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Income in old age: is national superannuation the answer?

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No. 4 1983

Income in Old Age: Is National Superannuation the Answer?







Roy Forward



The views expressed in this paper do not necessarily reflect those of the Legislative Research Service, or the Department of the Parliamentary


Commonwealth of Australia 1983

ISSN 0726-3244

Printed by C. J. Ti MON, Commonwealth Government Printer, Canberra
























There are two main methods of financing old age income programs. The first is to rely on general revenue, which is collected from a wide variety of sources that usually include generally progressive income taxes. The second is the social insurance method, which relies on

contributions; these may come from covered individuals in their capacity as residents, employees, self-employed or taxpayers, and/or from employers (with government occasionally adding a percentage for

each insured person). Moreover, contributions may be, at least in part, flat-rate, or they may be a fixed percentage of personal taxable or earned income or payroll, or they may be levied at higher rates on higher incomes (or on women, because they live longer).

This two-fold classification leaves a large grey area in practice, as in cases where an earmarked levy (which may be regarded either as a tax or as a contribution) is imposed on taxable income and paid into general revenue, and in cases where a contributory scheme is to a very high degree topped up from general revenue.

The general pattern is for two main methods of providing benefits to be paired with the two main methods of financing. First, benefits in the form of universal, basic and flat-rate pensions of a guaranteed minimum income kind (but subject, perhaps, to means tests) tend to go with general revenue financing (and it is that combination we have had in Australia since 1908, earlier in some states). Secondly, earnings-related or income maintenance - and hence graduated - benefits tend to go with contributory financing (and it is this

second combination which in Australia is called superannuation and is provided by employer-sponsored occupational superannuation schemes).

It is important to note that it is not necessary or automatic for the two methods of financing and the two methods of benefit-provision to go together in that way. The desire of governments to keep taxes low, and hence to restrict themselves to servicing the most needy, may help to explain its occurrence. The historically earlier dominance of friendly societies, provident funds, occupational superannuation schemes and the commercial insurance

industry in the field of earnings-related income maintenance may also help to explain how the insurance model came to be seen as appropriate for public programs in the same area.

There are exceptions to the rule, with some social insurance schemes, for instance, having as a minor element a basic flat-rate pension alongside the major income-related benefits, both being financed from the same contributions. But in any case, the grey area mentioned earlier makes the apparent association between method of

financing and method of benefit-provision very illusory in fact, since

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few social insurance or contributory schemes turn out to be funded;* as a result of inflation, the ageing of the population, earlier retirement and a reluctance by governments to increase the rates of contributions, most governments end up underwriting such schemes in a fairly open-ended pay-as-you-go manner.


In a survey of 134 countries in 1979,[1] it was noteworthy that only three countries in the world besides Australia did not use the contributory or social insurance method of financing their old age, disability and survivors programs. They were Nauru, New Zealand and South Africa. Nauru and South Africa were described as having a

'social assistance system', Australia and New Zealand as having a 'dual universal and social assistance system', but what the four had in common was that the entire cost was met by government.

Another twelve countries, most of them with communist governments, did use social insurance methods of financing but did not require contributions from individuals, so that the source of funds was the employer, the government, or both; they were Albania, Bulgaria, China, Cuba, Czechoslovakia, Guinea, Iceland, Lebanon,

Pakistan, Poland, the USSR and Vietnam.

The ninety-two countries described as using a 'social insurance system' were: Albania, Algeria, Argentina, Austria, Bahamas, Bahrain, Barbados, Belgium, Benin (Dahomey), Bolivia, Brazil, Bulgaria, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Congo, Costa Rica, Cuba, Cyprus, Czechoslovakia, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, France, Gabon, Germany (Democratic Republic), Germany

(Federal Republic), Greece, Guatemala, Guinea, Guyana, Haiti, Honduras, Hungary, Iran, Iraq, Israel, Italy, Ivory Coast, Jamaica, Japan, Jordan, Korea (South), Kuwait, Lebanon, Liberia, Libya, Luxembourg, Madagascar, Mali, Malta, Mauritania, Mexico, Morocco,

Netherlands, Nicaragua, Niger, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Rwanda, Saudi Arabia, Senegal, Seychelles, Spain, Sudan, Switzerland, Syria, Togo, Tunisia, Turkey, USSR, USA, Upper Volta, Uruguay, Venezeula, Vietnam, Western Samoa, Yugoslavia, and Zaire.

* A 'funded' scheme is one in which the pooT or fund into which contributions are paid, and out of which benefits are drawn, is separately managed; cash reserves may earn investment income, and it is actuarily designed to be self-sustaining. A 'non-funded'

scheme is one in which there is no such separate pool or fund; instead, contributions, which are paid into general revenue, help to pay for current benefits which are paid out of general revenue: hence the term 'pay-as-you-go'. I. Social Security Programs Throughout the World 1979, US Department

of Health and Human Services, May 1980.



Another four countries used a 'dual universal pension and social insurance system', namely Canada, Mauritius, Norway and Sweden. Another two (Ireland and the United Kingdom) used a 'dual social insurance and assistance system', and Trinidad and Tobago used a 'dual

social assistance and social insurance system'. Denmark used 'multiple universal pension, assistance and social insurance systems', and Finland a 'multiple universal pension, assistance, and employer liability system'.

Then there was a group of fifteen countries with a 'provident fund system': Fiji, Ghana, India, Indonesia, Kenya, Nepal, Nigeria, Saint Lucia, Singapore, Solomon Islands, Sri Lanka, Switzerland, Tanzania, Uganda and Zambia. A distinguishing feature of provident

funds was that benefits were in lump-sum form; Taiwan, with a 'contributory lump-sum benefit system', also belongs with this group. (Lebanon and Western Samoa each had a 'social insurance system', but the former provided lump-sum benefits only, and the latter provided certain lump-sum options.) Malaysia had a mixed system of a provident fund with lump-sum benefits only, and of social insurance for


Eleven countries were listed as having no old age, invalidity or survivors programs at all, except special systems for public employees: Afghanistan, Botswana, Burma, Ethiopia, Gambia, Kampuchea (Cambodia), Laos, Malawi, Sierra Leone, Somalia and Thailand.

Of the 103 countries listed as requiring a specific percentage of earnings as a contribution from individuals towards old age, invalidity and death cover, the lowest were El Salvador, Honduras, Indonesia, Madagascar and Mauritania, all with one per cent. The highest were Uruguay, which required rates from 18 per cent to 29 per cent in hazardous occupations, and whose normal rates were 5-17

per cent for men and 6-18 per cent for women; Netherlands, with 17.7 per cent; Chile, which ranged from 7.25 per cent for wage earners to 16.6 per cent for salary earners; and Singapore, where rates varied from 1.5 per cent for the lowest income earners to 16.5 per cent for the highest. The unweighted mean average contribution for the 103 countries was 4.77 per cent of individual earnings.

Of the 113 countries listed in the same survey as requiring a specific percentage of payroll from employers towards old age, invalidity and survivors programs, the lowest were Bolivia and Indonesia with 1.5 per cent, and Canada and Ivory Coast with 1.8 per cent. The highest were Poland which required 22-30 per cent of payroll for private non-agricultural undertakings, 20 per cent for private agricultural undertakings, 18 per cent for nationalised non-agricultural undertakings, and 14 per cent for nationalised agricultural undertakings; Uruguay, which required 12-29 per cent in

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hazardous occupations, but whose normal rates were 10-15 per cent; Romania, with rates of 7-25 per cent according to industry; Iraq, with 25 per cent for firms operating in oil fields; Hungary, with 22 per cent for private employers and only 10 per cent if the government was

employer; Singapore and Sweden, with 20.05 per cent; and Czechoslovakia and Iran, with 29 per cent. The unweighted mean average employer contribution for the 113 countries was 7.98 per cent of payroll.

In Table I, which is derived from a survey of the 23 OECD member countries, social security contributions as a whole are presented as a percentage of total taxation revenue (in which, for this exercise, social security contributions were included). The

unweighted mean average was 23.26 per cent, but that figure included countries that use the contributory method of financing not at all and in part, as well as wholly; with Australia and New Zealand excluded, the average was 25.47 per cent.

Employers' social security contributions were greater than employees' in all OECD countries except Denmark. The unweighted mean average of employees' social security contributions as a percentage of total taxation (in which, for this exercise, social security

contributions were included) for the 15 OECD countries in which employees contributed was 9.64 per cent. The corresponding figure for employers' contributions in the 18 countries in which employers contributed was 17.04 per cent.


Arrangements in Canada are similar to those proposed by the majority report of the Hancock Committee (National Superannuation Committee of Inquiry) for Australia in 1976 and which were rejected by the Australian Government in 1979 in response to pressure from the

insurance industry:

(i) a basic flat-rate pension (the Old Age Security Pension) paid to all residents;

(ii) an indexed, earnings-related, contributory and compulsory pension plan (the Canada Pension Plan supplemented by the Quebec Pension Plan) that covers retirement, disability and death and provides for vesting and preservation;*

* Vesting is ensuring that those who withdraw from a contributory scheme are paid withdrawal benefits which reasonably reflect the entitlements that have accrued up to the time of withdrawal - from all contributions, not just their own. Preservation is the deferring of withdrawal benefits until death, disablement or normal retirement age, instead of paying them in cash at the time of withdrawal.





Employees Employers Total

Spain 10.72 37.49 48.21

France 11.38 29.03 43.16

Netherlands 15.58 17.83 38.15

Italy 5.74 22.24 35.71

Germany (Fed. Rep.) 15.48 18.06 34.10

Austria 13.25 16.27 31.40

Switzerland 10.35 10.47 30.77

Belgium 8.65 19.66 30.71

Luxembourg 11.80 16.72 30.31

Japan 10.21 14.76 29,,02

Greece NA NA 28.70

Sweden 27.40 28.63

Portugal 8.70 17.75 26.99

United States 10.12 15.56 26.41

United Kingdom 6.56 9.91 16.87

Norway 15.16 15.16

Ireland 5.08 9.24 14.32

Canada NA NA 10.41

Finland 8.46 8.46

Turkey 5.76

Denmark 1.02 0.75 1.77


New Zealand

Source: OECD, Revenue Statistics of OECD Member Countries 1965-1981, Paris, 1982, Tables 7, 15, 17 and 19.

Note: Employees contributions in Finland, Norway and Sweden were adjudged as largely financed out of levies on an income tax base, and so were omitted from these tables; no explanation was given for the puzzling zero figures for Turkey.



(iii) a means-tested supplement (the Guaranteed Income Supplement) for those not covered, or not covered sufficiently, by the Pension Plan;

(iv) occupational superannuation schemes and tax-sheltered savings schemes on top of the other three.

Two of the main differences from the Hancock proposals are that the pension ceiling in the Canada/Quebec Pension Plan is quite low, so as not to discourage occupational schemes, and that the Canada/Quebec

Pension Plan is apparently a funded scheme rather than run on a pay-as-you-go basis, because in 1977 it was reported as facing imminent bankruptcy. Long and heated debate has been going on about the Canadian system, so it would be unwise to give further details about arrangements that are clearly in transition. In 1976 an

interdepartmental Canada Task Force on Retirement Income Policy was set up which reported in 1979. In 1977 the Ontario provincial government set up a Royal Commission on the Status of Pensions in Ontario which issued a ten-volume report in 1981; some of its findings were very critical of the Canada/Quebec Pension Plan and its report was reviewed by an Ontario select committee on pensions. Then at the

beginning of 1983 the federal government set up a committee to report by the end of the year on overcoming deficiencies in the system relating to coverage, inflation protection, portability and the treatment of women.

Unlike Australia, where occupational schemes are unregulated by government except for certain taxation provisions, Canadian occupational schemes are closely regulated at both federal and provincial levels, with respect to vesting, fund investments and their disclosure, and so on. Even so, demands are rife for the reform of those schemes to give greater inflation protection through the

revaluation of preserved pensions and of pensions while they are being paid, earlier vesting, improved portability, better protection for spouses such as the splitting of pension credits, provision for child-rearing dropout, compulsory survivor benefits, etc. The sheer volume of demands suggests that the system is facing terminal overload, with superannuation being asked to do more than it was designed for, and there is a fear that sponsors of occupational schemes may avoid further regulation and the associated higher costs by winding down their schemes and leaving the whole morass to government.


The first component of the United States system is the Old Age, Survivors and Disability Insurance (OASDI, or, with hospital insurance, OASDHI) to which it is compulsory for employers and employees to contribute through payroll tax. Benefits are computed

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from contributors' average indexed monthly earnings, with higher earnings replacement rates for lower incomes, and are indexed annually. Secondly, there is a means tested Supplemental Security Income (SSI) for those with no or low entitlement under OASDI.

Thirdly, there are occupational superannuation schemes (regulated by the 1974 Employment Retirement Security Act - ERISA) and tax-sheltered savings schemes such as Individual Retirement Accounts (IRAs). As in Canada, there have been numerous commissions of inquiry to try to find

answers to much the same list of complaints.

One of the troubles with the US system is that, because it is contributory, it is electorally extremely difficult to vary benefits in line with available funds or in accord with varying priorities. The existence of funds and the use of the terms 'insurance' and

'entitlements suggest to Americans that 'their' money will be returned to them in benefits and that it cannot be tampered with. But in fact, so high is the ratio of returns to contributions that the system is now like a chain letter or a pyramid selling operation, with current benefits being paid out of current contributions in a way that cannot last. A 65-year old average wage earner retiring last year had

paid only US$7,209 over his or her entire working life, but (according to one estimate of longevity and inflation) will with his or her spouse, receive US$520,000 - about 75 times the dollar amount contributed; in real terms the ratio is still five to one, which is

far higher than could have been achieved had the same amount been saved or invested in bonds. Consequently, the retirement fund for the first time had to borrow from the disability fund in November 1982, and by the end of 1983 both will probably have to borrow from the hospital fund. Yet the myth persists strongly among citizens that priorities cannot be reordered because they are 'only' getting their

'insurance' back .[2j


In West Germany the situation is similar to that in the US, with a compulsory, contributory, indexed (at least until recently), national superannuation scheme (Rentenversicherung), a supplement for those whose pension is insufficient, and occupational schemes. Employer and

employee contributions and a government subsidy are paid into the Rentenversicherung fund from which retirement pensions and disability and survivors benefits are paid on a pay-as-you-go basis (although by law certain reserves are held and some income also comes from their

investment). Problems are similar to elsewhere. The ageing of the population raised the ratio of beneficiaries to contributors from 37:100 in 1960 to 55:100 in 1975, with one projection of 70:100 by the

2. Harry C. Baliantyne, Acti r— W7faiis and Old-Age and Survivors Insurance and Disability Insurance Trust Funds', Social Security Bulletin, 45:6, June 1982, 3-10. See also Peter G. Peterson, 'The Salvation of Social Security', New York Review of Books, 16 December 1982.

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year 2000. The consequent risk of the fund going bankrupt, despite huge rises in contributions, led to the setting up of a commission of inquiry to report in May 1983.


Contributory or social insurance financing of age, retirement and other income support benefits has been looked at by the Labor Governments of Fisher, Curtin and Whitlam and by the non-Labor Governments of Cook, Bruce and Page, Lyons, Menzies, McMahon and Fraser, and although a Royal Commission and national committees have

reported and a National Welfare Fund has been set up (but actually run on a pay-as-you-go basis), the closest Australia has come in practice to such a principle was the Whitlam Government's proposed compulsory

health insurance levy of 1.35 per cent of taxable income (which was rejected in the Senate), Mr Fraser's experiment with a similar levy of 2.5 per cent (which operated from 1 October 1976 until 1 November 1978), and Mr Hawke's proposed medicare levy of one per cent.

The main reasons for suggesting contributory or social insurance financing have been:

(i) it is very common in other countries;

(ii) it would mean the end of means tests with the overtones of charity that they imply;

(iii) it would allow for a big rise in income levels for the aged/retired without increasing taxes;

(iv) it would remove the question of pension levels from party politics and from the uncertainties of the annual budget;

(v) it would demonstrate to people the real cost of benefits;

(vi) it would make benefits a matter of earned right;

(vii) it could supply government with funds for investment of several billion dollars.

The main reasons for rejecting it have been the hostility to it of the friendly societies and the insurance industry, the lack of a guarantee that everyone would be covered; the unwillingness to impose another 'tax' on people who might not be able to afford it, the higher

priority accorded to meeting the needs of the poorest first, the



compulsory aspect, and the removal of such a major financial matter from budgetary contrcl.[3]

The idea is not yet dead. Labor in 1982 was reported as moving towards a national superannuation scheme financed by an income tax levy. A scheme was proposed to the ALP shadow cabinet by Mr Chris Hurford and a caucus committee in 1982, but, although the Party

remained committed to national superannuation in principle, the final form of its proposals had yet to be decided by the time of the March 1983 elections; the idea of another income tax levy of two per cent to set beside the already proposed medicare levy of one per cent was thought to be not electorally attractive at the time.C4]

Mr Barry Jones, in a book published when he was Labor Opposition spokesman on science and technology, saw a guaranteed income and/or national superannuation scheme as a means of enabling people to retire early: their entitlements assisting them, in a time

of falling demand for labour, to make the transition from paid employment to post-industrial leisure without trauma.(5] He personally favoured a contributory retirement scheme that would tie in with an incomes policy, as well as providing domestic risk capital for high technology industries. The idea was that a government could

offer trade unions indexed pay increases, with some of those increases in cash and the rest going as contributions into a national provident fund, from which lump sum payments could be made on their retirement, but which in the meantime could itself be invested in a fund for venture capital. Of course, the fact that other ends which are quite desirable in themselves could be served by a national superannuation

scheme is not enough to make such a scheme desirable in itself, nor does it mean that those other ends cannot be met in other, more desirable, ways.


One of the very serious deficiencies in all superannuation schemes is the assumption that the primary retirement pension or lump sum benefit accrues solely to the individual beneficiary. There are often

supplements for having a wife in particular, or a spouse in general, and for having children, but ever they are treated as increments to the primary pension so that they, too, are paid to the individual

3. The above three paragraphs are summarized from David Ingles, Financing Social Security: An Analysis of the Contributory 'Social Insurance' Approach, Research Paper No. 19, Development Division, Department of Social Security, Canberra, June 1982, 4. See Paul Kelly, Sydney Morning Herald, 6 September 1982.

5. Barry Jones, Sleepers, Wake! Technology and the Future of Work, Melbourne, Oxford University Press, 1982, 143, 204-5, 243.

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beneficiary. Only if the contributor dies do surviving 'dependants' such as widows, widowers (much less often), half orphans and full orphans receive survivors benefits and death benefits. While the contributor lives they get nothing directly.

From the point of view of single and childless contributors it is, of course, unfair that they should have to help finance any benefits at all for the 'dependants' of others. There are no compensating features of any known schemes that soften this one-way cross-subsidization of the marrying and progenitive members by the rest.

Yet from the point of view of dependants, that is, of those who wholly or partly depend on the income of the contributor, a proportion of that contributor's contributions represents income for current consumption foregone by them, and therefore a proportion of the eventual primary retirement pension or lump sum entitlement should

be apportioned to them as well.

A spouse who has given up his or her own career in paid

employment to produce goods and services in an unpaid capacity at home, while the other spouse remains in employment, might be expected to feel especially strongly that he or she should be credited with one half of the other spouse's contributions, that is, that all the income

received by each spouse should be regarded as joint income, and that superannuation benefits earned through contributions from that joint income should themselves be jointly owned or equally split.

The model income unit around which existing superannuation schemes, both occupational and national, were developed was characterised by:

(i) a single man, or

bread-winner', that employment;

husband, or father as 'the

is, as the sole person in paid

a one or two generation nuclear family;

de jure marriage between spouses;

(iv) marriage for life between spouses;

(v) the spouse of a man could only be a woman, and vice versa.

Today, exceptions to that pattern are so common as to make it improbable that a rational and equitable superannuation scheme can be devised at all. In other words, the whole notion of superannuation may have been appropriate in one era of economic and social life, and



its usefulness may have ended with the demise of that period. The following changes are overtaking us:

(i) single women. wives and mothers are in paid employment in great numbers. It is easy enough to expand (if necessary) survivors' pensions to include widowers along with widows. But what can be done in a national superannuation scheme when both spouses are contributors

and one of them dies: should the surviving spouse receive the survivors pension while he or she is also still in paid employment? And when retirement comes, should he or she continue to receive the survivors pension (earned by the deceased's contributions) as well as his or her own retirement pension? If a negative answer is given to these questions, it will provide a salutary reminder that contributory or insurance modes of

social welfare provision do not necessarily lead to the elimination of means tests as is so often claimed.

(ii) high unemployment, the trend towards part-time work and job sharing arrangements, the growth of cottage industries such as home computer consultancies, and the movement of both men and women into and out of the paid

work force as needs and opportunities arise all make nonsense of notions like 'the bread-winner' and 'dependants'. Men and women are becoming increasingly independent and interdependent.

(iii) de facto 'marriages' are more and more recognised as deserving of respect and official recognition, so that rather than there being a sharp either/or distinction between people who are spouses and people who are merely living together, there is now a gradation of marriage-like relationships from casual to committed, with a legally registered marriage an optional extra at

any point, or at no point at all along the continuum. Notions such as 'spouse', 'dependants' and 'survivors' do not fit easily into this picture.

(iv) the same question is posed by the rising tide of divorce and separation, by the consequent rise in the number of sole parents and of parents who share the care of their children week and week about, and by the rise in the

number of women who choose to be single mothers but who yet have intricate blends of independence-dependency with other people.

(v) marriages and marital-like relationships between homosexuals are probably more common today than previously, and their desire to find social arrangements suited to their congenital or acquired leanings further

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undermines the rationale for meaningful and equitable device future needs of people who happen 'bread-winner in a nuclear family'

superannuation as a for providing for the not to conform to the model.

Superannuation schemes can be designed to cope with a demand for apportioning accrued entitlements between spouses, because that is a situation still in accord with the old model. But it is impossible to imagine how any scheme can cope with contributors and would-be contributors who move into and out of the paid workforce; who drop out for a while to have children or work in the informal or alternative economy; who spend much of their life on unemployment, supporting

parent and education benefits, and who chose to retire at 45 anyway; who have interdependency relations that change radically over the space of the forty to fifty years which in the heyday of

superannuation were to be spent working for the one employer; and who only sometimes, and in varying degrees have dependants.


One of the major factors inhibiting moves towards a contributory scheme in Australia has been the opposition of the existing employer-sponsored occupational superannuation schemes. A common view, and one that has a lot to be said for it, is the laissez-faire one that as far as possible such schemes should be left alone to continue as options for those employers and employees who want them, on the ground that the great variety of arrangements they offer is

necessary if people are to enjoy freedom of choice. Based as they are on freely contracted arrangements, they would not exist (it is argued) if they were not felt to be meeting needs, and therefore they should not be needlessly interfered with or abolished.

The fact that only a minority of employees are covered by occupational superannuation schemes (mostly in jobs that are more highly paid, white collar, in public services or in larger and more strongly unionised firms, and filled by men) is probably a clear sign that most employers and/or employees do not regard superannuation as

necessary or desirable, or at least do not think the possible benefits to them are worth the probable costs. In particular, there are some kinds of industries and jobs - where work is irregular or part-time -that are extraordinarily difficult to fit into an occupational superannuation scheme. That some workers are able to have their employers help them ensure a degree of earnings-related income maintenance after retirement, death or disablement, while others are

not, is no more unfair than that some workers get higher pay and all kinds of perks and others do not: it is just something that goes with the job.

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The complaint from some employees that their schemes do not guard against the erosion, by inflation, of their entitlements, (a notable feature of defined contribution schemes*), and the complaint from some employers that their schemes do not guard against the escalation, by inflation, of their contributory obligations, (a

notable feature of defined benefit schemes) are, it could be argued, problems for those people and for those schemes rather than grounds for intervention by the community at large.

Similarly, with complaints about the lack of portability of entitlements from one job or scheme to another (this from employees), or about the unfair treatment of women employees, or about the lack of protection for de facto spouses, or about the lack of provisions for splitting accrued entitlements on the separation or divorce of spouses - these, it can be argued on the laissez-faire approach, should be

left to private negotiation between the parties involved in particular occupational superannuation schemes, with employees being aided by their trade unions or professional associations; likewise with the complaint that occupational superannuation schemes provide inadequate

vesting (this from employees who feel inhibited from early retirement or job-swapping) or inadequate preservation (this from employers who feel it acts as a positive inducement to employees to withdraw). The main fallacy in this approach is the weak bargaining position in which many employees find themselves through lack of information and

interest. This, and any general pressure to increase labour mobility in the community by improving portability, could be the main grounds for government intervention.

But from the laissez-faire point of view, the only justification for setting up a national superannuation scheme would be to fill in the gaps in coverage left by the existing occupational schemes. Even so, it is very difficult to envisage a national scheme

that would not in many ways interfere with the existing schemes. A national scheme (contributory or non-contributory, compulsory or voluntary) that offered only low benefits would allow occupational schemes to flourish, but would still leave many people under-provided for. If its benefits were high, occupational schemes would suffer from the competition and go to the wall. A national scheme that was

* A defined contribution scheme is one in which benefits - usuaily a lump sum payment - equal the member's accumulated contributions, plus any other contributions paid in on the member's behalf, plus investment earnings; also called an 'accumulation', 'money purchase' or 'allocated fund' scheme. A defined benefit scheme is one in which benefits are related to a member's length of membership and pre-retirement wage or salary level; while

employees contribute at a specified rate, employer contributions may be recalculated periodically to cover residual costs; also called a 'benefit promise' or 'unallocated fund' scheme.

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contributory (compulsory or voluntary) could lead some people into stacking (contributing to more than one scheme at a time) and over-provision (putting too much aside for later), but if government acted to integrate the two systems (as in the two-airline agreement), then government would find itself intervening, supervising and in the end having to accept responsibility for the viability of both.

For example, a national scheme that was compulsory and contributory could have the effect of employers and/or employees finding it too onerous to continue contributing to existing occupational schemes and result in the decline of the latter. One method of integration in this case would be the provision known as contracting out, whereby members of occupational schemes that were

assessed as offering adequate benefits, or benefits comparable with the national scheme, would be exempted from contributing to the national scheme. Of course, if the national scheme became too competitive for the contracted-out occupational schemes, the latter would have a limited life; but even the setting by government of minimum standards against which occupational schemes were to be

assessed would be a form of intervention, and could have the effect of forcing occupational schemes into policies that were unwelcome to employers and/or employees (as well as being administratively expensive to police). In any case, it would not be long - if the analogous history of private schools and the State aid debate is any guide - before the occupational schemes and their members were demanding grants to compensate them for missing out on the subsidization from consolidated revenue that the national scheme and its participants received.

We must conclude, therefore, that the creation of a national superannuation scheme, even one designed to be as non-disruptive as possible, would have profound effects on the existing system of occupational superannuation schemes, and would radically alter the context in which employers and employees alike make their superannuation decisions.


Not everyone in Australia is pressing for national superannuation. Workers on low to middle incomes are reluctant to support a proposal that would direct any of their earnings away from meeting pressing present needs in order to finance an uncertain income in an uncertain

future. For them it is enough that they will receive the age pension with its fringe benefits. Workers on middle incomes may wonder how they will manage on the age pension, but are nevertheless unwilling to invest in a scheme the main effect of which will be to debar them,

under an income test, from receiving the age pension at all. Those on middle to high incomes are mostly in occupational superannuation schemes already, yet it is from them that the main pressures for a national superannuation scheme seem to come.

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What they hope for is an end to those very features of their present schemes that made the setting up of those schemes so attractive to their employers: lack of portability, lack of vesting, a narrow range of benefits, etc., which all go to bind the employees to the employer and yet to keep the schemes as cheap as possible. These middle to high income earners hope that a superannuation scheme run by government would be more employee-oriented.

But there is a moral objection to government bothering about the middle to high income earners. The essence of superannuation of any kind is earnings-related income maintenance in retirement; the goal is that wage and salary earners continue to enjoy something like their accustomed incomes and living standards 'after normal retirement. But since the corollary is that people who have not had any earnings

have no earnings-related incomes to maintain, superannuation also implies the perpetuation into old age of those very inequalities in income that one normally expects governments to try to mitigate. There would appear to be little justification for the general community going to the administrative trouble and fiscal expense of helping to prop up the post-retirement incomes of the better-off.

It is possible, however, to design a national superannuation scheme that would be redistributive to the benefit of those at the lower end of the income scale. A national scheme that was voluntary, or that allowed for the contracting-out of approved occupational schemes, and that was therefore less than universal in coverage, would almost certainly be left with such low income earners as participants that effective redistribution could not occur (the occupational

schemes having creamed off those in more highly paid jobs). A national scheme could only be redistributive if it were universal in scope, which in practice would mean compulsory. Contributions could be made higher for the higher income earners than for the lower income earners, while benefits could be paid according to a flatter curve than the curve for contributions, and could even be paid at a flat basic rate to people who had never been income earners at all.

A common solution overseas, and one favoured in part by the majority report of the National Superannuation Committee of Inquiry (Hancock Committee) for Australia in 1976, is a mixture of the two main methods of financing (contributions from employees and employers, but also general revenue subsidies) and of the two main methods of

providing benefits (earnings-related benefits to contributors, but also flat-rate basic benefits to the rest). The rationale for such a mixture is the fundamentally political one that there is some justice in those who put more in also getting more out if they also help

finance at least basic benefits for the needy - that is, if there is a modicum of redistribution involved in the scheme as well.

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One trouble with that idea in Australia is that one part of the package is already well-established here (namely, the age pension financed from general revenue), so that, although the basic pension under such a proposal would probably be paid at a higher rate than the present age pension, and would not be means-tested, it would be hard to convince most income earners that they should pay an additional tax

levy or superannuation contribution for something which they now 'get for nothing'.


(i) The contributory method of financing income in old age and retirement is widely used overseas, but inflation, unemployment, the ageing of the population and early retirement have meant that such schemes are increasingly having to be bailed out by subventions from general revenue.

(ii) It is widely accepted that contributors in a

contributory scheme should not be denied benefits on the ground of failure to qualify under a means test. Yet in the same schemes means tests are often used to deny benefits to surviving dependants, even though they, as much as the contributors, have foregone the income that was set aside in contributions and hence have helped to

'pay for' the benefits that are denied them.

(iii) The compulsory aspect of national contributory schemes is unacceptable to many. People who accept compulsory taxes, which are used for a general community purpose such as providing a guaranteed minimum income to the needy, might baulk at being forced to pay into a scheme the main effect of which is to take out of their own

hands the decisions as to whether and how much they should save.

(iv) Contributory schemes disregard people's ability to pay. While means tests are used to preclude the payment of benefits to those who do not need them, little if any attention is given to 'ability tests' which might

preclude the payment of contributions by those who cannot afford them. There may be an annual earned income below which no contributions need be made, but the unavoidable financial obligations on people are not

so equal as to make such a floor figure anything but generous in some cases and cruelly punitive in others.

(v) One advantage claimed for contributory schemes, that they show people the true cost of social security programs, is lost as soon as benefits from those schemes begin to be topped-up out of general revenue: indeed,

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people are then given a false impression of the costs, the extent of that deception being in direct proportion to the degree of such general revenue subsidization, which in many schemes is quite substantial.

(vi) Contributory schemes which provide allowances for dependants and benefits to surviving dependants are increasingly anachronistic, given the breakdown of the normative model of a lifelong union within a nuclear

family of a breadwinner and his spouse. Not to pay such benefits would be unjust to any succession of total or partial dependants who have had to make, in aggregate, as many sacrifices to pay for the contributions as the contributor has; yet to try to apportion the

entitlements among all the people who at some time or in some degree have been dependent on the income of the contributor would be impossible.

(vii) The sense of having earned a right to benefits, often claimed as an advantage of contributory schemes, is not all gain; it may replace the aura of charity and the taint of pauperism that can be associated with benefits

paid out of general revenue, but it also introduces a rigidity into benefit structures that could prevent highly desirable modifications in changed circumstances.

(viii) Earnings-related benefits, which almost invariably go with contributory schemes, and which are at the heart of any superannuation scheme, perpetuate income inequalities into retirement and old age: that is, they

benefit the haves, not the have-nots.

(ix) A contributory scheme can be designed to be as, or more, progressive as the personal income tax system, but since the principle of progressiveness conflicts with the principle of income maintenance, it is highly unlikely that such a scheme would be politically acceptable; the token redistributiveness built into many overseas

schemes, by the payment of a basic flat-rate benefit to low contributors and non-contributors, could not be used as a sweetener in Australia because the corresponding benefit (namely, the age pension) is already established

as payable from general revenue.

(x) One respect in which a contributory scheme is superior to one financed from general revenue is that, unlike taxes which can be evaded or avoided, contributions must be paid before one can receive the related benefits.

(xi) The costs to contributors and to government of a contributory scheme are much higher than for one financed from general revenue.

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(xii) A contributory scheme may be easier to sell to the electorate than one financed from general revenue, on the assumption that contributions will not be viewed as another tax; but that political advantage could be more than cancelled out by the organised opposition to the

introduction of such a scheme that could be expected from the commercial insurance industry.

(xiii) The old idea that a contributory scheme would remove issues of income in old age and retirement from political arena could only be realised if the scheme fully funded, independently managed and incapable being subsidised out of general revenue. With demographic uncertainties as the ageing of

population and immigration and emigration rates, with unemployment, inflation and early retirement destroying actuarial predictions, the insulation of scheme from government intervention, and hence

party political controversy, is highly unlikely, eve it were desirable.

the the was of such

the and all any from n if

(xiv) The same considerations imply that those cannot be removed from the normal budgetary government. In any case, the argument that investment decisions about such colossal s

should be removed from the normal fiscal was always highly dubious.

issues also processes of savings and IMS of money


(xv) The balance of the above points being so overwhelmingly against the contributory method of financing, it must be concluded that the idea of introducing a national superannuation scheme in Australia has almost nothing to be said in its favour. The most obvious alternative is to concentrate on improving the existing age pension arrangements, financed as they are from general revenue;

this was also the main recommendation of the minority report of the National Superannuation Committee of Inquiry in 1976.

(xvi) Insofar as the main pressure for the introduction of national superannuation comes from income earners who are already members of occupational superannuation schemes, the overcoming of their dissatisfactions with those schemes might call for government assistance.

However, a laissez-faire attitude by government has much to be said for it, for the improvements called for (e.g., portability) affect those very aspects of such schemes that make them attractive to employers; if there

are too many reforms (from the employees' point of view), employers could easily conclude that there is little point in their continuing to sponsor

superannuation schemes for their employees.

12 April 1983

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