RDP 9511: Superannuation and Saving 1. Introduction

Traditionally, Australia's retirement income system has relied mainly on the age pension. For many years the main alternative source of retirement income, employer-sponsored and personal superannuation, was not widely used. Over the past decade, however, there has been substantial reform of government pension entitlements and superannuation legislation, designed primarily to promote the use of private saving for retirement and to boost private and national saving. Access to government pensions was restricted and the role of superannuation was broadened. As a result, superannuation has become an increasingly important form of household saving.

While these initiatives continue to expand superannuation coverage and have increased the flow of household saving into superannuation funds, the net effect on aggregate household saving is not clear. There has been no obvious pickup in aggregate household saving over the past decade corresponding to the rise in superannuation, and it is possible that households may have partly offset the rise in superannuation saving by reducing other forms of saving.^[1] This paper looks at this issue: specifically, to what extent have flows into superannuation increased aggregate household saving?

Theory does not provide a clear guide to the degree of substitution that we might expect. In standard models of saving behaviour, saving is determined by households' intertemporal consumption preferences and resources are transferred between periods by a portfolio of assets which, at the margin, are regarded as perfect substitutes. In these models, a shift in the allocation of resources to superannuation will not increase aggregate saving, but will result in a one-for-one reduction in other forms of saving. In more realistic models, however, superannuation and other forms of saving are regarded as less than perfect substitutes and, as a result, increased superannuation will not be fully offset by falls in other types of saving. Capital market frictions, such as incomplete information or liquidity constraints may also inhibit substitution, so that complete offsets do not occur.

We might also expect to see different degrees of substitution depending on the source of the superannuation saving. For example, personal contributions, and to a lesser extent employer-funded contributions, may be regarded as reasonably good substitutes for other forms of saving. Savers may have reasonable information about these flows and some control over whether the saving is allocated to superannuation or to other types of saving. They may have less information and less effective control, however, over other forms of superannuation saving, such as interest earnings and capital gains on superannuation assets. While increased superannuation saving through higher net contributions may be expected to be offset by some reduction in other saving, it is far less likely that increased superannuation saving through higher earnings would have the same effect.

The empirical evidence on this question is mixed. Some overseas studies find that superannuation and other forms of saving are independent (Venti and Wise 1987, 1990, 1991, 1992). More recent studies, however, conclude that higher saving through retirement saving schemes is largely offset by falls in other forms of saving (Engen, Gale and Scholz 1994; Gale and Scholz 1994; OECD 1994; Faruqee and Husain 1995). These studies are not particularly useful, however, because there are significant differences between overseas private pension schemes and Australia's superannuation scheme. For Australia, Edey and Britten-Jones (1990) observed that increased flows into superannuation had not resulted in any obvious increases in aggregate private saving in Australia by that time. Goode (1994) finds evidence of partial substitution.

While these studies, and ours, provide some insights into household saving behaviour, the recent changes in superannuation arrangements in Australia mean that past saving behaviour of households may not be a good guide to future behaviour, particularly as it applies to superannuation saving. The new system has important compulsory elements whereas older schemes relied more on voluntary superannuation. There are also other important differences between the new and older systems and it would be wrong to simply extrapolate these results when assessing the likely impact of the new superannuation arrangements. Nevertheless, an understanding of past behaviour should provide a sounder foundation for assessing the likely impact of current and future superannuation arrangements on household saving behaviour.

The paper is organised as follows. Section 2 describes trends in superannuation, particularly developments over the past decade that have boosted superannuation saving. Section 3 provides an analytical framework for looking at the interaction of superannuation with other forms of saving. Section 4 looks at household saving behaviour in Australia over the past few decades and examines some of the main factors which may have influenced saving over this period. Section 5 presents empirical evidence on the relationship between superannuation saving and other household saving. Section 6 concludes the paper.

Footnote

This is part of the broader question of the effect of superannuation on national saving. [1]