Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

Retirement review’s misleading figures

Terrence O'Brien

19 March 2021 | IDEAS@THECENTRE

The Retirement Income Review (RIR) conclusions are based heavily on the assertion of a $40 billion a year cost to taxpayers from the way superannuation is taxed; however this is selective and misleading.

In Implications of the Retirement Income Review: Public advocacy of private profligacy, I outline that Treasury produces two estimates — one of $40 billion a year in ‘tax expenditures’ rising at 10% a year, and one of $7.5 billion a year, roughly steady over time. However, the RIR is heavily based only on the high estimate, while the more defensible estimate is the lower one.

The RIR expresses concern that the cost of ‘tax expenditures’ — driven by the concessional 15% tax on superannuation earnings — will grow to outweigh the actual cost of the Age Pension by the late 2040s.

The cost of superannuation tax concessions by the neutral measure of $7.5 billion a year is about one-fifth the claim the RIR uses. By this measure, overall retirement system costs (super plus Age Pension) would likely not rise as a proportion of GDP, despite population aging and rising retirement incomes.

Moreover, analysts have shown the effective tax rate on superannuation earnings is already much higher than the statutory rate and higher even than the RIR’s benchmark treatment.

The methodology for the high estimate is biased against all saving, with the bias increasing with the length of the saving.  Based only on the biased estimate, the RIR suggests that the tax treatment of superannuation is too costly, growing too fast as a share of GDP, and too weighted to those who can afford to save up to the super contribution limits.

In response, it implies policies that would limit compound after-tax returns to super saving and incline each generation towards consuming more fully its own lifetime savings. This is a remarkable inversion of the past 30 years of policy support for greater self-funding of retirement, through building household savings and through them, national savings.

The RIR also suggests government should aim to induce faster and more complete consumption of superannuation capital and housing equity to prevent retirees’ wealth rising and resulting in growing bequests.

Policies to crimp voluntary saving and accelerate retirement spending would create more uncertain retirements and a more fragile economy, more exposed once again to the vagaries of foreign lending and investment that preoccupied policy advisers in the early 1990s.

Housing cost is supply and demand

Peter Tulip

19 March 2021 | IDEAS@THECENTRE

A common objection to the idea that planning restrictions make housing unaffordable is that some other factor is said to be more important. Leading candidates include low interest rates, high immigration, tax concessions and location premiums.

However, contrary to what is often thought, these demand-side explanations are not alternatives to the standard view. They are complements. The importance of these demand-side factors does not weaken the argument that zoning matters. It clarifies it.

Planning restrictions raise prices by limiting supply. In terms of high-school economics, they make the ‘supply curve’ steep or inelastic. The factors mentioned above raise demand — they shift the ‘demand curve’ out.

High house prices reflect the interaction between inelastic supply (due to planning) and rising demand.

It does not really make sense to ask whether supply or demand is more important. That is like asking which blade of scissors does the cutting. Both are necessary.

Over history, zoning regulations rarely change. Their inertia is actually the problem. So fluctuations in demand explain fluctuations in price. Research I did with Trent Saunders found most of the recent increase in Australian house prices can be explained by lower interest rates, with faster immigration also contributing.

In a well-functioning housing market, supply would respond to meet this demand. In our major cities, it fails to do that. So, from a policy perspective, the emphasis is on planning restrictions. That is consistent with demand factors having more explanatory power from a historical perspective.

Similarly, there is growing demand to live in desirable locations. Again, that only boosts the price if supply is inelastic. Supplying more detached houses may be difficult but in our major cities there is always the option of ‘going up’.

As Keaton Jenner and I show in an RBA paper, the reason apartments cost almost twice as much in central Sydney as in central Melbourne or central Brisbane is that Melbourne and Brisbane have built lots of well-located apartments.  Inner Sydney’s apparent ‘location premium’ reflects an administrative shortage of permits to build.

Simply put: if we built more, housing would be more affordable.

Judge Tudge by promised turnaround

Glenn Fahey

19 March 2021 | IDEAS@THECENTRE

New federal Education Minister Alan Tudge has set an ambitious 10-year turnaround goal to once again be among the world’s highest performers.

His priorities in delivering improvement are reforming teaching quality, curriculum, and assessment. These priorities must be pursued with an outcomes-based approach if an education turnaround can be effected. That will put him at odds with a sector that’s routinely fixated on what’s put in rather than what comes out.

It will be necessary to align the turnaround mentality to curriculum, assessment, and teaching quality — rather than seeing them as standalone priorities.

The Minister must avoid the trap of seeing curriculum reform as a one-stop shop for educational improvement. It’s easy to become weighed down by inevitable battlegrounds over content and to be seduced by faux quick fixes, like importing overseas curriculums.

Ultimately, it’s delivery of curriculum more than development of curriculum, that is critical to the turnaround goal. That demands articulating — and gaining support for — how curriculum will improve teaching content, not just be an exercise in reshuffling the same deck.

Tudge’s commitment to retaining, while refining, NAPLAN is welcome, but must be matched with how higher standards will translate to the classroom.

Leading a national conversation about using NAPLAN — among other tools — to drive performance will make a lasting improvement to education. Tudge can take a leaf from the book of NSW Education Minister Sarah Mitchell in establishing benchmark outcomes for schools and delivering accountability that’s lacking; particularly for parents who have few options picking between schools.

Yet, the pachyderm in the classroom inevitably boils down to teaching quality. Workforce strategy is needed to improve flexibility, responsiveness, accountability, and expertise in the teaching profession. This requires a shakeup to a stagnant workforce that is rigid, resistant to change, unaccountable, and evidence-rejecting.

Reversing the trend is a major undertaking and one where few friends will be won within the education sector. Ambitious national leadership in education is timely and much-needed.

This is an edited extract of an opinion piece published in The Australian as Education reform starts at the end; student outcomes