But I must say, I’ve never meta
decent idea that hasn’t been rejectedwhen it’s first put forward, with greatconfidence
and near unanimity. ButI’m still a bit disappointed that a largegroup of well
respected economistswere so easily given the ‘doddering daiquiridrinking’
treatment which is, youcome up with a line to say, ‘this is silly’and then
everyone says ‘oh well, I guessit must be’ and they don’t talk about itagain.
Michael Bailey: Are there people in

Canberra, Tony, that are sympathetic tothis
idea?

Tony Cole: I think there arecertainly bureaucrats who listen to it,but
they need some more comfort frompeople outside

Canberra talking aboutit more before they do
anything. I’vehad a long term view that having a variablerate of SG was an
economic policytoo good to ignore. Monetary policy isactually fairly
ineffective – it’s blunt andit’s harsh. Only about a third of householdshave
any mortgage debt. Andprobably half of those have insignificantmortgage debt.So
when you put interest rates up ordown you have an effect on a very smallslice
of the population.

And you haveeffects on small parts of the economy.You have a
big effect on the home buildingindustry, where you’ve got approvalsdown to
9,000 today I think it was.But you have a big effect on the homebuilding
industry, you have a big effecton anything that’s financed by credit,car
purchases and so on. But it’s a veryuneven effect across the economy.If you
vary the SG rate, you’ve got90 something percent of working-agepeople who are
in employment. So tohave the same effect on the economyas you will have with an
interest rate increase, you’ve only got to have abouta third as much of a
variation in the SGto have the same effect. So I start offon the basis that we
ought to be ableto vary it for economic policy reasons.

But it’s also a social
policy tool, so thegovernment needs to set a band withinwhich it will be, and
an average whichit should achieve over a rolling five yearperiod. Then an
independent agency– preferably the Reserve Bank so it’snot working at cross-purposes
withmonetary policy – can present any casefor going outside those bands.Rob
Goodlad: I put a call into

Singapore
yesterday to follow up on theletter that was written by the economists,on the
question of the Singaporemodel of varying contributions to theCentral Provident
Fund, the nationalsavings scheme for everyone over there.

It was just to get an
idea of what itwas all about and whether or not it’sactually worked. And
apparently whenthis scheme started well before the1987 crash, it was designed
so that theemployer kicked in 25 per cent of amonthly salary, employees kicked
in 25per cent of a monthly salary. And it wascapped out that each year the
maximumyou could get out was about $5,000.Now in 1987 after the stock marketcrash,
it was decided they wanted to doeverything to keep people in jobs. Andin doing
that they decided to make thecost of doing business in Singaporecheaper.So they
reduced the employercontribution down to 20 per cent from 25 per cent.

And the
money that was inthis fund was used for all sorts of socialinfrastructure,
housing, education. Itwas designed to capture everyone thatworked in between
that 20 to 80 percent wages bracket.But now after all this time and aftera bit
more tinkering with the ratios,they’re down to employees contributing20 per
cent, employers contributing14.5%. And if you ask people over there,‘well how’s
it all going?’, they considerthat they still have a major long termadequacy
issue.

Pauline Vamos: In

Australia,
the 9percent we know over the long term isnot going to be enough for most
people.So even with the economists proposing12 per cent by 2015, it means
stoppingthe momentum of the level of engagement,it’s going to start reversing
membersputting in extra contributions.So from our point of view it wasn’ta
solution that looked at the wholepicture. And the other issue I wouldraise is
that it was put in the paper, noconsultation with the industry, so thefirst
time we see it is the same timeeverybody else sees it and suddenly wehave the
press knocking down on ourdoor.

Now, we spend an inordinateamount of time and
money speaking topeople within the industry and outsidethe industry so we go to
governmentwith an informed public policy view.And so from an industry point ofview
we say well, hold on, where is thecourtesy here? Because had we had thatdialogue
and understood, then maybethe reaction in the press would havebeen a little
less sharp.Fiona Reynolds: We came out aswell as ASFA, fairly early in the piece,to
say what we said – retrograde andshort sighted. And I actually think westill
stand by that opinion, for a numberof reasons.

I agree with Pauline that thefirst
time we see it is a letter that’s gone,it’s in the newspapers, we very quicklyhave
the press on the phone, ‘can yourespond?’. From a political angle, onceyou
start moving the SG from 9 to 6,how long is from 6 to 3, to nothing,you know. I
don’t think the SG shouldbecome a plaything of different governmentsthat come
and go, we’ve alreadyhad a little bit of that.Tony Cole: It was created by
government.Fiona Reynolds: Well, we’re talkingabout getting to 12 per cent.
NickSherry as early as this week was in theFin saying there is no way we’re
going to12 percent.

That’s a couple of days agodespite the fact we’ve got the
Henry andHarmer reviews going on. Then there’sissues for members, but there’s
alsoissues for superannuation funds. If theydon’t know how much money’s comingin
on a monthly basis, because we aregoing to keep moving things, how canthey plan
their investment strategies?How do they know what they are goingto be doing?
And it might be okay forthe public servants because they are ina defined
benefit superannuation fundthat won’t be effected.

Tony Harris: Arguing about
the certainty of inflows to the industry is avery curious argument. It suggests
that you’re the only industry in Australiathat has to have certainty, everybodyelse
has to have uncertainty.Fiona Reynolds: We still have todeal with uncertainty
….Tony Cole: Traditionally half theaccumulation is earnings rather thaninflows,
so you have got no certainty onthe earnings side anywayRob Goodlad: Well
there’s certaintyand there’s confidence as well.Just thinking while you were
talkingthere, Fiona, I remember fifteen yearsago there was lots of discussion
abouttax rates and different points throughsuper and I had an unpreserved
amountand I thought, blow this, I’m pullingmy unpreserved amount out and I’mjust
going to put it into a deposit on ahouse.

Now as it turns out it was probablythe
best thing I ever did. But it does add weight to what Fiona’s saying,that people
do need confidence that thesystem’s going to remain intact beforecommit, it’s a
behavioural thing.Tony Harris: I wouldn’t build acastle
on my need for certainty, becauseyou just don’t – you shouldn’t get it inthis
economy.Tony Cole: I just want to mentionsomething about

Singapore, just
becauseit will get lost. One of the thingsyou have to know about

Singapore isthat
the money has always been investedin government bonds, and that most ofthe
bonds that are issued in Singaporeare issued only to give the CPF somethingto
buy, something to invest in.

And typically the interest rate paidon those bonds
has been around 2.5 percent, although I think it got as high as4.25 for a very
brief period. But that’swhy it’s inadequate, not withstandingthe vast amount of
contribution.The second thing is that it’s cappedout at a moderate salary. So
the majorityof people are actually on the cap, themajority of people contribute
the capamount. It’s still not enough, it produceswoefully inadequate retirementincomes.Pauline Vamos: Often
when peoplethink about super, they don’t thinkabout its investment in the
economy.

Some parliamentarians still think thatall the super money is in a box
somewhere,under somebody’s desk, andthe bottom line is, it invests in the realeconomy,
it owns 25 per cent of thelisted shares on the ASX. So the moneythat goes in is
actually spent because ithas to be invested, whereas the moneythat’s given to
consumers directly is notnecessarily invested, or even stimulates the economy.

That was one of theuncertainties around the impact of theeconomists’
suggestions.
Michael
Bailey: If the 6 per cent
hadbeen in place since last November, hypothetically,would that have made anydifference
to the job losses we’ve seen?Nicholas Gruen:Of course, I meanhow much we can argue about,
but thatthere wouldn’t have been an effect isabsurd. Just as it’s quite obvious
that thecash splash, as it’s now called, had someeffect.Tony Harris: To the
extent it doesn’t have an effect, the superannuation industry can relax.

Because
peoplethat won’t take up the option to reduceSG to 6, they’ll put in their own
salarysacrificed contributions. To the extentit does work well, that’s what
it’s aimedto achieve.Tony Cole: People can always makevoluntary contributions, the 3 per
centunder our proposal would immediatelygo into salaries, but people choosing
tomake voluntary contributions can salarysacrifice ….Garry Weaven: But only
half theworkforce can salary sacrifice, it’s driven- as superannuation used to
be entirelydriven – by employer decisions.

Pauline
Vamos: There’s a good percentageof employers
who don’t have thefacilities to provide salary sacrificeTony Cole: They can
still make avoluntary contribution if they wantto. And if they don’t want to,
then thatmeans they’d spend it and what we’retalking about is roughly $4
billion aquarter that would flow to consumption.Trevor
Thompson: Perhaps if Icould share a view. It
seems to us thatit’s taken about 25 years to build someconfidence in the
system.

To disturbthat by switching the contribution levelsto something that is
going to be potentiallydistorted by super policy seems toraise a whole heap of
questions. I thinkall policy levers should be considered,not necessarily all
utilised. The proposalopens up a whole lot of issues around,why wouldn’t we be
spending less, say,using the same arguments they’re usingfor super, on health
care, on defence orany other thing, there’s a whole agendathere…Nicholas Gruen: It’s a
financialthing, that’s why we don’t say ‘let’s havefewer obstetric deliveries’,
okay. Wedidn’t think of that because we didn’t think it made sense.

But super is
a largefinancial facility, and that’s what we’regoing through, a financial
crisis.Colin Tate: Aside from the selfinterest in the superannuation industrywhich
is evident in the businesswe have, I can see your policy ideas asquite clever,
to take it from somewherethat doesn’t actually take it out ofgovernment
coffers, and doesn’t directly even take it out of an employer or anemployee’s
direct cash flow.

However, not that I’ve ever agreedwith much John Howard’s ever
said, butI actually agree with what he said theother day that for an employer,
if theyknocked off the 6 per cent payroll tax itwould actually give my business
an immediatebenefit to keep jobs for the nextsix to twelve months. I don’t see
this SGproposal directly saving one job in mycompany whatsoever.Nicholas Gruen: That’s
becauseyou’re an employer. And if you were aconsumer you would see that you
wouldspend more money.

Rod Glover: The timing of our proposallast November was in the context of
three different objectives. One wasthe government was thinking abouthow it
might stimulate the economy,stimulate consumption. Secondly, aview that many of
us have that the 9 percent is not adequate long term. Andthirdly, the
government at that stagewere desperately trying to hold on to aBudget surplus.
One of the features ofthe proposal that is different to changing tax rates or to
directly spendingmoney is reducing SG from 9 to 6 actually produces a budget
saving because of the different tax treatment of the 3 percent being super as
opposed to the 3 percent being treated as wages or salaries.

So part of the
framing of this was apolitical framing for the governmentto say, this is how
you can stimulatethe economy without spending moneyyourself. But recognising
what you’redoing to super in the short term, youshould actually frame that with
the longterm argument for an increase in super,so you meet the short term need
forconsumption, and the long term needfor saving in the one proposal.Garry Weaven: Looking at
thenames that signed that letter, I acceptit’s friendly fire. But it still can
be lethal.My concern was really two things, one isthe politics of it, and
second that it’s notnecessarily a stand out idea – you know,it’s not a bad idea,
but there are otherways to add what I think is the requiredadditional stimulus.

I
just think that if you did reduceSG from 9 to 6, I’d be almost certainthat the
next election would be foughton the idea of not –not taking that boneoff the
hungry dog, and putting it backinto super. The next election would befought on
that. And there is no way inthe world that at least one of the majorparties
wouldn’t run that position. Sothat I think it’s a dangerous, dangerousstrategy
from a political point of view.It was too hard to get there, and socreatively
done by the government whenthey legislated SG, with the phasing and all – we
can’t risk it in my view.And on the economics of it, I think thatthe marginal
propensity to save hasgone up, and only a small part of thestimulus that has
been put out there hastranslated into consumption.

That’s notthe end of the
story, I know, Nick.But I think it wouldn’t be bad to tryand focus on the
issues of more directjob stimulus. And if the superannuationindustry needs to
be roped intothat, with creative measures, fine, youwould do that if you
thought the crisiswas bad enough, and you wouldn’t do itotherwise. Because I
think we all knowthe problems of regulation seeming agood idea at the time.
But, my bet isstill really on the idea of direct stimulation.We haven’t done
anywhere nearenough thinking, if any, on how theprivate sector, that part of
the privatesector which has some money, whichis largely in superannuation
funds, andoffshore funds, sovereign funds, andsome parts of the private
industry, howit can be channelled into that direct jobcreation stimulus.

I’d
prefer to focus onthat.
Michael Bailey: But is that sort ofprogram providing the immediacy weneed?Tony Cole: I worry about
thegovernment starting to tell super fundshow to invest their money.Nicholas Gruen: Exactly.
I think alot of what Garry’s said is interestingand I’d like to follow it up.
But certainlyon that point I’d be much more concernedabout governments telling
superfunds how to invest than trying to fiddlewith the rate. It’s like an
interest rate,it’s so transparent and hands off, it’s justmoving a single
parameter.

Tony Cole: I think on the marginalpropensity to save – we did see a
big increasein saving yesterday in the nationalaccounts. But we don’t know
where thatcame from, I mean that could just be allthe interest rate cuts .Tony Harris: That’s
right, threequarters of people haven’t reduced theirrepayments to the bank.Colin Tate: So, Don
Russell …youwere there when this whole plan wasconceived, when 15 per cent SG
wasconsidered a minimum requirement. Iimagine you were grossly disappointedwhen
the Howard Government did what it did.

Can you reflect a little biton that plan
and then also, if you werea chief of staff to the Prime Ministertoday and the
economy deteriorates toa more dire scenario, what are the solutions?And is
reducing SG one of them?Don Russell: The stimulus underwhat the economists have suggested isreally
coming from a windfall increasein wages to people. at the same timeIt’s
temporary. At the same time you’retelling them this is probably the worstfinancial
situation we’ve ever been in, atthe same time you’re telling them we’vebeen
overconsuming and we shouldbe saving, so my guess is most of that’sgoing to end
up in savings. Whichis where it’s been going from othermeasures.

I would have
thought that thechances of stimulus to consumption ispretty marginal.Nicholas Gruen: In which
case it’s agreat sly scheme for the industry to getthe rate up to 12 per cent
in the future,without much effect on the short term– perfect. No problem at
all.Don Russell: This is a really unusualcollapse in that we’re dealing witha
quite extraordinary collapse in wealth,a collapse in equities and US housingprices
and what have you. We are notgoing to get this back into some sort ofbalance
until we put a floor under assetprices, and in reality push those assetprices
back up again.

Because that’swhat’s terrifying the pants off people.They’re
looking at retirement arrangementswhich they thought were inplace but now, my
goodness, people arethinking about working until they getput in a box. So we’ve
got a major problemwhich is to do with asset prices.Now one of the things the
SG hasdone – and I’ve dug these numbers outbecause Richard Gilbert has got me
todo something at the IFSA Conferenceabout increasing the SG – one of thebig,
big benefits of the SG has been thatthe equity risk premium in Australiahas
actually come down.

Australia’s
traditionally run anequity risk premium higher than therest of the world
because we’re a capitalimporting country. Normally we’vehad to offer anyone
holding equity in

Australia
something higher than theworld average.But if you look at what’s happenedto the
equity risk premium over thelast twenty, thirty years, we used to bewell above
average, but it’s come backdown. All the money that we’ve channelledinto super
and into Australianequities has actually worked to lowerthe equity risk premium
which hashad an amazing effect on valuations,it’s had an amazing effect on
basically the cost of capital, it’s actually enabled a whole stack of things in

Australia to be
financed which we haven’t financed before.

But in the last two quarters, it’sactually
jumped back up again.Nicholas Gruen: Above the rest ofthe world?Don
Russell: Above the rest of the world. In other
words the Australian equity market has been punished morethan other markets when
you link itback to earnings and what have you.You can understand why it’s
happened,it’s to do with people’s concern aboutcommodities, the world growth
rateand so on, but one of the things we have got going for us is that in the SG,
we have this steady amount of money that’sgoing into the equity market and goinginto
assets in

Australia.

So
I think if you turn that off, you know, you get very little consumption,and you
run the risk of actually doingsomething quite unpleasant to equityprices in

Australia,
which is likely tohave a negative effect overall.Rod Glover: The argument aboutwhether
it’s going to work in the shortterm, and whether people are going toconsume or
people are going to save,is a bit to one side in the sense that weface that
argument with any stimulus measure.

You hand out a cash payment,you give them a
tax cut, anything that’stemporary. There’s going to be no doubtwhatsoever that
some of it’s going to bespent and some of it’s going to be saved.Pauline Vamos: There’s a
potentialreal cost to members in that. If suddenlythere was a market uplift and
they’renot putting in as much as they can, theymiss out on that uplift.Rob Goodlad: I’ll still
argue withyou in 1998 and in 2001 in the tech wreck, had the government reduced
the SG that quite possibly we’d still have afairly sizeable catch up, just from
thatperiod.Rod Glover: But we’ve got toremember that we’re talking about the additional
9 per cent that goes in each year, your base in superannuation is alreadythere,
and it’s just 6 per cent extrainstead of 9 per cent extra going in, andit’s
only that two year window. So youwork out, if you had a 10 per cent difference,you’re
only talking about a 1 percent or 2 per cent difference long tem.Garry Weaven: I promise
you one thing.

You give people a chance, they’llvote for 9 per cent in their pay
packetevery day, and no tax regime ever inventedwas a big enough incentive to
getmoney into super, none.We had zero growth in superannuationpre-’83, when 5
per cent of the finallump sum was taxable. People have aninfinite preference
for a dollar in theirhand – in fact, there’s even a preferencefor a dollar in
their hand plus everythingthey can borrow off a bank, at an18 per cent interest
rate.

Fiona Reynolds: And superannuationas a policy is already coming underfire
this year. There’s discussion aboutwhat we should be doing about it longterm.
That is going to get worse, it’s go-ing to get worse this year, when
peoplesee their returns. And probably the yearafter when people see their
returns. AndI just think this policy at this time isreally, really dangerous to
the long termviability of superannuation.The finance sector also employs ahuge
number of people in

Australia,
sowhat happens about that? You knowwe’re taking people from – instead ofpaying
15 per cent contributions tax topossibly paying 40 per cent marginaltax on the
amount that we’re savinganyway.

Then you’ve got people at theretirement end who
are having theircontributions reduced. So that’s likelyto mean them getting
more of an agepension, so the government’s payingover there. It just seems like
a viciouscycle to me.Nicholas Gruen: I’m struck, andI take Garry’s point that
there is a politicaloverlay to this and it’s wise not to benaïve about it. So
that’s fair enough.But I am still struck by the fact thatthis is a proposal to
lower compulsorycontributions temporarily, to thenincrease them by 3 per cent
or a thirdfrom where they are now. And everyoneis so focussed on their short
termconcerns that we haven’t even talkedabout that.

I actually think that
increasing compulsorysaving in

Australia
is a missingpart of the recovery, of negotiating ourway through this terrible
period with anasty looking foreign debt.I signed the letter and argued foran
increase – a long term increase, notas a sort of rhetorical flourish and notas
something which might help me sellwhat I really want to do, which is getmy
Keynesian rocks off in the shortterm. But because I think that’s reallyimportant.And
I think that the super industry,if you’ll pardon me saying, reminds meof my old
friends in the automotiveindustry who just can’t see why peopleshouldn’t be
forced to buy cars.

‘Thereare all those jobs in the industry, whycan’t the
government make life easier forus?’ Well, that’s not the government’s joband
all sorts of things are going on inthe economy.And we’re in a crisis and the
crisiscan morph in all sorts of nasty ways intoa, for instance, a currency or a
borrowingconfidence crisis. And I think theindustry is looking a gift horse in
themouth. If the industry can get the SGinto a space in which it’s in policy
makers’minds like the interest rate is, thenit’s really come of age, it’s
really becomea very deeply legitimate part of the economiclandscape in

Australia. And that’sthe
opportunity that I thought I wasoffering the industry.

And I’m sorry Ididn’t
make the appropriate phone calls.Fair enough there are political risks thatare
not to be trivialised, but I wouldurge people to look at the opportunitiesas
well as the threats.Garry Weaven: I agree, Nick, theindustry hasn’t any right
just to saybecause we’re there and we have jobswe should get whatever we want,
but itactually is a more sustainable industrythan making petrol-based cars. It
ismore promising as a long term comparativeadvantage, and part of thatcomparative
advantage is national savingsas you know. And I actually agree,I’m in the same
camp as Tony as a longterm advocate of variable super.

I onlywant it to go one
way though.Tony Cole: Intellectually I neverthought I could do that.Garry
Weaven: Well I tell you, oneday we will return to an inflationarythreat
environment and that is the timewhen governments need to take partof their
potential tax take and put thatinto super. Instead of handing it out inpolitical
bribery.Nicholas Gruen: As they shouldhave been doing for years.Garry Weaven:
It’s a real politik approach. Because you cannot wean apolitician off giving out
money at election time.

So you give voters the secondbest thing to cash in hand
which is cashin their own personal super account.With full preservation rules
and a pensionsystem at the end of it.I think that is reasonable, and youcan
vary that and you can make it clear that it does depend on the budgetconditions
at the time, the inflationary environment, your economic objectives year on year.Nicholas
Gruen: But the rate can’tgo down?Garry Weaven: Well it can comefrom a base of 9
or a base of 12 with occasionaltop ups when the economy andfiscal policy allows
it to.

That would beentirely understandable and would haveboth a political
effect and the long termsavings effect in my view. So I’ve alwaysfavoured that.
If you think throughthis crisis, that’s where we ought to beheading. It’s very
likely, I think, to be aninvestment led recovery, not a consumptionled
recovery. And I think maybewe should focus on that a bit.Tony Cole: Well none
of us areopposed to the government spendingmoney on building infrastructure,helping
people to reduce their carbonemissions.
Michael Bailey:
But for your SGproposal to work, you’re saying it’sgot to be able to come down
to meeteconomic shocks.Tony Cole: That’s my view, and onthe basis that I don’t
think monetarypolicy can be effective because it workson such a narrow slice of
the economy.

So I’d like to give the Reserve Bankanother instrument, that’s what
I ’d like.Rob Goodlad: I think it’s counterintuitivethat a year ago, it was
madeextraordinarily attractive for people toinvest in superannuation when the
marketwas at its highest. Well now thatthe market is at its lows, we’re
reducingthe amount that goes in, so from aninvestment perspective, it’s the
wrongway round.Nicholas Gruen: It alarms mea little bit, this idea that the way
wecurrently do things is sacred, and thatwe can’t adjust the 9 per cent no
matterwhat.

The difficulty is the industry isgoing to say, we want to adjust
the 9 percent, but only up to 12. Government’sin a situation where they’re
squeezedand they’re trying to make deals that aremutually beneficial to
different objectives.What we were trying to do withthis was basically say,
here’s somethingthat had a short term impact, that meetsGovernment needs, and
has a long termimpact that meets the nation’s needs.You can sell that politically.
Just arguing9 to 12 in my view is not going to get upin the current climate.The
super industry doesn’t have anyincentive to say, for example, let’s go 9to 12
and let’s reform the regressivity ofthe taxation treatment of super, becausethat
second component of it is actuallya negative for super.

So no one elseis going
to play into that space. In theabsence of that, in the absence of a shortterm-long
term trade off, then what arewe left with? Even worse for the superindustry,
we’ve got a debate about theadequacy of pensions in the retirementincomes
review, are they going to pulla bit from super to make sure they’repropping up
the pensions?Because we haven’t got a lot ofmoney coming from anywhere else. SoI
think the danger of doing nothing asa super industry and putting nothingon the
table, a give and take, is that youmight get done over.Colin Tate: Rob, what
was theresponse to your porposal from Kevin Rudd, whom you know well?Rod Glover:
I’d prefer not to talkabout the direct response from the individuals.Basically
we spoke to the PM,we spoke to the Treasurer’s office, wespoke to Nick.

But
what I would saythere is no way in the world that there isa universal view
within the governmentabout what should happen in superannuation.Trevor
Thompson: I wouldn’tdiscount lightly the potential damageof moving backwards to
say 6 per centat this point. It is unbelievably naïveto think that it can be
jumped fromthere up to 12 per cent in any reasonableperiod of time – just sit and
try tocontemplate the process you’ve got togo through to make that happen, andconsider
the history. I just can’t see howthat can be done.Tony Harris: The interesting
thingabout making statements in the longterm is how easily digestible they areby
the population. I mean we’ve movedwomen’s eligibility for the aged pensionfrom
60 to 65 years, that’s a huge disadvantageto women.

But because of thelength of
time it was done over, it’s beenaccommodated reasonably well. Andif you do our
proposal over the lengthof time we proposed, get into people’sbrains that it’s
automatic, the debategoes away.Garry Weaven: It’s part of a biggerdiscussion in
a way, isn’t it, because whatyou’re really is, politicians are such anappalling
race of people that we shouldreally just have a ceremonial election,you know,
and let them all run aroundcutting ribbons for the next three years.But take
all the important decisionsaway and put them in the handsof some rule book or
some independentestablished tribunal.

My fear is thatwould very quickly become
outdated,outmoded and so conservative, that itwould be immeasurably worse.For
example, I don’t think theReserve Bank was very flash at all whenthey did their
first interest rate rise. Iwrote to the papers saying they shouldactually get
out of

Canberra
and go to

New York,
and Ken Henry too, becausethey were all singing the same bloodysong about
inflation while the USeconomy’s falling off a cliff.In spite of my concerns
about shortterm political behaviour, you need to bevery careful about saying,
we’ve so lostfaith in the democratic process we cannever retrieve it.

Michael Bailey: Can I just inviteeveryone at the
table to hop into a timemachine, it’s 1993 and compulsory superis enacted, and
the proposal to haveit set by an independent body is enactedfrom day one.I’m
just wondering, particularlythrough all the years where obviously itwent to 9
and then nowhere, if we hada Reserve Bank looking after the SG,what would its
journey have been andwhere would we have been in terms ofsome of our foreign
debt problem, ourhousing bubble problem, would we be abit better off in terms
of facing the crisisthan we are today.

Nicholas Gruen: I don’t knowwhether
there’s anyone around the tablewho would argue that an independentbody of
technocrats should take over anessentially political decision to increase,in a
long run sense, the level of compulsorysuperannuation.Certainly speaking
personally, Isee the role of an independent agencyas one that deals with the
parameter,which is the SG, in a counter cyclicalway when it’s reached some
level of maturity.

I would argue it’s not fullymature now, but I would argue
that thisis an invitation for the industry to helpit get to that level.In fact
I think super should keepgoing. I think you’re looking a gift horsein the
mouth, it should go above 12 andprobably 15 and should be available forpeople’s
deposit on their homes. Foreducation and so on. Doesn’t make anysense if it
isn’t a sort of integrated savingspackage.

But the super industry is giving allthat
away because it’s saying, we’ve gotour fingers on the ledge and by Godwe’re
going to hang on, we’re not goingto discuss any of this stuff because wemight
get a smaller super pool and it’staken us this long to get the thing setup. But
those are the things that are upfor grabs it seems to me.Rod Glover: I could
not agree withthat more strongly. The other observationI’d make is some of
those discussionsare happening. They might not behappening in the public
debate, but theyare definitely happening.

And I think ifthe super industry is
not in that space,and is not engaging in those debates,then they might just
find it happenswithout them.Garry Weaven: If people want toadvocate the ability
to get your handson your super at any time in your lifeand just spend it, fine.
But don’t thensay you’re about building long termsavings.Nicholas Gruen: Well
you are, becauseyou’d have a higher SG. You cando two things at once, not one.
Walkand chew gum!Garry Weaven: How much higherdo you reckon the SG needs to be
if people can take their house deposit outat the ages of between 20 and 35? And your
education expenses. I can see the ads – ‘You can send your children to Carey
Grammar.

Give us your super.’Tony Cole: I personally wouldadvocate getting
retirement incomessorted out first before we expand super.Pauline Vamos: The
industry isnot, as Nick says, hanging on to thecurrent framework for grim
death. A lotof the change in the industry has beendriven by the superannuation
industryitself. And there are some tax incentiveswithin super that maybe we
just need togive back to government so they can usethat for other things.

We
need to debate the wholepicture, the impact on wages as well.Remember to get SG
up, there was awage freeze for quite some time.So in terms of going backwards
andthen forwards again, you’ve got to thinkabout, well what will that do to
wages?I think one of the universal statementsthat has been made here is that
thereneeds to be a band, and there needs tobe a floor. And I suppose what we
aredisagreeing on is where that floor needsto be.

Garry Weaven: If politicians
decidethe SG is the centre of their response tothe crisis, the superannuation
industrymay be doomed. I think there are otherthings that should be at the
centre ofthe response, like investment by superfunds.
Michael
Bailey: One of the proposalsin the economists’ open letter
was arelaxing of some of the hardship accessrules around super. What
specificallywould you like to see happen there?Rod Glover: We were thinkingabout
it from this perspective, is itbetter to hold on to the current systemor is it
better for someone to keep theirhome?I’m talking quite exceptional
circumstanceshere, not a general propositionabout people being able to tap into super
for general housing or employmentor retraining services.

But is itpossible that
there are situations whereit would be better to dip into that if itmeans
keeping your home or keepingthe skills that are going to be needed tokeep you
in work. And I would say yesto that.But I wouldn’t get too much morespecific
than that. Other than to say, wedo need to think about whether there’s aneed
for some flexibility.Pauline Vamos: I think that peoplecan dip into their super
if they’re inthe situation where they’re about to lose their home.

Despite what
theactual rules are I think that particularly,APRA is quite generous about it.Fiona
Reynolds: They are supposedto asses whether you could ever actually afford that
home you might be about tolose. It can create unfortunate situationsbut you
know, there’s a sole purpose testin superannuation for a reason, and weshouldn’t
remove it lightly.Colin Tate: Closing comments?Tony Harris: Inventory did drivethe
national accounts and I think that’sbecause companies think consumptionhas
collapsed.And if you want consumption togrow I don’t think interest rates will
doit for you.

I’m very worried about thegovernment’s capacity to spend moneylet
alone spend it wisely, and that’s anotheradvantage of having people spend their
own money if they want. Paluine Vamos: My concern is stillthat once you go to 6,
you’ll never getback. And I haven’t changed that viewdespite all the
conversation.Fiona Reynolds: You have to bepractical about this. We’ve said for
examplein our submission to the Henryreview that we did with Industry SuperNetwork,
that on adequacy you needto have a floor but also a ceiling. And maybe once
you’ve hit that ceiling of where you need to get to, then everything after that
once you want to pull it out at retirement age, maybe that’s when you decide it’s
not tax free. Because the government has givenyou tax incentives to get to a
certainlevel but not just for you to keep pumpingmillions of dollars in.

 

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