As the nation grapples with economic uncertainty, a glimmer of hope lies in an unexpected place: Australia’s superannuation system. Economists have been sounding the alarm about stagnant living standards, with predictions that real household disposable income per person may not return to its 2021 peak until 2037. However, a unique financial strategy could prove pivotal in reversing this trend.
Recently, Chris Richardson, a leading economist, highlighted the bleak outlook for living standards, emphasizing the critical role of productivity. Since the Industrial Revolution, technological and educational advancements have driven economic growth by increasing the efficiency of labor and capital. Yet, this engine of growth appears to have stalled, with productivity improvements slowing significantly.
Productivity Concerns and Economic Growth
Historically, Australia’s economic forecasts assumed a 1.5% annual increase in labor productivity. However, the Reserve Bank has revised this figure to a mere 0.7%, reflecting a broader global trend of decelerating productivity growth. As American economist Paul Krugman famously stated, “Productivity isn’t everything, but in the long run, it’s almost everything.”
Despite the validity of Krugman’s assertion, John O’Mahony of Deloitte Access Economics argues that this perspective overlooks a critical factor unique to Australia: the national superannuation scheme. Established in 1992 by the Keating government, this initiative mandates that employees contribute a portion of their wages to superannuation funds, which are primarily invested in company shares.
The Superannuation Advantage
Australia’s superannuation system is a financial powerhouse, with assets now totaling $4.2 trillion. O’Mahony projects that by 2063, these assets could exceed $38 trillion, adjusted for inflation. This massive pool of capital is not only invested domestically but also in foreign shares, generating a steady stream of international dividends.
In about 40 years, superannuation assets will be worth more than $38 trillion, a fourfold increase after inflation.
The influx of foreign dividends into Australian superannuation accounts represents a significant boost to national income. While Australia has historically paid substantial dividends to foreign investors, the growing flow of foreign income back into the country is beginning to offset these outflows.
Implications for Economic Growth
The superannuation scheme’s impact on economic growth is twofold. On the one hand, the mandatory contributions have curtailed immediate consumer spending, slowing economic expansion. This effect has been particularly pronounced in recent years as contribution rates increased from 9.5% to 12% of wages. Although legally paid by employers, these contributions effectively reduce employees’ take-home pay.
On the other hand, the investment of superannuation funds in shares has generated dividends that enhance Australians’ income. While these dividends are initially held in superannuation accounts, they eventually enter the economy as retirees withdraw funds or pass them on to heirs.
Long-Term Economic Projections
Every five years, the Treasury releases an intergenerational report projecting economic trends over the next four decades. The 2023 report predicted a 50% increase in real gross national income per person by 2063, reaching $124,000 annually. However, this estimate did not account for the substantial foreign income generated by superannuation investments.
When O’Mahony recalculated, he found real income per person 13% higher, with foreign income growth contributing 28% to the increase.
This oversight underscores the transformative potential of Australia’s superannuation system. As the scheme matures, its influence on national income and economic growth will become increasingly significant.
The Path Forward
Australia’s superannuation system offers a unique advantage in a world grappling with sluggish productivity growth. By continuing to invest in both domestic and international markets, the nation can harness the power of compound returns and foreign dividends to bolster economic prosperity.
While challenges remain, particularly in addressing immediate living standards, the long-term outlook is promising. As more Australians retire with substantial superannuation balances, the flow of funds into the economy will accelerate, supporting consumption and investment.
In conclusion, while the current economic landscape may appear daunting, Australia’s superannuation system provides a strategic edge. By leveraging this financial ace, the nation can navigate the challenges of the 21st century and secure a brighter, more prosperous future.
