Implications of Superannuation on the financial Industry Essay Sample
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Introduction of TOPIC
2.1. Superannuation – a significant contributor to the financial industry Superannuation impacts significantly on financial markets especially on the Australian stock exchange, with total assets of over $1.3 trillion dollars (at March 2011) and large annual flows, particularly (APRA 2011). Superannuation can support investment, which facilitates Australian companies to expand and drives economic growth. From June 2000 to March 2011 superannuation funds hold aggregate asset more than doubled, increase from approximately $480 billion to $1,357 billion (APRA 2009b and APRA 2011). Superannuation guarantee has been responsible for a significant proportion of the growth and diversity of financial services and insurance industry. Superannuation occupied 45 per cent of the finance and industry sector in Australia — as shown in Figure 1.1 below. (IBISWorld 2008). Regarding to the domestic competition, the insurance and superannuation companies are becoming strong financial institutions (IBISWorld 2008). 2.2.1. Superannuation in various investment assets
* Stock market
According to ASX, the percentage of Australian equities that superannuation funds held, increased from 8.5 per cent in 1998 to 16.5 per cent in 2007 (ASX 2007). By contributing a significant portion to total market capitalization, superannuation helps grow the available funds for investment and expansion of Australian companies. Australia has been a “shareholder society” whose workers now have more money that invested in managed funds compare to any other economy.
* Managed funds
Superannuation funds are the biggest contributor to managed funds. As at the March quarter 2011, superannuation funds hold 71 per cent of total assets in managed funds. (life insurance funds, public unit trusts other funds made up the remaining 29 per cent) (ABS 2011).
* Private equity
Superannuation funds invested in venture capital and private equity at later stage are then invested in other industries; stimulate Australian businesses with prospects of fast growth and high rates of return. 2.2.2. Superannuation in different financial sector Superannuation is also invested both as deposits in our Australian deposit taking institutions (ADIs) such as banks and building societies, and in the equity of ADIs. $163 billion in ADI deposits had been invested by superannuation funds (as of March 2011). A further $16.8 billion was invested in the bonds of financial corporations (bank and non-bank), and $115 billion invested in the equity of financial corporations. This is an essential source of liquidity for the ADIs and it helps ADIs to reduce a large proportion of wholesale funding from overseas.
2.2. Superannuation support investment within Australia economy The superannuation sector in Australia plays an important role in supporting to fund Australia’s substantial demand of investment, both now and into the future. The private investment boom Australia is experiencing as a result of the currently historically unprecedented mining boom. So the support private sector investment through investments on the stock exchange is especially important. Now Australian superannuation tends to much-needed public and private infrastructure. Australian retirees will also be seeking the type of long-lived, low risk, moderate reward investments which large-scale public infrastructure projects provide. 2.3. Contribution of the superannuation industry in the stability of financial system
2.4.3. Superannuation assists Australia economy avoiding GFC Australia’s large superannuation funds through their direct and indirect investments enabled Australian companies to raise
equity and reduce their reliance on international debt markets during the overseas market turmoil. A
Source: OECD (2009)
The table illustrates that the unemployment rate in Australia has been substantially lower than the OECD average, while the GDP growth is significantly higher. In fact, Australian economy escaped a recession and appears rapidly to have returned to its pre-GFC economic situation. 2.4.4. The super industry was a major source to fund corporate share raising The superannuation industry was an important buyer for the shares of companies which sought to issue shares. It has been indicated by the proportion (26%) of the ownership of all ASX listed companies that pension funds and insurance companies comprise.
Furthermore, the private placements constituted nearly double that number and those placements were to large institutional investors showed the fact that the superannuation industry played an important role in helping corporate Australia to lower corporate risk during the GFC. 2.4.5. Superannuation help to stabilize banking sector When international debt markets had credit problem, Australian banks sought to raise capital by private placement. During the global crisis, managers of Australian super fund (among other large institutional investors) kept its share in securing confidence in the Australian banking system and prevented the potential of bankruptcies.
2.4. Tax concession
Superannuation with contributions being taxed at 15%, investment earnings within the fund at 15% and capital gains at 10 – 15 % is considered a very tax effective vehicle to build wealth for retirement (compare to income and investment earnings taxed at 40.5%). Treasury estimate that the value of these superannuation tax concessions has grown significantly in recent years. Selected superannuation tax expenditures, 2006–07 to 2013–14 | Concessional taxation of employer contributions| Concessional taxation of superannuation entity earnings| 2006–07| $11 400m| $12 900m|
2007–08| $13 150m| $22 050m|
2008–09| $13 300m| $16 300m|
2009–10| $14 100m| $10 900m|
2010–11| $14 300m| $12 200m|
2011-12| $15 800m| $13 600m|
2012-13| $16 300m| $15 200m|
2013–14| $17 900m| $17 900m|
Note: * estimate is not available. Source: Treasury, ‘Tax expenditures statement 2010’, op. cit., pp. 120–122 and p. 128.
It is often argued that superannuation tax concessions benefit to high-income earners and reduce much-needed Government revenue. This is because that the implication of such a reduction is that higher income earners will invest in other types of assets that attract tax concessions (such as housing) and that there will be an additional cost to government as some individuals
become eligible as a result of lower superannuation balances for transfer payments such as a part- pension and associated benefits.
2. Other economic impacts of superannuation guarantee
3.5. Impacts on national savings
3.6. Impacts on labor markets
3.7.6. To employees
From an employee’s perspective, mandatory contributions can change the time profile of labor payments and can be seen as a form of deferred wages. Generally, most young people are unwilling to save any money for retirement if they were not required to do that. By the scheme, they become lower income earners and their overall welfare is reduced. Furthermore, the labor supply will have a lower market wage rate beside the lower pre-retirement consumption. The Superannuation policy also provides greater incentives for aging workers as well as self-employed to participate to the workforce and encourage people to maintain their connection with the workforce.
3.7.7. To employers
There will be no effect on employers in the long run. The burden of increase will be transformed by price rises on the goods and services they sell, or by lowered wages for their employees, or both. All employers will have to implement the same superannuation obligation; therefore they will not face any specific disadvantage flowing from it. Increasing the Superannuation Guarantee is like imposing a (pure) payroll tax, and it is considered as the most efficient taxes available to government– in the long run they are known to impart minimal distortions (deadweight loss) on an economy. In the short term, an increase in the Superannuation Guarantee could increase costs of employers. These costs could lead to the result of cutting down spending on wages, the conduct to employee retrenchment in the short-run.
Clare (December 2008), The Age Pension, Superannuation and Australian Retirement Incomes, ASFA Research Paper The Allen Consulting Group (August 2011), Enhancing financial stability and economic growth: the contribution of superannuation, Report to the ASFA Connolly E and M Kohler (2004), ‘The Impact of Superannuation on Household Saving’, RBA Research Discussion Paper No 2004-01 Freebairn J (2004), ‘Some Long-run Labour Market Effects of the Superannuation Guarantee’, Australian Economic Review, 37(2), pp 191–197. Australian Bureau of Statistics, 2001, “Superannuation Australia Coverage and Financial Characteristics”, Catalogue No. 6360.0 Bateman, H., G. Kingston, and J. Piggott, 2001, Forced saving: Mandatory private retirement provision, (Cambridge University Press: London) Davis, K. and Harper, I., (eds), 1992, Superannuation and the Australian Financial System, Allen and Unwin, St Leonards, NSW