Nibbling away at the rorts

AustralianActuary Business

Joshua Slocum, famous for being the first sailor to single-handedly sail around the world (in the late 19th century) wrote of the slow but gradual progress his yacht, Spray, made up the east Australian coast. He referred to Spray ‘nibbling away at the miles.’

In a modern day version of slow but purposeful progress, the Commissioner of the Royal Commission into Trade Union Governance and Corruption has delivered his own version of nibbling away at the rorts. Justice Dyson Heydon AC, QC, delivered his report to the Governor-General on 28th December 2015. An odd day, perhaps, given that most Australians prefer to be at the beach at this time, or sailing the east Australian coast, and paying attention to a weighty report that carries 79 recommendations for law reform is not so easy. Nonetheless, the GG is made of sterner stuff and the report is now available to the public. One of the recommendations (#51) gives the Government the necessary ammunition to kill off what has been an unconscionable restriction on employee freedom of choice for the last twenty years.  Continue reading →

The French, Italians, English and Austrians knew it. Why not the Australians?

AustralianActuary Economics

The French are credited with saying that the more things change, the more they stay the same. The phrase is less elegant when expressed in English.  Perhaps the most frequently quoted line of Guiseppe di Lampedusa’s novel ‘The Leopard’ is the Prince’s acceptance that ‘If we want things to stay as they are, things will have to change.’ George Orwell wrote, in his essay ‘The Lion and the Unicorn’, of England having ‘the power to change out of recognition and yet remain the same.’ Friedrich Hayek wrote of ‘the fatal conceit’ of those people who believe that central control and planning of a country’s economic output is possible, and even desirable. These are only a handful of examples of a history of observation and understanding of the challenges in achieving meaningful change in a society. Change is endless, although superficial unless the emotions of the people change. Continue reading →

Fair trade coffee, quality certification and responsible investing

AustralianActuary Economics ,

At the centre of each of these topics lies social activism that always progresses to economic rent-seeking. They start when certain people have a view that a market is failing in some way. Those people make their own judgement and decide that they want to change the particular market. They want to impose their views on the market participants. For example, in fair trade coffee, the central aim is to improve the working conditions and reward to local farmers and labourers in coffee growing areas. In quality certification, the certifying authority believes it is better able to judge quality than the consumer and so its stamp of approval adds an element of protection to the buyer. With responsible investing, the picture is a little confusing at present. Responsible investment agents are not clear on their value proposition – on one hand they present their case as ensuring (their) ethics are brought into the investment decision and so certain investments will be automatically excluded. On the other hand, they try to present this approach as good for investment returns. Well, it can’t be both. More on that later. Continue reading →

The Ungrateful Dead

AustralianActuary Life

Grateful Dead, the US rock band, is this year celebrating 50 years of, well, live performances, I guess. I bet the founding members didn’t think when they formed the band in 1965 and gave it such a great name (that pun was actually intended) that they wouldn’t be around half a century later. I guess it just goes to show, you just can’t tell how long you will last in this world.

Which makes me think of the pursed-lipped tut-tutting that is happening in Australia right now about The Ungrateful Dead. These are people who have the temerity to die before using up all their superannuation savings, hence bequeath the residual to the next generation. Here’s a piece of journalism on the topic in today’s Financial Review:

“This year an estimated $8.5 billion will be bequeathed by the estates of Australians who die before using up their retirement savings, according to superannuation advisory firm Rice Warner.”

The social services Minister has stated that he thinks that people who have been granted tax concessions to build up their super should actually spend it, rather than saving it and drawing the age pension. There is some logic missing in there, given our means-testing system that increases the amount of age pension when you have less assets separately, but we’ll let it go.

The Ungrateful Dead. So many media commentators today are lining up and tut-tutting their mean, thrifty behaviour – unfairly using tax concessions to pass on wealth to the undeserving next generation. It’s not more than a few years ago that the Ungrateful Dead were being criticized for blowing their super savings on a round-the-world holiday then coming home to live on the pension. Double-dipping, it was called. And then they didn’t die soon enough!

If you want to avoid this disapproval in the eyes of the journalists writing this stuff, then you should do the sensible thing and plan to use up all your savings on the day you die. This only requires a simple calculation of how much you should spend each year once you determine what your future investment return will be and how long you will live for. Simple, really.

Much ado about Nothing

AustralianActuary Life

Apologies to Shakespeare, of course, but the title of his comedy from the late 16th century could equally apply to the 2015 Budget changes supposedly intended to make the age pension more sustainable. In case you missed it, the asset test arrangements are to be re-jigged for entitlement to the age pension. At lower levels of assets, the threshold has been lifted meaning some people with assets around the margin will receive higher age pension payments. At the upper end, the threshold has been lowered so some people with higher levels of assets around that margin will have lower pension payments. The rate of taper between the two thresholds will accelerate.

A Shakespearian comparison is valid. Equally, is the contemptuous Mick Dundee New York scene – “that’s not a knife”.

I won’t bore you with modelling charts as the end result is a yawn. For the vast bulk of the population, these changes mean virtually nothing. Many people will see payments marginally increase. Those with assets at the higher end of the means-test will see initially lower pension payments, then as their personal assets reduce more quickly to make up for the short fall, they will then move on to the higher pension payments. For most, it is simply a minor timing switch in the receipt of pensions.

“That’s not sustainability.”

Gathering voices

AustralianActuary Economics ,

Some months ago, I posted a piece here saying that the problem with the economy had nothing to do with high interest rates. Cutting interest rates further would not work. Since then, the Reserve Bank of Australia has cut the official cash rate from 2.5%pa to 2.0%pa.

If only a few more economists would make their views known, such as here, and a few more would stand up to the uninformed mainstream economics doctrines* taught mostly everywhere since the death of Keynes, then we would begin to see an improvement in public policy. Let’s hope.

* To help kickstart thinking, how many borrowers pay 2%pa on their borrowings? What is your mortgage rate? What is your credit card rate? What is the cost of capital under a debt finance model for a small business? There are thousands of interest rates in the market, not just one with stepped margins. Why would that be? What does that mean for the IS/LM model and ‘the’ interest rate?

General Election in the UK

AustralianActuary Economics

The election result in the May general election has seen the Conservative party win majority Government. This is undeniably the best result for the UK and interested on lookers. To commentators, the result is a huge surprise. Pre poll accepted wisdom was that there would be no single party majority but instead a messy cobbled together and inherently unstable coalition, possibly with Labour as senior partner. Fortunately, that was avoided.

The UKIP party won approximately 13% of votes, yet only 1 seat, due to the workings of the electoral system. In contrast, the Scottish National Party won 5% of the vote and 56 seats. Go figure.

What Mr Cameron should now do is recognise that the Conservative majority, plus the 13% vote to UKIP, shows that the UK population appreciates economic management. To date, the Government has made modest progress in correcting the economic mismanagement of Labour. Key action is now needed to reduce the budget deficit, reduce statism, reduce welfare abuse and reward individual responsibility. Profit is not a dirty word – profits, and reward for effort, must be admired, not demonised. Tax rates should be reduced, trade liberalised and regulations scrapped. Mindless regulation imposed by the EU must be resisted or ignored – yes, Brexit would be an excellent outcome.

Mr Cameron is not in the mould of Mrs Thatcher or Mr Reagan. But he should take heart that displaying the attitude of those two great leaders to economics will gain him electoral respect, despite what the leftist media says. Please get on with it.

Does this represent effective retirement incomes policy?

AustralianActuary Economics

The Australian Retirement Incomes system is based on the three pillars of a taxpayer-funded age pension, compulsory occupational superannuation and then everything else including voluntary savings, causal work, family support etc. The introduction of compulsory occupational superannuation in 1992 has not done much to relieve pressure on the first pillar.

This chart shows how a retirement income is generated in one particular case. The hypothetical individual in this chart enters full-time work at age 21 on a salary of $45,000pa. What follows are 44 years of continuous work, with the salary rising at a real rate of 1.5%pa, superannuation contributions are at 12% of salary over the whole term and the investment return is 3%pa real before fees and taxes. On retirement at age 65, our hypothetical worker targets a retirement income of 50% of pre-retirement income.

It is not inspiring. This person would be unusual among Australians to have a full-time career with no employment breaks, through choice, necessity, unemployment, parenting etc. The earned income is better than the median. The rate of contribution is 12% of salary throughout – at present, most people have no more than 9.5% saved. The real investment return of 3%pa will require everything to go well over a very long period, including through retirement.

The conclusion is that the taxpayer is funding about half this person’s retirement income, until about age 90, when the taxpayer takes over 100% funding obligations.

The smell of tax change is in the air

AustralianActuary Economics

Can you smell it? The prevailing winds at this time of year come from the direction of Canberra as the Government and public servants in the departments of Treasury and Tax work out the policy changes that will form part of the Budget night speech by the Treasurer in early May. When I turn my nose towards Canberra, I can definitely detect the smell of tax changes.

The federal Government executive works feverishly ahead of the Budget in formulating ideas for policy change. Sometimes, the ideas are good, sometimes they are not so good and sometimes they are positively barmy. The work rate is high and the stuffiness in the office air in Canberra gets worse as each day moves into night and the deodorants applied that morning have long ago given up the good fight. At this point, the officials can open the windows or turn up the air conditioners. Usually, it is in the office where the policy idea might be considered by Sir Humphrey as ‘courageous’ that the window is opened. This lets the smell of the idea waft out into voterland and the reaction of voters is a guide to Government as to the acceptability of the idea. In other offices, the windows remain tightly shut and no whiff of the idea gets out until shortly after 7:30pm on the night of the Treasurer’s Budget speech.

Right now, the tax changes under serious consideration, judging by the air wafting from Canberra, include changes to franked dividends, age pension eligibility and negative gearing. Continue reading →

Allowing access to superannuation assets to purchase first home

AustralianActuary Economics ,

Another kite being flown? The Federal Treasurer, Joe Hockey, suggested that the law could be changed to allow first-home buyers access to their ordinarily preserved superannuation savings. Supposedly, this would help them finance the price. The cost of housing in Australia is very high and getting into the market is hard.

If that is a kite, it should be shot down. Such a change in policy would be a very bad decision. The high price of housing is not caused by young people not having access to super money. Nor would the price pressure be eased by allowing such access. In fact, the price pressure would be made worse as extra demand chases an unchanged supply. The prices would rise, the first home buyers would have depleted their super savings and the transfer of assets would have gone to sellers of housing.