Superannuation and Macroeconomic Growth and Stability


18 November 2016

In previous work, we identified structural shifts caused by an increase in the Superannuation Guarantee (SG) rate. Here we examine the implications of these structural shifts for Australia’s macroeconomic stability and future economic growth. We identify multiple channels via which a rise in the SG rate impacts macroeconomic stability. Principal among these are the observed rise in the level of private-debt-to-income, which does not generally aid macroeconomic stability, and a reduction in Australia’s net foreign financing requirement, which is regarded as stability enhancing. We also find an increase in demand for corporate debt liabilities by domestic financial asset agents, such as superannuation funds, which results in a deepening of Australia’s corporate bond market. Diversification benefits, both in terms of greater regional diversification for Australian households, and a more diverse capital structure for Australian commercial banks, are also apparent and regarded as stability enhancing.

In an earlier study, we used the VU-Nat financial computable general equilibrium (financial CGE) model, which integrates detail of the economy’s financial sector with a traditional real-side CGE model, to explore the macroeconomic effects of the superannuation sector in Australia, by simulating a one percentage point increase in the ratio of Australian superannuation contributions relative to the national wage bill.

Using a refined version of this model, this work was extended to investigate the implications of an expanded superannuation system for the Australian commercial banking sector. As part of that analysis, five long-run structural implications were identified:

  1. The ratio of debt-to-equity used in financing of residential housing rises.
  2. The private-debt-to-income ratio is elevated.
  3. Australia’s net foreign financing requirement falls.
  4. The non-bank financial intermediaries and life insurance agents expand.
  5. The capital structure of the commercial banks changes, with an increased reliance on corporate bond and equity financing relative to bank deposits. The commercial banks are also shown to expand in the long-run, however, unlike the five shifts identified above, this expansion is contingent upon a rise in the national savings rate.

In this paper we explore the implications of these structural shifts for macroeconomic growth and stability. To this end, we present a review of the literature regarding the pro-cyclical and countercyclical properties of various economic structures and policies in order to gauge the implications of the various structural shifts that arise from an increase in Australia’s Superannuation Guarantee (SG) rate. Specifically, we summarise the degree to which various approaches to fiscal and monetary policy, managing financial capital flow volatility and exchange rate risks, and the impact of indebtedness on economy-wide business and financial risks, can reinforce or dampen the impact of business cycles.

Summary and key findings

Our analysis of the results in terms of the five structural shifts identified above highlights various channels through which a rise in the SG rate may enhance or dampen macroeconomic stability. For example, we show that a rise in the SG rate drives an increase in both Australia’s private-debt-to-income and private-debt-to-GDP ratio. These shifts arise due to both the intermediation and savings effects and imply that an expanded superannuation sector may not aid macroeconomic stability based on this measure.

However, our modelling also showed that Australia’s net foreign financing requirement is reduced by a rise in the SG rate. As we demonstrate here, this reduction manifests as a fall in the foreign ownership share of the financial liabilities that all domestic liability agents use to finance their economic and financial activity. This outcome generally aids macroeconomic stability, via a reduction in Australia’s exposure to foreign credit supply shocks.

We also find some evidence that an expanded superannuation sector generally drives a deepening of the domestic market for corporate bonds. This was put forward as an important reform agenda item by the commercial banks in their recent Financial System Inquiry submissions.

Diversification benefits are also identified, via a reduction in the reliance of the commercial banks on bank deposit financing, and enhanced regional diversification in the financial asset portfolio of Australian households.
In future work, we intend to extend our analysis by considering the impact of superannuation fund members’ switching of investments during stress periods on macroeconomic stability.