Dawkins Has Limited Options In Getting Us To Save
Sydney Morning Herald
Friday April 16, 1993
John Dawkins wants to change Australia from a nation of binge consumers into a nation of squirrels.
His priority is to find ways of making us save more.
But regardless of what Mr Dawkins may plan for us, he has to come to terms with what actually motivates us to save.
Any plan to encourage Australians to save more has to address why people save in the first place. It must look at which type of saving has the greatest effect on the total level of national private saving.
Saving means different things to different people. You may think it simply means having a savings account in the bank. It does, but it also means a lot more.
Economists define saving as the total disposable income during a given period of time that is not spent on current consumption during that time. That simply means consumption is forgone. It applies to all sectors of the economy- government, business and households.
According to the Australian Bureau of Statistics, Australia's household saving ratio - the ratio of household income saved to household disposable income - has been on a downward trend since reaching a high point in the mid-1970s. That's why Mr Dawkins is worried.
If you ask 10 people why they save you'll get 10 different answers. But the motives for saving generally fall into three broad categories.
We all tend to save for large items of consumption; that trip you've planned to Asia or Europe or that car you're about to buy.
Saving for major consumption items can mean either putting away money before that aeroplane ticket is bought or buying the ticket on credit and paying it back over time.
While people save with a short-term target in mind, they also save in case of emergencies. Generally, people in risky occupations, where there is a chance of losing a job or facing a pay cut, will tend to save more to provide a safety net.
Saving for that rainy day, called precautionary savings, increases during times of prosperity and decreases during times of recession as the need to use savings in difficult periods becomes a priority.
The last major reason people save is for their retirement. Most people in some form or another fall into this category.
Much of our retirement saving takes place without us even realising it. Paying off a mortgage, buying shares in a company, buying government bonds and paying money into a superannuation fund all count as saving. Building up assets such as paintings, antiques or jewellery also count as retirement savings.
Most people planning for retirement do not open a savings account and put money into the bank. Instead, most Australians saving for retirement either do it by paying off their home mortgage or putting money into a superannuation fund.
Unfortunately for economists, not everyone falls into a nice neat category. There are people who have a wealth generating psychology and save for the sake of generating wealth itself.
While people generally save to consume at a later date, whether that is in the short term with a new car or in the long term in retirement to buy food, there are those who simply save for the pleasure accumulating wealth alone can give them.
Take the example of a friend of mine. He plans to spend the next five years working as a highly paid merchant banker to save as much money as possible and then leave the daily grind behind to run his own life. At the same time, he also has a mortgage and belongs to a superannuation fund.
For most of us that's only a dream. We have to face the reality of working for the rest of our lives until the age of retirement. But he's saving to free himself from the shackles of employment and derives pleasure from the benefits that generating wealth alone can bring him.
Mr Dawkins would be impressed with my friend's efforts. But when Mr Dawkins berates the rest of us for our irresponsible ways and urges us to save more, it's hard to know how we can increase our saving.
Does he mean putting away an extra $50 a week on top of what we already hide away in our savings account? Will this actually help in any way to increase the level of national saving?
Unfortunately, no.
It turns out that the only type of saving that affects the level of national private saving is retirement saving. To understand the reasons it is useful to turn to State of Play 7* . It examines the effect that each of the three motives for saving has on the total private level of saving.
While some people save to purchase a car, these savings are cancelled out by other people spending their equivalent savings to buy a car.
According to State of Play 7, for every 10 families saving a 10th of the cost of a wedding in any given period, one family is actually throwing the wedding party. The money spent on the wedding will tend to cancel out the savings from the 10 families who are saving during that period. The same applies to washing machines, overseas trips and cars.
As a result, in any given period of positive saving by some families, their efforts are matched by the equal and offsetting negative savings of others.
Over time, the effect of precautionary saving is also nullified across the community.
State of Play 7 explains that if you statistically adjust the saving figures for the cycles of booms and recessions, you find that most of the aggregate private saving occurring as a precaution against the effects of such cycles would soon disappear.
Like the first type of saving, it would cancel out across the community and across time for "average" or "normal" economic circumstances.
The first two saving motives have little impact on the level of total private saving. It turns out that the level of national private saving is affected by you and me deciding to accumulate wealth on a long-term basis to either spend it in retirement or pass it on to heirs.
It's now important to look at saving for retirement more closely. What factors affect why and how we save for retirement?
State of Play 7 says there are four factors that drive retirement saving.
How much people save for their retirement depends on how long they expect to live in retirement relative to how long they expect to remain working.
It depends on the age structure of the population - whether there are large numbers of people in the retiring age or more in the age of high saving.
Australia has an aging population. One of the perceived problems is that a large part of the population is in or near retirement without having been trained to save during their lives.
Another factor driving retirement saving is a person's perceived desire to hold wealth in retirement. It depends on issues such as whether a person believes financial security in old age is important and how much people want to leave behind to friends and family after their death.
Finally, government policy can help determine the extent of national saving for retirement, through government levied contributions and administered pensions.
In Australia, the Government has already made radical changes in policy with its move to compulsory contributions by employers and could also be considering compulsory employee contributions.
Countries that have little public support for retirement, such as Japan, tend to have higher private saving. But clearly, once a system is in place, it is difficult for a government to remove it.
That's where the Government's plan to force us to save through superannuation comes into it. The Government can't affect people's personal desire to accumulate wealth or the age structure of the population and changing the retirement age will meet with social problems.
For any government policy to really make an impact on the amount Australians save, it must focus on saving for retirement and that means home mortgages and superannuation funds.
Reducing tax rates on interest earned on bank accounts is unlikely to have much impact on the total level of private saving. This is why superannuation has become the cornerstone of the Government's national saving plan.
The Government knows there is a long-term problem with national saving. It can no longer fully support a retired population.
Pressuring individuals to save, through compulsory superannuation, is aimed at moving closer to a free market system where individuals look after their own savings instead of government providing for retirement. But rather than eradicate government provisions, it's merely trying to lessen the extent to which people are dependent on the government for their retirement.
Overall, people save because they have to survive. The Government is now saying to Australians they will have to save more for their own retirement and get better at looking after themselves. But after all the motives for saving are taken into account, the Government is still left with limited options to make us tighten our belts and boost the level of national private savings.
* State of Play 7, INDECS, Allen & Unwin, August 1992, rrp $19.95.
© 1993 Sydney Morning Herald