Superannuation s contribution to Australia s economic future. ASFA 2013 Investment Interchange. 4 June John Daley, CEO, Grattan Institute

Transcription

1 Superannuation s contribution to Australia s economic future ASFA 213 Investment Interchange 4 June 213 John Daley, CEO, Grattan Institute

2 Superannuation s contribution to Australia s economic future 1 ECONOMIC POLICY CONTEXT Australia is home to a number of world-leading policy innovations. Income-contingent higher education loans otherwise known as HECS for most of the people in this room, and HELP for those a little younger. And our system of funding retirement at least in part through compulsory contributions to individual accounts, known to everyone in this room as superannuation. The future of this superannuation system will be shaped in part by the wider challenges for Australian economic policy. These challenges include the squeeze on Australian government budgets, the looming prospect of declining real incomes, and the limited opportunities for governments to promote economic growth in ways that are big enough to make a difference. I ve been asked to look at how these challenges affect key issues in superannuation policy. We can only resolve these issues in the public interest by thinking through what are the real justifications for superannuation today. We can then make policy choices about superannuation understanding both their impact on the public interest in superannuation, and their impact on the other economic challenges facing Australia. 1.1 Budget pressures Forecast gap The first of these economic challenges is the looming decade of deficits for Australian governments. Australian governments (State and Commonwealth combined) are currently forecasting to collectively reach a surplus just in There are questions about whether this forecast is plausible, but on any view Australian government budgets are under pressure over the following decade. Potential annual deficit of Australian governments budgets by 223 (Percent of GDP) %.%.5% 2.% -2% 4.%.5% 1.% -4% -6% -8% Forecast surplus Signature initiatives e.g. Gonski, NDIS, Direct Action parental leave Grattan Institute, Budget Pressures on Australian governments Health trend Higher welfare response to inequality increase Terms of trade potential fall Deficit 223 on current trends Superannuation s contribution 4/6/213 p.2

3 Ed n - schools Welfare - seniors Defence - capability Welfare - workforce Infrastructure Health - Hospitals Economy & finance Health - primary Welfare - families Industry Welfare - disability Criminal justice Debt management Gvt operations Comm services Health - other Aged care Superannuation Health - pharma Ed n - skills Welfare - NFS Ed n - higher ed Env t & climate ch Disability services Foreign affairs Research Welfare - carers At a federal level, both parties have promised signature initiatives that will cost budgets at least half a percent of GDP over the decade. Most of the costs for DisabilityCare or the Gonski schooling reforms start to bite after 217, only reaching steady state by around 222. The biggest single pressure is likely to be the relentless increases in the costs of health care. If health costs continue to increase at the same rate as the last decade, they will consume an extra two percentage points of GDP by 223. Welfare costs are also likely to increase. The gap widened between rich and poor in Australia over the last decade. However, the mining boom meant that those at the bottom didn t fall far behind, and the real incomes of even the lowest quintile households increased by 37%. Real incomes will rise much less in the next decade. With Newstart payments now at very low levels, there may be much more pressure to increase welfare payments for those who are least well off. In addition, we are likely to continue to see political pressure to increase aged pension benefits. Finally, the terms of trade will inevitably fall, and this will reduce Commonwealth government revenues. The precise size and timing remain unclear, but the direction is all too obvious. A Grattan Institute report estimated that cumulatively these pressures could reduce the budget balances of Australian governments by four percent of GDP sixty billion dollars in today s terms. The pressures could well be worse Health, welfare and infrastructure Many of the pressures for the next decade are illustrated by the last decade. Change in Australian governments expenditure $ bn relative to CPI Real growth Growth at GDP Over the last decade, health and infrastructure spending grew much faster than GDP. Welfare payments for seniors also grew $13 billion in real terms, again faster than GDP. 2 1 See Daley, McGannon and Savage, Budget pressures on Australian governments (213), Grattan Institute 2 Budget pressures on Australian governments, p.15 Superannuation s contribution 4/6/213 p.3

4 1.1.3 Budget pressures and policy choices Some believe that this rapid growth in health and aged pensions was driven by the ageing of the population. This is not true. These areas only grew faster than GDP because of policy choices that governments made, either explicitly or by default. Real increase in expenditure ($212 billion) Health 45 4 More, improved, and new services 35 per person 3 GDP 25 growth Health inflation >CPI Pop ageing Pop growth Grattan Institute, Budget Pressures on Australian governments Rate & eligibility change Indexation >CPI Pop growth and ageing Age Pension Health costs increased primarily because a 6 year old today visits the doctor more often, has more tests, has more operations, and takes more drugs, than a 6 year old ten years ago. The greater number and proportion of 6 year olds increased health costs a little. But most of the real increase in health spending resulted from providing more and better health services per person. 3 Aged pensions increased partly because there are more people over the pension age, and partly because they are indexed at weekly earnings rather than CPI. However, the faster-than-gdp growth resulted from specific government policy decisions to increase eligibility for pensions, and to raise the pension even faster than weekly earnings. 4 3 Budget pressures on Australian governments, p.16 4 Budget pressures on Australian governments, p.2 Superannuation s contribution 4/6/213 p.4

5 1.1.4 Budget projections These decisions were easier to make over the last decade because Australian government budgets, particularly the Commonwealth budget, had large tailwinds from the mining boom. Budget outcome (% of GDP) Cash balance Forecasts Structural budget balance Contribution of cyclical impacts to budget outcome (% of GDP) -3 Grattan Institute, Budget Pressures on Australian governments Financial year ended Estimates from the Treasury, the Parliamentary Budget Office, the OECD, Deloitte Access Economics all agree that the benefit was around 2% of GDP. 5 These tailwinds meant that governments could afford to increase spending without asking too many difficult questions about how to pay for it. The next decade will be more difficult. With declining terms of trade, Australian government budgets will be under more pressure. Although opinions differ about exactly how fast minerals prices will fall, the decline will make it harder to fund real spending increases. 5 Budget pressures on Australian governments, p.28; Parliamentary Budget Office, Estimates of the structural budget balance of the Australian Government 21-2 to (213) Budget%2Office/Parliamentary%2Budget%2Office%2Stuctural%2Budget%2Balance.ashx Superannuation s contribution 4/6/213 p.5

6 Already Australian governments are feeling the pinch. In order to hit the forecast budget surplus in , the next Commonwealth government will have to be very different from its predecessors. Real expenditure growth by Commonwealth government Cumulative annual growth, % per year 4% 3% 2% 1% % Howard first 3 terms to 23-4 Howard last term 24-5 to 27-8 Rudd-Gillard 28-9 to e Next government e to p Commonwealth BP 1 p.1-6 Budget forecasts assume that the next government will hold real spending growth to less than 2% per year. This is much less than the cumulative annual spending growth of more than 3% per year over the last 2 years. From its starting point before the global financial crisis to the budget of (by which time the stimulus spending should have been well washed out of the budget), cumulative spending growth under the Rudd-Gillard governments was 3.6% per year Budget implications for superannuation policy As a result, governments will inevitably ask tougher questions over the next decade about superannuation policy. We will probably hear more about superannuation tax concessions. We will also probably hear more about whether superannuation design could be improved to reduce Age Pension liabilities. This budgetary environment will also lead to very different conversations. Over the last decade, specific interest groups often stymied reforming simply by identifying a loser group. Reforms from the GST, to carbon pricing, to Gonski, were sold on the basis that no-one will be worse off. 7 But substantial improvement in the underlying budget position by definition means that someone is worse off. Indeed, improvement on this scale is perhaps most likely to succeed if a government explicitly communicates that everyone will share the burden. 8 Thus I suspect it will no longer be enough to show that superannuation reforms will leave some people with less money in their retirement. In future, it may well be argued that everyone needs to share the burden and that includes future retirees. 6 Commonwealth Budget , Budget Paper No. 1, p Budget pressures on Australian governments, p.53; Garnaut, Ending the great Australian complacency of the early twenty first century, Victoria University 213 Vice-Chancellor s Lecture (213) OF%2THE%2EARLY%221st%2CENTURY%2Ross%2Garnaut%228513v3.pdf 8 Budget pressures on Australian governments, p.5 Superannuation s contribution 4/6/213 p.6

7 1.2 Declining incomes Australians have had a very prosperous 5 years. Growth in Real National Income per person (Per cent) Terms of trade Labour utilisation Labour productivity Foreign income s 197s 198s 199s 2s Dolman, B and Gruen, D, Productivity and structural change, 41 st Australian Conference of Economists (212) Over the last 5 years, real incomes for Australians grew by an average of more than 2% every year. In the 198s this was a combination of rising labour productivity and increasing participation. The miracle economy of the 199s benefited from strong productivity growth that most attribute to the productivity reforms of the 198s and 199s. In the 2s, labour productivity growth slowed to its lowest average in 5 years. But individuals had more to spend because of the minerals boom and the associated improvement in the exchange rate. 9 The next decade will be more difficult. If the terms of trade fall, this will subtract from real income growth. If labour productivity growth only grows at 1% as it did during the 2s, and the terms of trade reverse, then real incomes will be close to flat for a decade. There has been a lot of squawking about cost of living pressures over the last few years. Real incomes were in fact rising. 1 Imagine the political pressures when incomes are not rising, and there are genuine problems with the costs of living. 9 Dolman, B and Gruen, D, Productivity and structural change, 41 st Australian Conference of Economists (212) Structural-Change/Downloads/Productivity-and-Structural-Change-Speech-DGruen.ashx 1 Phillips, Li and Taylor, Prices these days: the cost of living in Australia (212), NATSEM Superannuation s contribution 4/6/213 p.7

8 Whether this scenario comes to pass will depend on how fast the terms of trade fall. Treasury are projecting a relatively slow decline over decades to a level higher than the historical average. However, the history of terms of trade booms in other countries over the last 5 years suggests that things may not end so gently. Grattan Institute analysis of comparable terms of trade booms in other countries shows that the terms of trade generally subsided to be at or below their pre-boom levels within five or six years. We need to be at least prepared for this possibility. 1.3 Economic growth government opportunities With budgets under pressure and declining incomes, we would all like to see productivity grow rapidly. Unfortunately, there is no magic wand labelled productivity in government s bottom drawer. What can governments do? Superannuation s contribution 4/6/213 p.8

9 1.3.1 Big 3 reforms tax, female and older age workforce Grattan Institute s analysis of policy reforms to increase economic growth only found three reforms big enough to matter over the next decade. 11 On these reforms there is some agreement on what policies are required to make a difference. The tax mix particularly the balance between company and other taxes could make a big difference to the incentives for investment. Female workforce participation is likely to increase if there are reforms to welfare and childcare subsidies so that women have more incentives to work when they have young children. Older age workforce participation is likely to increase if there are fewer incentives to retire. This would require changes to the age of access to the pension and superannuation. Collectively these reforms could increase economic growth by 5% over the decade. Superannuation has particular impacts on this last reform. 11 Daley, McGannon and Ginnivan, Game-changers: economic reform priorities for Australia (212) Grattan Institute, Superannuation s contribution 4/6/213 p.9

10 Iceland Sweden NZ Norway Switzerland Japan Denmark US South Korea UK Canada Finland Australia OECD average Older age workforce participation and the access age for superannuation Fewer older Australians work than in many other countries. Adjusted workforce participation rates of year olds (%) Grattan Institute, Game-Changers Although Australia is ahead of the OECD average which includes Greece and Spain it is substantially behind New Zealand. Studies of both worker behaviour in Australia, and cross-country analysis, suggest that the age at which people qualify for the Age Pension and can effectively access superannuation affect retirement decisions. 12 Retirement ages in Australia have increased over the last decade. Female participation continued to increase for all age groups over 44, partly as a result of increased higher education. Male participation had been flat to declining for several decades when the first Inter-generational report was written in 21. But since then, participation rates have risen quickly. 13 Labour force participation rates (per cent of age cohort) Men Women Grattan Institute, Budget Pressures on Australian governments 12 Game-changers, p.5 13 Budget pressures on Australian governments, p.45 Superannuation s contribution 4/6/213 p.1

11 If these participation rates continue to rise perhaps helped by increases to the age of access to the pension and superannuation this wlll substantially increase Australian economic growth. It will also reduce pressures on the budget. Changes in labour force participation rates, per cent of total population 213 to to Lower participation due to ageing Grattan Institute, Budget Pressures on Australian governments Increased participation of older workers Increased older participation with super / pensions reforms Increased female participation with childcare/welfare reforms If 6 year olds in 223 work at the same rate as 6 year olds today, Australia will indeed have problems, and the participation rate will fall by 2%. However, if participation rates continue to trend upwards - not even as fast as the last ten years then participation will barely fall in the next decade, although it will be almost a 2% drop in 2 years time. 14 If we see reforms to increase the age of access to superannuation and pensions, we are likely to see increased total participation rates, even over 2 years. If we reform incentives for female workforce participation, the total participation could be 2% higher than today, even in 233. From a budgetary and economic growth perspective, this is likely to be the largest single issue for superannuation for the next few years Infrastructure You may have noticed that the earlier analysis of economic reform priorities did not highlight funding for infrastructure. This may surprise those who have heard that Australia has an enormous infrastructure deficit sometimes estimated at $8 billion, holding back economic growth. 15 However, this infrastructure deficit may be more engineering mirage than economic reality. The only published evidence of a large infrastructure deficit appears to be a long wish-list of the projects that engineering and construction firms would like to build. The Alice Springs to Darwin railroad stands as a monument to the proposition that not all infrastructure increases productivity by more than the cost of the infrastructure. Infrastructure only increases productivity if it is the right infrastructure in the right place, provided at the right price Budget pressures on Australian governments, p Engineers Australia (21) Australian Infrastructure Report Card 21. (21) 16 Game-changers, p.26 Superannuation s contribution 4/6/213 p.11

12 Government funding for infrastructure has already increased very substantially over the last 6 years. Engineering construction work done for public sector % of GDP, calendar year 2.5% 2.% 1.5% 1.%.5%.% Grattan Institute, Game-Changers: Supporting materials Other Drains Water Electricity Railways Roads, subdiv s Just looking at roads and railways, government spending on infrastructure engineering is a larger percentage of GDP than at any time since the ABS started to collect records in It is not obvious that this five-year surge in infrastructure spending has been matched by a surge in productivity. 17 The search for productive infrastructure is precisely the target of the cost-benefit analysis required by Infrastructure Australia. Value of projects in Infrastructure Australia s project pipeline ($ billion) 35 Added to pipeline 3 (threshold/ready to proceed) 25 Project variations 2 Funded 15 Residual on 1 threshold Grattan Institute, Game-Changers: Supporting materials Residual ready to proceed Relatively few projects are assessed by Infrastructure Australia as having a positive cost benefit case so that they are on the threshold or ready to proceed. In the last three years of data, about $1 to $15 billion of road and rail projects were added to this pipeline. Most of this pipeline was funded, with relatively little left that is unfunded, 17 Game-changers, p.27 Superannuation s contribution 4/6/213 p.12

13 but ready to proceed. 18 This suggests that there may not in fact be a large number of productivity-enhancing projects waiting for money. Even amongst those projects that do get a green light from IA, the average assessed cost benefit is only about 1.5. For every $1. of funding, productivity is forecast to increase by $1.5. This is not an overwhelming return. And of course, there is no guarantee that this return will be made most large infrastructure projects around the world cost more than was planned, and provide fewer benefits than anticipated. 19 There are plenty of theoretical reasons to believe that the marginal piece of government-funded infrastructure will do relatively little to increase economic growth. Building the first road from Melbourne to Sydney has a big impact on productivity. Duplicating a lane that only reduces trip times between two small towns has a much smaller impact on productivity. So before we spend too much energy arguing about why superannuation funds don t invest enough in infrastructure, there is work to be done to prove that there are in fact opportunities going begging. 2 PURPOSES OF SUPERANNUATION How might superannuation policy be affected by the economic challenges of pressured government budgets, declining real incomes, and limited opportunities for government policy to increase economic growth? To answer this question, I first want to consider the policy justifications for superannuation. First, superannuation aims to encourage lifetime income smoothing. On average, we tend to spend money for the short run more than is in our long-term interests. Superannuation essentially forces people to save more earlier in their lives so that they have more towards the end. Although libertarians would argue that people should be free to make their own decisions, they have yet to find a convincing riposte to the well-documented tendency of many people to make decisions for the short-term, that they themselves would not make with a different frame of reference. Agreeing to be bound to the mast, like Ulysses, is a good strategy for long-term prosperity. 2 There remain questions about the effectiveness of superannuation for lifetime income smoothing. It would appear that people save less on their own account with the introduction of superannuation. However, their total savings for retirement (including superannuation) are probably greater than they would be without superannuation. 21 Second, superannuation aims to encourage intergenerational equity so that each generation pays for its own costs of retirement, rather than imposing this burden on the next generation. This is particularly important when the shape of the population is changing. Here again, there is a flavour of trying to save us from our own short-term preferences. Voters (and therefore governments) would much rather spend money today than save it for tomorrow. As many European governments are discovering, if pension systems are not transparent, then it is easy to present an apparently healthy 18 Daley, McGannon and Ginnivan, Game-changers: economic reform priorities for Australia: supporting materials (212) Grattan Institute p Game-changers, p Kahneman, Thinking fast and slow (212) 21 Gruen and Soding, Compulsory superannuation and national saving, Economic Roundup 3 (211) Superannuation s contribution 4/6/213 p.13

14 budget, spend money on today s voters, and conceal unaffordable pension liabilities for the future. Superannuation, and particularly the device of individual accounts, increases the transparency of whether savings for retirement are adequate, and increases the political cost of using those savings to fund short-term government decisions. Third, superannuation was originally intended to create a pool of Australian capital for investment in Australia. It was conceived in an era that was focused on the twin deficits including the current account deficit. With the increasing mobility of international capital, it is less clear that this is a real economic problem. 22 Fourth, superannuation is sometimes justified on the basis that it increases retirement incomes. But of course, we would all like to be rich. The increase in retirement incomes must be balanced against the costs. Too often in public debate, higher superannuation balances are seen as an end in themselves. Of course, for the business of fund management, they are. But for public policy, higher balances come at a cost. Either less tax is collected (imposing higher taxes on someone else). Or current spending is curbed, with a cost to the welfare of workers today. These considerations must be taken into account before assuming that higher superannuation balances are in themselves a Good Thing. Finally, a variety of other purposes ascribed to superannuation. Some have argued that the superannuation system was designed to provide paid roles for union officials, or so that union interests would have a substantial control over capital. 23 It would be fair to say that these are seldom claimed as substantial justifications for the scheme. 3 IMPLICATIONS FOR SUPERANNUATION POLICY Thus the dominant justifications for superannuation are that it smooths lifetime incomes, and it promotes intergenerational equity. Given these justifications, what do current economic challenges suggest for major issues in superannuation policy? How should we approach superannuation tax concessions, the access age, lump sum payouts, infrastructure investment, and the costs of administration? 3.1 Tax concessions Although questions remain about the precise size of tax concessions for superannuation, there is no question that they are large. The intergenerational equity of these tax concessions is doubtful. Many of them go to people who are older, and relatively well off, and who would otherwise save anyway but pay a bit more tax. Tax concessions for people close to retirement do little to reduce intergenerational transfer. In fact, they do the reverse. On average, they increase the tax burden on relatively young taxpayers to benefit more wealthy older taxpayers. Ironically it is precisely these relatively young taxpayers who will pay in the future for the retirement of older workers with inadequate savings. This is particularly unfair if tax concessions are so big that budgets cannot afford them in the long term. The younger generation then bear a higher tax burden today, and will bear a higher tax burden again in 25 years time as they age but the superannuation 22 Greenwood, Good for the national; good for the people: an assessment of Paul Keating s Superannuation Policy, Honours thesis, University of Sydney. 23 Peter Martin, on Superannuation in Australia, Radio National, Rear Vision, 21 April 213, Superannuation s contribution 4/6/213 p.14

15 tax concessions enjoyed by their parents are withdrawn. Given the context of longterm budget pressures that I outlined earlier, this is a real risk. Consequently, we should be concerned that superannuation tax concessions will be a means for transferring wealth from younger generations to older generations, the precise opposite of one of the true justifications for superannuation. The claim is that these tax concessions increase the savings of those in retirement. But this puts the superannuation cart before the policy horse. Superannuation arrangements aren t justified merely because they increase retirement incomes. The fairness of superannuation arrangements depends on who is paying for them, and whether one generation extracts more resources from the system than the next. 3.2 Access to super age I have already identified the age of access to superannuation as a key issue for economic growth. Lifting the access to superannuation age to the pension age would both lift economic growth, and increase intergenerational equity. At present, a third of all superannuation balances are spent before people reach pension age. 5% of those who live to 65 will still be alive 2 years later at the age of 85. Very few of these people have enough superannuation to fund their entire retirement income for so long. Superannuation spent before pension age generally increases the long-term liability of government for age pensions. The tax concessions for superannuation are only justified if they reduce intergenerational equity. By definition, superannuation spent before the pension age does not do so. 24 One policy option might be to allow unreserved withdrawal of superannuation benefits before the pension age but only if the tax concessions for superannuation were paid back for any money withdrawn early. 25 This would recompense taxpayers for funding concessions with little or no public benefit. Again, this intergenerational equity issue is exacerbated if existing arrangements are so generous that change is inevitable in the long term. The younger generation pays three times: once for tax concessions today; a second time for the increased pension liability in 15 or 2 years time, and a third time because it will be forced to work longer in 2 years time as the access to superannuation age is inevitably lifted to help government budget balances. Some have argued that superannuation should provide the benefit of funding early retirement in return for workers giving up their wages. 26 This kind of thinking binds Australia in perpetuity to the particular political deals of the 198s. For some, these politics were the defining moments of Australian politics. But in 213 we re entitled to make our own decisions. Requiring workers to pay some of their income into superannuation accounts is conceptually no different from requiring people to pay tax. It is entirely justified if it prevents one generation imposing the costs of its retirement on the next. This compulsion remains perfectly fair, even if it doesn t come with the added bonus of early retirement. Indeed, given the substantial tax concessions embedded in superannuation, it would be unfair to other taxpayers if this money is spent before the pension age. 24 Game-changers, p Game-changers, p Grattan, Don t wreck super: Keating, The Age 26 May 29 Superannuation s contribution 4/6/213 p.15

16 3.3 Lump sums One can take a similar approach to the payout of lump sums. The argument is that superannuation is my money, and if I choose to spend it all at once, such is my choice. Again, such an analysis ignores the substantial tax concessions provided for superannuation. These concessions are only justified if they improve long-run intergenerational equity by reducing future pension liabilities. Manifestly, superannuation that is spent in a lump sum does little to reduce future pension liabilities. 3.4 Infrastructure investment I have already touched on the opportunities to use superannuation to increase infrastructure investment. As I have explained, one should be sceptical that there are a large number of economically productive infrastructure investments just looking for cash. Indeed, a number of recent road projects in Australia have reduced productivity. Investors in projects like the Brisbane Clem7 tunnel lost their money precisely because the roads cost more to build than people were prepared to pay to use them. There are some spillover benefits from reduced congestion for others. However, the work on so-called Wider Economic Benefits suggests that these are not typically more than 3% of the total benefit of the infrastructure. And they are inherently unlikely to be realised in projects other than those that increase public transport access to the centre of large cities. So while there are many calling for substantial changes to encourage Australian superannuation funds to invest more in infrastructure, I suspect that the major reason for lack of investment is concern about lack of return. Of course, if there are genuine distortions that discourage investment in infrastructure, those distortions should be reformed. But we should remain vigilant lest governments compel superannuation funds to invest in projects that do not provide a risk-weighted return as good as other opportunities. Superannuation has enough distortions already that it can do without this one. 3.5 Costs of administration I would like to conclude with a brief story. Imagine you are a bright young Treasury official. You dream up a brilliant new scheme to encourage lifetime income smoothing and improve intergenerational equity. Employers will pay a 9% payroll tax into accounts in the name of each worker. These accounts will pay out a pension when workers reached retirement age. A new branch of the ATO is going to collect the employee contributions, invest the money, and send annual accounts to individual Australians. You present it to the Treasurer. She is impressed. But then you explain that the new government department to run this system is going to cost around $9.5 billion per year. I suspect that the Treasurer would tell you that the idea is interesting, but the costs of administration need further work. The entire ATO is administered for a mere $3.4 billion. 27 Surely superannuation can be delivered for less? For a mere $4.6 billion, the Department of Human Services 27 Australian Tax Office, Annual report , p.ii Superannuation s contribution 4/6/213 p.16

17 assesses eligibility, manages the paperwork, and distributes all Commonwealth welfare benefits, medical benefits, and delivers a range of services as well. 28 The investment and operating costs of superannuation are around $9.5 billion per year. 29 This cost reduces intergenerational equity because future generations will have to pay more for pensions. Sooner or later the Commonwealth government will realise that dollars spent in superannuation administration and fund management are dollars that would otherwise reduce future Commonwealth pension liabilities. If future Australian government budgets are going to be under more pressure, then more vigorous government intervention is likely. The Cooper review stepped in this direction with MySuper. But I would suggest that the opportunity is so large that governments will not have to look far for justifications to do more. 4 CONCLUSION Australia faces big economic challenges: rising budget deficits; slowing, if not flat, income growth; and some limited opportunities for governments to increase productivity; all of which will be politically difficult. Superannuation will inevitably feel the pressure for reform. Superannuation recipients will have to shoulder their share of the burden. The claims for maintaining superannuation ultimately rest on its real justifications income smoothing and intergenerational equity. Given economic challenges and these justifications, we are likely in the longer term to see reduced taxation concessions, raised ages for access to superannuation, limits on lump sums, and requirements to reduce the costs of administration. Some of those reforms may not be in the financial interests of some people in this room. But the mission of something like Grattan Institute is to think hard about what is in the long-term public interest, irrespective of sectional interest, so that in the long-run we are all better off. And consequently I would also like to acknowledge the role of ASFA in inviting me here today. It takes courage to ask an outsider to come inside the tent and talk about reforms, some of which may be difficult for the industry. But one of the marks of a mature and vibrant industry is precisely the preparedness to engage in discussions with those from outside who are prepared to be critical. Such discussions can often change minds about what is truly the right thing to do in the public interest. I look forward to your questions and comments changing my mind. 28 Department of Human Services, Annual report p According to APRA s annual statistics, in 212, funds larger than four members controlled $897 billion, investment expenses were $1.9 billion, and the operating expenses were $4.6 billion (APRA, Statistics: Annual Superannuation Bulletin June 212 (213), p.39). Self managed super funds controlled another $441 billion (APRA p.31), and the operating and investment costs were probably around $3 billion (Australian Government, review into the governance efficiency structure and operation of Australia s superannuation System: A statistical summary of self-managed superannuation funds (29) pdf, p.15) Superannuation s contribution 4/6/213 p.17