After another interest rate rise last month plenty of Australians are asking why there isn’t another way to rein in inflation.
And no fewer than half a dozen journalists, fellow economists and highly leveraged members of my group chats have raised such an alternative: increasing the compulsory saving rate into superannuation accounts, to reduce disposable income and thus consumption.
If we need to reduce demand to rein in inflation, so the thinking goes, wouldn’t it be fairer to reduce everyone’s consumption by the same proportion?
Unlike previous changes to the superannuation scheme this increased payment to super would come out of the take home wage packet - rather than on top of it.
On paper the plan sounds great. We force people to save more today, so they will spend less and thus lower inflation. And by applying it to wages, which all workers earn, the reduction in consumption will be more evenly spread rather than rising interest rates which are much more keenly felt by those with high levels of debt. The money can then be returned to households slowly when the inflation surge is over, or when they retire.
Unfortunately I do not think such a scheme would work.
Incentives matter
One big issue is that households may well offset the forced saving by a reduction in their rate of voluntary saving.
Imagine you have plenty of money in your mortgage offset account and the government takes away $10,000 from you promising to give it back in two years time once inflation has returned to target. Would you cut back on your consumption, cancelling dinners out and after school classes, or would you dip into your liquid savings to smooth your consumption knowing the money will be paid back (with interest) soon?
This hypothetical is even more clear cut if the household that is already making voluntary contributions to their super account (generally older and wealthier households). They could simply reduce their voluntary contributions by the same amount as the rise in compulsory saving and be completely unaffected by the policy.
At the more extreme you could even imagine households taking out loans and credit cards to keep their level of consumption going - knowing that they would pay back the loans in 2025 when they get access to their funds.
There is strong evidence that most people would try and smooth their consumption via borrowing or reduced saving. Only households who aren’t able to borrow will be forced to cut back. What sort of households would be unable to borrow and be forced to cut back? This RBA research paper dives into this question in considerable detail.
These households are disproportionately young, renters, poorer and in total are only around 20 per cent of the population. This number could fall even lower as the implementation of a forced saving scheme would surely increase demand for new types of credit and loans.
Fundamentally a compulsory saving scheme doesn’t change households underlying desire to save, and thus households will be strongly incentivised to reverse the impact of such a policy - and many will be able to do so.
By contrast higher interest rates encourage people to cut back on their consumption regardless of their income or ability to borrow. Whether you are wealthy or poor, saving or borrowing, higher interest rates give everyone a stronger reason to save (even if they also have large income effects for people who are at the extreme ends of the net-borrowing spectrum.
In short such a scheme would force all of the inflation fighting burden on those that can least afford it, allowing wealthier households to ignore the scheme and carry on spending. The wealthier may even benefit from it if it means they can put more of their income in their tax advantaged superannuation accounts!
It gets worse
There are also lots of practical problems with implementation. We already know that there is a long record of both wage theft and superannuation underpayment in Australia. I fear this scheme would supercharge both of those crimes.
You would effectively be giving every business a directive to reduce take home wages in exchange for higher superannuation payments. However, most workers don't think about their super accounts at all. In fact, superannuation research reports that many people could make themselves substantially better off if they spent just 5 or 10 minutes re-optimising their superannuation account settings, away from high fees and towards low-fee index funds - but they rarely do so.
This is always going to be a problem with such long-term financial products. However, I suspect it would similarly apply to such a hypothetical compulsory superannuation payments. Businesses would have no trouble decreasing take-home pay (conveniently pointing the finger at the government as the culprit). However there would be a strong incentive for many businesses to either forget to pass on the additional payments to the super accounts or to underpay their workers. When was the last time you checked your superannuation payments to make sure they are correct? I know, I certainly haven't.
Requiring businesses to set up an entirely new scheme seems like a golden opportunity for businesses to accidentally make a mistake and send an incorrect amount - given the novelty of such a scheme forgiveness for such mistakes would be highly likely. And, much like wage theft, I suspect the vast majority of such mistakes would be in the businesses' favour, not the workers'.
Who controls the spice?
Finally, you have the issue of who controls the rate at which households are forced to save. You essentially have three options here.
You give the power over to the Reserve Bank of Australia, or
You give it to some other independent government body, or finally
The Commonwealth Treasurer runs the show.
The problem with giving it to the RBA is that it inherently politicises the Reserve Bank.
Deciding the right mix between high interest rates and forced savings is inherently a distributional question. Should we be placing the burden on debtors or people who are unable to qualify for a credit card to circumvent the compulsory saving?
This is a decision that economists have no business making. It is a political decision and one that should be made by the people’s representatives. As upset as people are with the RBA now, imagine how much worse it would be when they announce they are deliberately withholding your wage so that your brother in law road can afford a bigger mortgage.
There is no basis in economics for making such a call, and thus the Reserve Bank of Australia (an organisation filled with economists) is fundamentally ill-suited to be making it.
However, leaving that power in the hands of a second organisation risks the risk of a second problem: conflict between the two organisations over which tool should be deployed and in what quantity.
We saw a very similar dynamic play out in the pre-pandemic period, when the RBA was keen to stimulate the economy but didn't want to do so with monetary policy for fear of stoking a housing bubble. Central bankers were desperate for APRA to intervene with macroprudential rules to rein in asset prices or the Treasury to spend more, but both were reluctant to do so. Accordingly, we had a group project in which all parties resorted to inaction and thus left tens of thousands of workers unemployed.
You could imagine a similar scenario in which the RBA and the GST-varying body get into a Mexican standoff where neither side wants to be the bad guy and rein in inflation with their respective tools and so the problem goes unchecked.
Perhaps the best answer for who should control such a policy is the Treasurer. However the Treasurer already has a multitude of tools which they could use to try and reduce inflation - indeed this scheme would conceptually be very similar to a simple tax on labour that is used to fund through tax cuts further down the line.
However, all of arrows in the Treasurer’s quiver are some combination of unpopular, difficult to do and hard to implement quickly. Increasing compulsory savings is just another option in this range of unattractive inflation-fighting tools alongside raising taxes, cutting public services and reducing transfers to households. Any of these alternatives would likely be more effective than such a compulsory savings scheme and less likely to promote wage theft.
So we are left with a policy proposal that would disproportionately fall on the poor and those who don't have good access to credit, that would be politically complex and run the risk of creating logjams in the management of aggregate demand all the while running the risk of wage theft and more conflict between the Treasurer and the Reserve Bank of Australia.
Unfortunately there are no easy solutions in life and certainly no easy solutions to the problem of high inflation. Monetary policy may not be everybody's favourite policy tool and I can certainly understand why highly indebted households would want fiscal policy to be deployed to help out. Unfortunately I don't think a compulsory savings scheme would work well. And even if you wanted to do something that approximates this policy you would be better off just issuing a temporary tax on labour income rather than messing about with the complexity of the current superannuation system.
Assuming inflation is primarily demand-pull, you are correct.
Also note, the problem is not the economics of it - not the macroeconomics - the aggregates
but the politics - the political economy of it - how to make it happen with the least harm.
These things are interdependent but the lines between the two are too often blurred.
Always surprised when people suggest contractionary changes in the SG or other tax rates would be more popular than changes in interest rates. Also worth recalling the SG rate is already increasing every year and therefore a significant drag on take-home pay.