Saturday, 27 March 2010: 16:45
Australia features a three pillar retirement income system that consists of the publically-provided age pension, privately-managed superannuation guarantee and voluntary superannuation. The second pillar, superannuation guarantee, mandates employers to make contributions at the rate of nine percent of gross wages on behalf of their employees into privately-managed superannuation funds of their choice. The adequacy of the current mandatory contribution rate has been questioned for a long time. Already in 1995, the Government at the time proposed to increase mandatory contributions to 15 percent of gross earnings to provide the elderly with sufficient retirement incomes and to mitigate the burden of ageing population on government pension expenditures.
In this paper, we develop a computable overlapping generations [OLG] model that features both intra- and inter-generational heterogeneity and more importantly, it incorporates the main aspects of Australia's retirement income policy. Using the model, we simulate three and six percentage point increases in the mandatory contribution rate. These rate increases to 12 and 15 percent of gross earnings are assumed to be (i) fully funded by the employer and (ii) equally paid by households themselves and the government. We show that these hypothetical policy changes lead to larger superannuation asset accumulations by all three income groups, which partly offset ordinary private assets. Total domestic assets and savings increase as a result. The saving increases, however, are exported abroad, rather than invested in the domestic capital stock. The welfare implications are positive for future born generations of middle- and high-income households while low-income households experience welfare losses due to a higher consumption tax rate balancing the government budget and because of lower effective wage rate.
We also simulate the aforementioned superannuation policy changes in the environment of non-stationary demographics with rising old-age dependency ratio over time. The policy simulations generate smaller increases in domestic assets and savings but more positive impacts on aggregate consumption and welfare relative to the results obtained in the stationary demographic environment. This is because of a declining share of working age population that accumulate larger total assets and due to a increasing fraction of the elderly gaining greatly from the policy changes in terms of higher retirement consumption.
In this paper, we develop a computable overlapping generations [OLG] model that features both intra- and inter-generational heterogeneity and more importantly, it incorporates the main aspects of Australia's retirement income policy. Using the model, we simulate three and six percentage point increases in the mandatory contribution rate. These rate increases to 12 and 15 percent of gross earnings are assumed to be (i) fully funded by the employer and (ii) equally paid by households themselves and the government. We show that these hypothetical policy changes lead to larger superannuation asset accumulations by all three income groups, which partly offset ordinary private assets. Total domestic assets and savings increase as a result. The saving increases, however, are exported abroad, rather than invested in the domestic capital stock. The welfare implications are positive for future born generations of middle- and high-income households while low-income households experience welfare losses due to a higher consumption tax rate balancing the government budget and because of lower effective wage rate.
We also simulate the aforementioned superannuation policy changes in the environment of non-stationary demographics with rising old-age dependency ratio over time. The policy simulations generate smaller increases in domestic assets and savings but more positive impacts on aggregate consumption and welfare relative to the results obtained in the stationary demographic environment. This is because of a declining share of working age population that accumulate larger total assets and due to a increasing fraction of the elderly gaining greatly from the policy changes in terms of higher retirement consumption.