Key points
- While the recent natural disasters will have an economic impact, we must remember that the underlying fundamentals of the Australian economy are strong.
- Australian economy affected by substantial external and internal forces: growth of China and India, our ageing population, size of the state, technology and carbon price.
- Dealing with these opportunities and challenges will require a flexible and adaptable economy.
- Our national superannuation nest egg will help Australia to meet the economic challenges of the future. The Stronger Super reforms are key pillars in delivering this vision
Good afternoon
I'm delighted to have been invited to address the Centre for Investor Education Conference.
So many of you here are conscientious watchers of Australian economic growth and activity, and indeed you are the asset guardians of so many of the Australian people's comfortable retirement.
So this is, without doubt, a room with substantial investment debate intellectual firepower.
And this is a pivotal time for Australia – a time for both the public and private sectors to be especially astute to questions of how to get the long term settings and decisions right.
A time when we are clearly witnessing an economy in transition.
A transition from 20th to 21st Century dynamics - involving different demographics, different technologies, different global prices and different social agendas and responsibilities than we saw define the last century, particularly after the Second World War.
We are experiencing global trends which will undeniably affect how our business and industrial sectors operate. A time when Australia is having to confront a unique set of challenges, and the related opportunities.
It is also a turning point in the development of our superannuation system.
As stewards of the superannuation system you well understand the important choices that we need to make and Ill talk more about these shortly.
Economic recovery from summer natural disasters
Before addressing some broader economic themes, I'd like to touch upon an subject that is dominating plenty of discussions at present – from boardrooms to lunchrooms — and this is how we successfully yet fairly and responsibly recover and rebuild from the devastation that has swept Queensland and parts of Victoria and northern NSW.
Of course, the human cost is incalculable. Our hearts go out to those Australians who have lost loved ones, their homes and their livelihoods, and to those who have had to deal with the kind of distressing situations we all hope we will never face.
I only hope they can gain some measure of comfort, however small, from knowing that their fellow Australians are with them in spirit.
When we look at the damage bill from these natural disasters, we must remember one thing — that the underlying fundamentals of the Australian economy are strong.
In the broader scheme of things, the economic damage from the floods and Cyclone Yasi are short-term challenges.
As you're no doubt aware, to help fund the reconstruction effort, the Commonwealth Government will introduce a one-off levy for the 2011-12 financial year, defer $1 billion worth of scheduled infrastructure spending, and make $2.8 billion of spending cuts.
Treasury estimates the flood levy will raise $1.8 billion.
The rationale for introducing the levy, rather than adding the cost of reconstruction as another line in the Federal Budget, is clear – it's not only the right thing to do, it's the commonsense thing to do.
As the Prime Minister has said: "In our growing economy, we should pay as we go. I don't want the country to have to borrow money and then have to pay the debt back later."
By introducing the flood levy, we are not discounting the generosity of so many people who have made donations to help out their fellow Australians.
Critics of the levy should remember that it is completely separate from donations. As Queensland Premier Anna Bligh has explained so clearly, donations help victims to replace the absolute basics, like to buy a replacement washing machine or indeed the clothes to wash, for example.
The levy will go towards longer-term needs, to help Queensland rebuild essential infrastructure like roads, bridges and railways — the nuts and bolts the state needs to get its industries operating again at full capacity.
The flood levy is designed to be fair. Sixty per cent of taxpayers will contribute less than $1 extra per week. For that small investment, Australians will receive a wonderful return — a resilient and cohesive nation that pulls together to rebuild after an extraordinary natural disaster.
And surely that the kind of Australia we all want to live in.
Looking ahead to the longer term, there are other dynamic forces at play...
In the coming decades, Australia will face opportunities and challenges that are quite different to those we have faced before.
These powerful long-term influences will shape the Australia of the future. We can already see some of these forces playing out now.
The re‑emergence of China and India as global economic powers underlines the new drama and excitement of a world, and a region, characterised by ever-deepening economic integration between countries.
Enormous benefits have been yielded by Australia of late:
- as the centre of gravity in the world economy shifts back to Asia;
- as Australia's natural resources continue to be in huge demand; and
- as the effective reduction in distance between Australia and its export markets assists our trading enterprises.
The extent to which we can sustain this prosperity will depend largely on how well the broader economy adapts to mining boom Mark II.
This means that it will be vital to have the right institutions and policy settings in place.
It is why the Gillard Government is determined to deliver a Minerals Rent Resource Tax, a lower corporate tax rate and participation driven productivity improvements.
Challenges ahead
Another powerful force shaping Australia's future is our growing, and ageing, population.
As highlighted in the Government's 2010 Intergenerational Report, the number of Australians over 65 years old is projected to grow from three million in 2010 to 8.1 million by 2050.
During the same period, the ratio of working-age Australians to those aged over 65 will decrease from 50 people for every 10 today, to just 27 working people for every 10 forty years from now.
These dynamics will of course put pressure on both our economic performance and public finances.
Fundamentally of course, this is not a bad story - it is a great story of giving.
A profound gift from last century to this century.
In this year's national census, we'll almost certainly confirm is that Australia is now home to more than 4,000 centenarians.
How terrific this is, longer life. It means tree changers, sea changers, and caravan park loving grey nomads investing in rural and regional economies all over Australia.
But what does longer life mean for us, not just as individuals and families, but as a society?
It used to be the case that we'd leave school in our teens, work for 40 to 50 years and then be in retirement for about 10, before finally meeting our maker.
Now we might be in education until 20 to 25 years of age, work for about 35 years, and then we have a post-work life of say 20 or even 30 years.
So the challenge, if we choose to call it that – is evident.
How do we ensure that life after work is secure, happy and comfortable as it ought to be?
Today, the average retirement lump sum of someone aged between 60 and 65 is $245,000 for men and $170,000 for women.
By 2035, those numbers will lift to $485,000 for men and $345,000 for women - and you'll note that this means women's super actually doubles.
But a significant part of this forecast growth in retirement balances is attributed to Gillard Government's reforms like the 12 percent Superannuation Guarantee and Superstream's efficiencies.
As we all know, increasing the incentives to save does come at cost to the Budget, because income that goes into superannuation attracts a lower tax rate. This concessionality is a key pillar of our superannuation system.
This is why the Minerals Rent Resource Tax is so important to our nation's future – it pays for the cost of increased superannuation's concessional tax treatment.
Let me talk a little about why Australians should be alarmed about not acting on super reform – as some in the political debate would have us do.
Research estimates indicate that only around 35 percent of the population is likely to achieve their desired standard of living in retirement based on current superannuation arrangements.
The Westpac-ASFA retirement standard determines that a couple in life-after-work need about $54,000 per year to live comfortably.
I don't believe this income level is dignified. For an individual it is around $27,000 a year including the aged pension entitlement.
The average current retirement balance from Australian Super, I'm advised, is about $43,000. If these retirees try to live at the Westpac-ASFA benchmark their superannuation will be exhausted in just 2 years.
If they stick to a modest lifestyle they have an 80 percent chance of it lasting their lifetime as an allocated pension. For those who have bigger balances or those with more time in the workforce contributing 9 percent who may ultimately achieve balances of $150,000 or $300,000 the outlook is not dramatically better.
The retiree with $150,000 can only expect to be able to live comfortably until they are 71 and the with $300,000 until they are 80 years old. That is still well short of a retirees' life expectancy.
And going back to my starting point about the tide of an ageing population, pure fiscal math dictates that the old age pension, indexed or not, simply cannot be the reasonable route to make up the personal retirement income adequacy shortfall.
These dynamics will put pressure on both our economic performance and public finances.
According to the Intergenerational Report release at the beginning of last year, at present the Federal Government needs to allocate equivalent to about 2.6 percent of our GDP to fund the aged pension – nearly $37 billion.
In 2030 the cost is about three times this amount – approaching $120 billion, or equivalent to 3.13 percent of our projected GDP.
By 2040 money equivalent to about three and a half percent of our then estimated GDP – around $215 billion – will be needed to fund the aged and service pension.
These projections are all before accounting for the Gillard Government's 12 percent compulsory contribution rate.
Because a more generous compulsory rate of superannuation – if legislated - does take some pressure off the taxpayer to fund our ageing population.
The superannuation measures outlined in the Government's 2010 budget are projected to reduce age and service pension outlays by $3.8 billion in 2035-36, with the cumulative total save for every year since 2012-13 being $41 billion by 2035.
So clearly, more personal retirement savings is a very big part of the answer of how to deliver an adequate and comfortable retirement but not break the bank in doing so.
That is why the Gillard Government's commitment and determination to take the Superannuation Guarantee from 9 to 12 percent is such a vitally important plank it this country's plan to confront an economy and country in transition.
Other forces that will shape Australia's future include environmental pressures such as water use and climate change, and the transformation of business, commerce and people's lives through technological advances.
In 2011 our economy is fundamentally in good shape — it is growing, unemployment is low, and public finances are sound.
But to adequately tackle the challenges that will undeniably be presented to us, and exploit the opportunities they will bring, it is vital that we do not let our current level of affluence lead to complacency.
To sustain our prosperity into the future, we will definitely need to do three things.
One, we will need a social agenda that enables all Australians to participate in the economic gains. Governments of a progressive, socially inclusive instinct like the one running the country today will be much needed.
I'm talking here about support for profoundly warranted reforms like a National Disabilities Insurance Scheme and addressing workplace participation by getting more people with a disability into productive work. The Prime Minister and Treasurer have shown real leadership here and I am sure they will continue to.
Two, we will need to be wary that the strong and caring ship of state built last century does not sink from burden overload this century.
In other words, we must be vigilant that we don't instinctively try and solve all public policy problems with public sector solutions. We require innovation, new thinking and erudite collaboration between the state and a responsible private sector.
And Three, we will need to make tough, smart decisions to build an adaptable, flexible, innovative and globally competitive low-carbon economy.
This strategy of combining social inclusiveness and adaptability is critical.
We must remember that our current prosperity is largely driven by high prices for our commodity exports, which may prove to be temporary as global supply responds.
In this environment, policies that help to boost Australia's national savings make a lot of sense. And of course we need each and every one of you here today to manage those savings as adeptly as possible.
Role of super in managing prosperity
There is a lot of talk about using the proceeds of the mining boom towards reforms that provide long-term benefits for the country.
There is discussion of Norwegian-style prosperity funds.
I am not going to get into a debate about whether we want to follow this example, but I'd like to point out that Australia already had its own pretty unique prosperity fund – its superannuation.
Our superannuation system is an enduring achievement of successive Labor governments. And it is based on a central tenet of Labor policy — that a comfortable retirement should not be the preserve of the privileged few, but enjoyed by all Australians – whatever their working life income.
However the gift of longer life means we need to save more for our future. We need more superannuation savings.
The Government has made a tough decision to use the part of the proceeds of the mining boom to structurally boost superannuation savings.
Around a third of the proceeds of the Mineral Resources Rent Tax will be used to increase incentives to save for retirement, including increasing the SG from 9 to 12 per cent.
Importantly we are targeting these incentives at those who need the most help to save for their retirement – those on lower incomes, those approaching retirement with lower superannuation balances and those just entering the workforce who will enjoy increased life expectancy.
Our superannuation reforms will boost our national savings, meaning that more of our future investment needs can be financed domestically, reducing current account financing risks. It will also help to reduce the dependence on the aged pension.
As a substantial share of superannuation funds are invested overseas, superannuation savings may also help to hedge the risks associated with potential commodity price fluctuations.
The increase in superannuation contributions will also help to moderate domestic aggregate demand, reducing pressure on inflation, interest rates and the exchange rate.
Consider how much better-off so many economies around the world would be if they had a deep pool of private capital that would stay invested in the domestic economy and help to generate the next wave of jobs and growth.
That's one of the reasons the Gillard Government is committed to growing our superannuation savings. That national nest egg not only provides a comfortable retirement for older Australians, and those who will retire in the decades to come, but also generates wealth and stability for all Australians.
Stronger Super & MySuper
But it is not enough to just support super. Instead, conscious of the demographic challenges that lie ahead, we must strengthen it.
Not only do we need to encourage Australians to contribute more to superannuation, we need to pay greater attention to what happens to this hard-earned money once it hits a member's account.
This is focus of the Government's Stronger Super reforms.
The superannuation system is complex, with back office systems that are not worthy of an industry that manages $1.3 trillion.
Simple activities like consolidating accounts or setting up accounts for multiple employees are time consuming. We all know we can do better.
Not all of this complexity is the industry's doing.
The use of the tax file number is a good example of legislative barriers preventing greater efficiency. That is why the Government has acted decisively to remove the barriers to greater use of TFNs.
However some of this cost and complexity is the industry's doing.
An independent report that many of you will be familiar with, best known as the Cooper Review came to exactly this conclusion.
It concluded that the industry has failed to take advantage of scale efficiencies, that members were being charged for services they did not need and worse still did not use and that, trustees, that it is people such as yourselves, who are paid to be the stewards of the system are not always focussed on delivering services in the most cost effective way.
This independent report concluded that fees in superannuation are too high and that competition had failed to deliver reduced costs for members.
If these conclusions were handed down in relation to any other industry can you imagine the outrage? Imagine if this was a report about milk prices or communication services?
Yet Australians currently pay around $85 a month in superannuation fees, which is more than the average person's monthly mobile phone bill.
Every dollar that is saved in unnecessary fees and charges directly boosts their retirement savings.
MySuper introduces a new duty on trustees to deliver value for money.
It also strips away unnecessary and costly product features so that members can compare funds based on a few transparent measures - investment returns, insurance cover and fees.
Some funds may already look something like MySuper, but we want to extend best practice to the entire industry.
There has been some inevitable criticism of MySuper. But I would ask the industry this – what does it say about the industry that 20 years after compulsory superannuation an independent report concludes that the Government needs to step in to ensure that members get value for money?
Treasury estimates that an additional one per cent in superannuation fees and charges decreases your lump sum at retirement by about 16 percent.
In other words, if we can achieve even a small improvement in value for money by improving the efficiency of the superannuation system, we can help Australians enjoy a comfortable and dignified retirement.
This is why Stronger Super is necessary. That is why MySuper is necessary.
Conclusion
Ladies and gentlemen, as I said at the beginning of my address today, Australia is truly witnessing an economy in transition.
An economy which will be affected by many substantial external influences and serious pressures and changes within our own borders.
So we need to be bold and decisive in getting the settings for the future right.
Our superannuation system provides the deep pool of private capital which will help us to meet those challenges, and whatever else the future may bring.
I thank you for the part you are already playing in prudently managing those savings and, by deduction, our future.