The Provision of Providing for an Ageing Population is Not About Saving.

There have been arguments in the media around the current rate of the superannuation guarantee on whether we should or shouldn’t lift it from the current rate of 9.5 per cent to 12 per cent.

The argument to lift it goes something like ‘the current rate would be insufficient to provide for individuals in retirement’ and those against lifting it state something along the lines of ‘the increase will come at the expense of wages, which can be used for things like house deposits and the current rate is sufficient’. 

Both arguments operate under a paradigm that assumes a currency issuing government will be unable to meet its aged pension obligations as we have a greater portion of the population ageing which would mean a financial constraint on the Government. Superannuation was introduced to ‘relieve’ pressure from the federal governments ‘budget’.

The paradigm that governments are constrained by revenue or ‘borrow’ is not applicable under a fiat monetary system. That idea is false. Under our current monetary system, at an intrinsic level, Governments spend via an appropriation bill and use a computer to mark up the size of an account.

There are ‘smoke and mirrors’ operations around bond issuance being issued relative to the level of deficit spending but these in no sense ‘fund’ the issuers ability to spend. Rather the issuer’s spending provides us with the ability to pay tax and it is what gives the financial institutions ability to purchase Australian Government Securities. The issuance of bonds merely changes the portfolio mixture in what is called the ‘intrabank market’.

In the same way you have an account with a financial institution your financial institution has an account with the central bank. The RBA in Australia. Government spending marks up the size of these accounts and bond issuance switches these from reserves (what banks use to pay each other) to securities (an asset that earns interest) Issuing bonds mean less reserves, a rising cash rate and more securities. The reverse is true when the RBA purchases bonds. 

If you haven’t realised by now, the intrinsic nature of government spending is unlimited. It will always be able to make a payment denominated in Australian dollars. We’ve witnessed, as a result of the pandemic, spending totalling some $200bn without raising taxes and the RBA purchasing billions of dollars of bonds in order to defend its target rate as treasury (specifically the Australian Office of Financial Management) issues bonds to match deficit spending and the RBA purchasing those same bonds back!

The idea that the government needs a pool savings in order to spend more at some point in the future is clearly false. Saving is the act of forgoing current expenditure to spend at a later date. This is applicable to a currency user.

You and I forgo current expenditure and may choose to spend more than our fortnightly income at some point in the future. That is not applicable to the Australian government who can always spend irrespective of past fiscal positions. So we can eliminate the argument that a currency issuing government needs to find ‘funds’ in order to make future payments.

I have written past posts about ‘money’

  1. Money is a creature of the State
  2. The Story of Money
  3. The Mythology of Printing Money
  4. The Mythology of Printing Money Part II
  5. Currency Issuing Governments Finance Themselves

In terms of providing an income for an ageing population – here in Australia, we decided, under a misunderstanding that the Australian government would find it increasingly difficult to meet future pension payments, to go down a path of compulsory saving and quarantine that income until a preservation age and have (in my opinion) a very minimal ‘safety net’ in the form of a public aged pension. 

Clearly the foundation for our system of compulsory saving was based on a false understanding. The Australian government will always be able to make payment denominated in Australian dollars.

I think it is clear that based on my understanding of the monetary system and my values system I would have a system of a public living aged pension and eliminate the compulsory nature of superannuation. There are however other arguments that give reason to a compulsory saving system and I’ll walk thorough why I disagree with those.

  1. The superannuation is both ‘sound’ and ‘effective’ at providing retirement incomes
  2. Superannuation contributes to household savings
  3. It allows for a pool of income for investment

The superannuation is both ‘sound’ and ‘effective’ at providing retirement incomes

Based on the idea of needing to relive ‘pressure’ from government spending in the future Australians opted for a system of compulsory saving, placing onus on the individual to provide for themselves in retirement. This onus extends to ensuring you are sufficiently employed (despite our current system not providing enough jobs) as governments (including Australia) have abandoned commitments of full employment.

It disadvantages, predominantly females, who spend a large time out of the workforce and it delivers a flow of income to capital that has them invest (speculate) with your retirement income and turns every worker into seeking unearned income. There is a contradiction in having the labouring class fight for an increasing share of national income (in the form of higher wages) while also having their money invested in a system that relies on capitalist profits in order to sustain an adequate retirement.

Those that have spent large amounts of time out of the workforce (either by choice or not) fail to accrue sufficient incomes to provide an adequate retirement and are reliant on the aged pension (which puts many into relative poverty as a result of the pension’s inadequacy)

A report by Cameron Murray into Australia’s retirement system stated;

The superannuation system does not smooth lifetime consumption for the bottom 40% of income earners. Instead, it makes them poorer when they are poor and working, and richer when they are rich and retired.

OECD data shows as of 2016, Australia has one of the highest rates of ‘Old Age Income Poverty’. Within the age group of 66+. 22.2 per cent of older people live with income poverty. We are higher than the United States with a level of 21.1 per cent. This is 2016 data. With the delay of retirements as a result of the ‘economic shock’ from covid and the higher rates of income loss that have stemmed from underemployment and unemployment within the age groups of 55+. I am making an assumption this figure could be much higher today.

As the Global Financial Crisis played out and now the advent of COVID Australian’s have been forced to delay their retirements plans. According to the article many ‘soon to be retirees’ are accumulating debt and some may rely on the public pension. Hardly a sound and effective system, when at least one fifth live with income poverty and many delay their retirements and are forced to work longer because of the vagaries of the market.

Superannuation contributes to savings

The concepts, sources and methods for the Australian System of National Accounts – states the Net Savings – Households is defined as;

Net saving – households is equal to gross household disposable income less household final consumption expenditure and consumption of fixed capital. Household saving is estimated as the balancing item in the households income account. It includes saving through life insurance and pension funds (including net earnings on these funds), increased equity in unfunded superannuation schemes.

To see whether compulsory superannuation has led to an increase of household saving (as apparently nobody saves unless they are forced to) we need to look at the household saving ratio which is defined as;

The ratio of household net saving to household net disposable income. Household net saving is calculated as household net disposable income less household final consumption expenditure. Household net disposable income is calculated as household gross disposable income less household consumption of fixed capital.

The household saving ratio was higher over the periods of the 60s and 70s. Clearly forcing people to save has not increased the ratio. There are other aspects that contribute to household savings. They are things like the governments fiscal deficit, ensuring wages rise with productivity (so the labouring class don’t need to go into debt to purchase their own output) and the provisioning of public services.

It allows for a pool of income for investment

First it is important to define investment. Investment within the national accounting data is defined into three categories. Capital investment by firms, inventory investment by firms and real estate investment by households. Within the calculation of GDP spending that increases the capacity of the economy to absorb additional spending is an investment. For example spending on plant and equipment and new construction of residential and non-residential buildings are investment but sales of exisiting stock are not.

It is assumed that as a result of ‘Government Budget Constraint’ governments need to enter into contracts with private providers (such as superfunds or corporations) for public infrastructure investment as to reduce their deficits (under a false financial constraint). This is one of those cases of privatising gains and socialising the losses. Governments build public infrastructure with the idea of generating profits (and guaranteeing them to private providers) The private providers then put in place ‘user pays’ systems (think toll roads) to ensure commercial returns. Why on earth should public infrastructure need to make a commercial return?

Another example is the current way in which we provision social housing. The ALP National platform at point 176 says;

Labor wil establish a bond aggregator so community housing providers can get cheaper, longer term finance for new affordable and social rental housing. We will examine the funding gap that makes it difficult for community housing providers to fund housing for the working poor and Social Security recipients.

How ridiculous that a currency issuing government (who causes the funding gap in the first place) needs to provide low cost loans to private entities (charitable or otherwise) to build needed public infrastructure. These policies are formed with an understanding that money is a limited resources (rather than a social construct) and tie into deficit fear mongering’

The orthodoxy claims all sorts of nonsense around deficit spending – that they ‘crowd out’ a limited pool of savings and thus private sector investment, claims that deficits lead to increasing interest rates as there is then competition for limited pool of funds (please read this post for more detail) and deficits impoverish future generations as they are forced to pay back debt. (Clearly ridiculous) A forever growing ‘pool’ of savings is not needed for firms to invest. Private firms invest based on expected returns and that is a product of effective demand (which is just jargon for spending) In terms of the national accounting data savings do not lead to investment. Rather Investment (spending to increase productive capacity) leads to Savings. Savings are a flow that come from a source of income. You need an income first before you can save.

What really matters in regards to an ageing population?

If governments can always provide income that begs the question what does matter in providing for an ageing population? The issue has nothing to do with ensuring pools of savings but rather dependency ratios as a larger portion of our population ages.

The above images show a population pyramid that show the portion of retirees relative the working age population growing.

Imagine a small village with a population of 15 people. 10 of those people work and they produce enough output, in terms of food and other goods and services to sustain the population. This is the populations level of material well-being. The other 5 are children and the elderly. As the years pass the 10 people of working age gets reduced to 8 as two are too old to work. To maintain the same level of material well being, the 8 people need to provide the same level of output that was once produced by 10 people.

The above is a simplistic example but it demonstrates the concept behind the need for rising productivity in relation to a rising level of the aged. The real world is vastly more complex with us needing to factor in death rates, population growth, employment population ratios, levels of labour underutilisation and the size of the labour force and labour force participation as well as the make-up of what to invest in to ensure comfortable existences for the elderly and resourcing areas we deem appropriate for provisioning our society into the future (climate change, education, skills development, particularly in provisioning for the aged etc..)

For more perspective have a look at the population pyramids from 1911.

Between 1911 – 1971 the dependancy ratio is lower than for the periods between 1991 – 2016. It is obvious that we will need to ensure adequate provisioning for more people in the age group of 65+ relative to our population as 65+ group exits the labour force.

For a further understanding I’ll quote the economist Bill Mitchell who defines the dependency ratio as below.

“The dependency ratio is normally defined as 100*(population 0-15 years) + (population over 65 years) all divided by the (population between 15-64 years). Historically, people retired after 64 years and so this was considered reasonable. The working age population (15-64 year olds) then were seen to be supporting the young and the old.”

The issue is further complicated as many of retirement age (65+) have been remaining in the workforce longer, mostly as a result of insufficient savings (because of our ‘flawed’ retirement system) Read the linked too post for detail.

The below graphs look at the dependancy ratio for Australia out to 2050 and give you some idea of the increase in productivity that may be required. The first graph shows the dependancy ratio for age cohorts and the second aggregates youth and elderly based on different types of scenarios. (later retirements etc..) Read the linked post for detail.

Finally let us look at rates of youth unemployment (15-24) and employment to population ratios. The data has been sourced from ABS Labour Force, Oct 2020 (Table 13)

These are young people with insufficient or no work and not in any form of education or training. As of Oct 2020 the unemployment rate for this cohort was 15.6 per cent (far higher than the national unemployment rate of 7%). The employment to population ratio as of Oct 2020 sits at 57.9 percent a far cry from the peak of 65.4 per cent from Jan 2008 with an unemployment rate of 9.2 per cent. While some of this cohort may have dropped out of the labour market to study, the falling employment to population ratio and rising unemployment rates well above the relativities in terms of population size shows we are failing this cohort!

Consider that these young people will produce (or should produce) our future material wealth and provide for our societies well-being.

Leaving these young people without education and without work in areas we will need for our future prosperity (investment in climate change, aged care etc…) will make us materially poorer as a society. If we fail in gaining these people into productive work and skills development, the health and social consequences that result will be a drain on our public health systems and support services.

The employment to population ratios of this cohort show how we are failing this generation.


The rhetoric that as the population ages and taxation revenues decline as there are less workers and costs increases as more pensioners will have a financial constraint on the government is false. Currency issuing governments at an intrinsic level spend first. There is no real cost to this. It is someone marking up an account via keystrokes on a computer.

The provisioning of living incomes for the aged will be equal to X percent of GDP. Irrespective of the source (public pension or private saving) the delivery of at least a living income will be what it needs to be as a portion of GDP.

The public aged pension will ALWAYS be able to be made, where as the saving option is dependent on contributions over time and the rate of investment return. The impacts on inflation irrespective of the source are dependent on the available real resources. 

It is a question on whether we have rising productivity to match same levels of output as there is a higher percentage of the population that is retiring. This is your dependancy ratio. The portion of the working age population (which is now smaller in relative terms to the aged) will need to ensure enough output (with less workers relative to the aged) to provide for the same level of material well-being.

We should be having policy to increase participation rates and we should be having a focus on lowering the level of underutilisation rates, particularly around the youth who will create our future material well-being!

In terms of ensuring we can adequately care for the aged, we should be investing in systems to ensure the elderly can stay at home for as long as possible, while receiving the care they need, we should be investing (in my opinion) public aged care facilities that ensure adequate staff:patient ratios and ensure adequately trained staff to resources these programs.

One of the only things that you can invest in that will provide returns 50 years from now is education. It is the skills development and knowledge that will determine our level of material well-being in the future. Everything else, whether it is building homes, constructing roads, creating public transit systems, investment in renewables will add to our stock of wealth but all these real goods need maintenance and the expertise to do that!

The discussion around needing to ensure private pools of savings and false government budget constraints plays into a paradigm that currency issuing governments are powerless in the face of global capital, that we need the rich to ‘fund’ public investment, that full employment is no longer possible.

Consider that as of Jun 2020 we had an underutilisation rate of 20.2 per cent of the labour force. That is some 2.3 million people that could be working to better our societies and a loss of millions of hours of work. Think of what we could resource and create with those millions of hours.

Instead you have alleged ‘intelligentsia’ of our society stating;

“We’ve got now, with a massive increase in the aged population, virtually doubling it. We’re going to have the lowest call by any country in the world upon the budget and this is all because of superannuation. The reason why the budget call, sorry, the reason why the pension call on the budget is going to be this low is because of superannuation – self provision.”

Nobody truly self provisions. In terms of an income we are reliant on federal governments deficit spending. It is the non-government sectors surplus. Then in terms of the creation of real resources (which is our wealth); education and health services, transport infrastructure, agriculture, construction, the arts; we are all reliant on the contribution of others!

There is very little public commentary in terms of stating what matters. It is the provisioning of real resources and ensuring a system of full employment that will provide for our material wealth and well-being. Instead we have nonsensical public discourse on residual numbers (Government budgets) that don’t mean a thing without putting them into a context of our own well-being!

That is all from me!

1 Response

  1. Kevin Phelan

    Clear, coherent and well referenced summary of the superannuation fraud being imposed on working Australians.

    The fear of old age poverty is used to coerce workers to sacrifice a significant proportion of their wages to capitalist speculators, while at the same time broader policy settings relating to employment and “balanced budgets”ensure that old age poverty is bound to be more widely experienced.

    One argument for a decent old age pension might be that older retirees would have a higher propensity to spend, adding to net wealth, in this sense supporting the employment of the younger cohort; so it’s not all a one way street in terms of the dependency ratio.

    Great stuff Jengis. You are a breath of fresh air!


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