13/06/2012 - 10:39

Our savings diversity challenges Norway

13/06/2012 - 10:39

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Australia’s model of compulsory super, combined with the Future Fund, provides a sustainable savings option.

Australia’s model of compulsory super, combined with the Future Fund, provides a sustainable savings option.

During the fierce debate about various forms of taxes the federal government wanted to apply to mining, Norway was consistently thrown up as a role model for a resources economy.

Norway is the poster child for the left of politics because it has an extensive welfare state underwritten by huge sums of petroleum taxes levied on developments within its North Sea economic zone.

The Norwegian sovereign wealth fund, at more than $600 billion, is one of the biggest in the world.

It was consistently held up as a model example for capturing wealth from finite resources for future uses; a similar story to the proposed resource super profits tax, later changed to the more honestly named mineral resource rent tax.

But an astute reader alerted me recently to the fact that in some ways the Norwegian future fund is not necessarily better than the Australian strategy for encouraging national savings.

While I am a little sceptical about future funds in general, I don’t want to be entirely ungracious about Norway.

Despite being cold and dark for a significant part of the year, this smallish Scandinavian nation punches well above its weight on numerous counts. 

It generally ranks as the most equitable country on earth and scores highly for liveability, freedom and economic development. In fact, it is rare to get all these factors aligning but it does so; and all credit to its leaders and the people who democratically back them for this achievement.

But, as I have mentioned previously, Australia – a much bigger and more diverse nation – comes a close second to Norway in almost every one of these measures. 

While I am competitive enough to want to lead the pack, there is a point where, in such close-run races, subjectivity in the measuring might well influence such small differences. I mean, who is giving us the lead on the sunshine index?

Thus, the point I discovered from being asked a valid question about Norway’s sovereign wealth fund, was that it is all in the eye of the beholder.

Norway has captured its petro-dollars in two sovereign wealth funds, which combined with a couple of smaller vehicles, amount to about $700 billion in today’s Australian dollars. 

When pitted against our Future Fund of about $80 billion, it is clear the Scandinavians win. 

But the question I was asked, was how does the Norwegian fund compare to our superannuation system because they are both essentially the same thing. 

Norway’s sovereign wealth fund, officially called the Government Pension Fund, is not a huge pot of money being set aside for the children of that country; it is there to fund the pensions of its citizens.

Norway has no compulsory superannuation. Instead, it provides a pension which is determined by your income over your career – a kind of defined benefit scheme like that of the old Commonwealth public service, which the Australian Future Fund is designed to cover.

Our alternative is compulsory superannuation, currently requiring 9 per cent of wages to be saved – soon to be 12 per cent if the federal government has its way.

Australia’s compulsory superannuation savings, effectively a massive fund managed by thousands of different people and organisations, sits at around $1.34 trillion, according to latest estimates.

Add the Future Fund and that equals about $1.42 trillion, or approximately double the Norwegian total. 

In effect, that is the same thing as the Norwegians designed differently.

That still puts the Scandinavians ahead. At 5 million people, Norway’s population is about one quarter that of Australia’s, so they have saved twice as much per capita for their pensions.

Furthermore, Norwegian pensions are funded by the oil companies (which pay to discover and develop the oilfields) whereas the great majority of Australians pay for their own; both in terms of a reduction in wages and the cost of management.

But the Norwegians have much higher taxes. Both personal tax rates and their GST equivalent are much higher, so it is swings and roundabouts there.

And, when you look into the future – which is the point – the distinction is much less clear.

From what I have found, using a variety of sources from Wikipedia to the treasuries of both nations, Australia’s compulsory superannuation is set to close the gap on a per capita basis. 

Presumably, because Australian superannuation is linked to overall work and effort in the form of total wages while Norway’s relies on a finite asset that is diminishing.

According to a Deloitte study after the GFC, analysis by Rice Warner estimated that the total pool of savings within the Australian superannuation market would reach $3.2 trillion by 2022. 

And that is under the 9 per cent policy setting and factors in about $8 billion in taxes that is levied each year on funds going into superannuation (above both the proposed mining tax and existing petroleum tax combined).

The best comparative figure I could find reported was in April 2011. The Norwegian Ministry of Finance had forecast the fund would reach about $1 trillion by the end of 2019. 

In effect, both these estimates rely on a growth in assets of 7 per cent a year. At that rate Norway would have about $1.2 trillion in 2022, just over one third of Australia’s savings.

Of course, it is fair to say there is still a big unfunded pension scheme in Australia, which is forecast to cost nearly $37 billion just in 2012-13.

As an aside, both nations have, by international standards, a high home ownership rate (the Norwegians are slightly higher) but I don’t know whether Norway taxes capital gains on the sale of the primary residence (we don’t). 

I am also unwilling to punt on how house prices in Oslo will compare to those in Sydney over the next 20 years.

Nevertheless, on paper it seems to me the Australian system, which is broad-based and representative of the economy and the people working in it, while the Norwegian system is entirely reliant on one, finite commodity.

Also, Australia’s system is designed to work with our growing population whereas Norway’s is quite the opposite because more people mean the money has to go further. That could fundamentally change arguments around immigration levels.

Furthermore, the Australian system diversifies the management risk relating to the funds by dispersing them among thousands of entities, from the very large collective superannuation funds to self-managed versions, which create an industry in their own right, further diversifying the economy itself. 

Most Australians have to take some responsibility for their superannuation and make decisions on who will manage it, within some fairly strict boundaries; personally I like that approach.

Against this, the Norwegian model puts everyone’s future in the hands of a small group of people to steward the funds in a way they think is best. 

This makes the funds subject to political decision-making. It is not hard to find a list of entities and areas from which the sovereign wealth fund is excluded from investing, suggesting a mandate which may not reflect everyone’s views.

• mark.pownall@wabn.com.au


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