The Australian economy right now is stuck in a downward spiral of low productivity. The longer-term problem is that while Australia's intergenerational fiscal and economic strategy is predicated on productivity growth of 1.6 per cent from 2019-20, the post-2012 trend is closer to 1 per cent - and it looks like we have a downturn on the horizon, so no quick rebound in activity.
Productivity gains are the grease which lubricates our economic machine, sustaining wealth increases for households, fuelling wage gains, and generating profits from earnings and capital gains that benefit business owners including superannuation fund members.
Productivity declines crimp decent wage increases, which is why sectoral wage gains in excess of 3 per cent are so rare these days, when a decade ago a 4 per cent annual enterprise wage increase was not unusual.
Surely, when it comes to the Australian economy we should shoot for the stars. That means striving for a win-win reform program with a fair-go ethos.
The Superannuation Guarantee (SG) introduced in 1992 is such a reform. The idea is to provide every working Australian an opportunity to have a more adequate retirement income, while allowing workers to pool capital and to invest like Warren Buffet in a diversified, fit-for-purpose scale superannuation fund which can also access unlisted investment opportunities and maximise the magic of compound interest.
The SG was phased in at 3 per cent, gradually rising to 9.5 per cent without increasing costs or making businesses uncompetitive.
The SG is legislated to begin rising from 9.5 per cent in 2021 to 12 per cent by 2025.
Now the SG is said by some to retard growth and living standards by leaving lower-paid Australians worse off. The irony in that argument is that working Australians in the aggregate have not been receiving "productivity" wages for a decade.
In an era when labour productivity is not feeding through to real wages (which once was automatic), employers have the capability to pay SG while not impacting wage increases.
We focus on labour productivity here in our chart as it is more (directly) relevant in the wage context. Some prefer multi-factor productivity (MFP), which captures technological change, and argue that growth here has been a little better, though not spectacular.
Business will not spend on CAPEX if consumers are on strike. And workers are in the end consumers, so it is a vicious downward cycle crimping aggregate demand.
That's why it is so unfortunate to see a small number of critics sweating the small stuff on the SG, when they should be helping to forge a consensus to retrofit our economy so it can perform in the next century - in a way that drives up living standards, whilst quarantining the disadvantaged from the adjustment process between the working and retirement phases of life.
It is worth remembering that, on average, people are living longer, and we are told that deposit rates will be "lower for longer". Presumably both trends are related and should precipitate higher saving rates.
Those who are against an increase in the SG claim that growth in employees' take-home wages today will be offset by close to the full amount of the SG rise. Given the complexity of the labour market (and the myriad interactions and wage-setting mechanisms it involves), such an argument is broad and simplistic.
There is also no guarantee that there will be a wage rise if the SG does not go up. Recent history shows us employers have not been returning labour productivity gains to employees, with wages only rising with the CPI. The critics of the SG haven't explained the transmission mechanism for how a full pass-through of productivity will occur (either to catch up for a lost decade or in the future).
Crucially, if superannuation funds do their job and perform strongly in generating returns on investment, workers will be adequately compensated for deferring after-tax consumption today with higher retirement period consumption. This was, and remains, the key objective of superannuation. So, what are we talking about?
Certainly, the architects of the Australian superannuation system were wise to build in the binding constraint of compulsion to the system. This approach was ahead of its time and has been vindicated by later research in behavioural economics.
Most of us know how to achieve value for money when buying most smaller consumable goods. Shop around, they say. But in timing the purchase of major capital goods (residential housing) and buying contracted services like gas, electricity, health and life insurance, tertiary training and certain specialised medical care and superannuation, most of us are flying blind and don't even know it. Therefore, compulsion works when effective oversight and quality filters are in place.
Compulsion has certainly underpinned that national saving, leading to a structural improvement in the current account so much so that it is no longer a vulnerability. The savings pool itself has supported strategic investments across the Australian economy in real assets such as infrastructure, property, IT, aged care, agriculture, renewables and more, protecting our national sovereignty. These vital supply chains would otherwise be picked off by foreigners for the most part.
Thinking about the macroeconomics, there must be a theoretical upper limit to SG contributions, but that number is higher than 9.5 per cent, based on how many Australians are still relying on the aged pension to some extent.
Provided that the superannuation system is efficiently converting deferred wages into an adequate stream of retirement income, that number could be well north of 12 per cent, even as high as 15 per cent as was originally envisaged by the system's architects.
Right now, the best public offer super funds are generating around 7 per cent in nominal terms over 20 years (which outperforms the global benchmark). Surely we can do better than this in the future too, especially when the Australian and global economies are firing on all cylinders.
So, the clear-cut lesson is that the SG needs to be higher than it is now.
We should be talking about how to get back on the high-growth, high-wages track. The main game must surely be meaningful supply-side economic reforms to drive the economy back to a high-growth trajectory. Areas ripe for rethink and reform include taxation, vocational training, energy, infrastructure, banking, and, yes, superannuation (for example, addressing fund underperformance, ending the problem of multiple accounts, tackling unpaid super and ensuring high-value insurance).
It is true that there are serious structural problems with the retirement income system in Australia. There are problems with the way the Australian taxation, transfer and retirement systems interact. The aged-pension taper rate is too high. Low-paid workers are disadvantaged here. The federal government should fix this problem.
Moving forward, it is a great time to rethink policy priorities, to work together to achieve a grand coalition for productivity-engendering policy reform. In other words, let's get back to the main game, and stop sweating the small stuff.
Australia can have stronger economic growth and higher investment returns, but only by paying productivity wages and to spur effective demand and motivate real business investment. The scheduled SG increases should be seen as a necessary companion of higher wage increases that delivers a fair go to working Australians.
- Stephen Anthony is chief economist at Industry Super Australia. Twitter: @SAnthonyMacro