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Macroeconomic and Welfare Effects of the 2010 Changes to Mandatory Superannuation

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  • George Kudrna

    ()
    (ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • Alan Woodland

    ()
    (School of Economics and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

Abstract

In this paper we investigate the macroeconomic and welfare effects of the major changes of the mandatory superannuation reform proposed in the 2010-11 Australian federal budget. These changes include gradual increases in the mandatory employer contributions from 9 to 12 percent of gross earnings and a policy that effectively removes the concessional 15 percent tax on mandatory contributions for workers with annual taxable income of up to $37,000. Using a computable overlapping generations model that incorporates main aspects of mandatory superannuation, the means tested age pension and progressive personal income taxation, we find significantly larger superannuation asset accumulations as a result of the reform, which generate increases in domestic total assets and household saving. The reform improves self-funding in retirement, with government expenditures on the age pension falling by almost 4.6 percent in the long run. The reform also has positive impacts on households' long run welfare, with higher income households solely benefiting from the increased superannuation contributions while lower income households from the contribution tax removal. The aggregate efficiency calculations indicate that the superannuation reform improves efficiency, generating a gain of almost 0.8 percent or $11,753 in initial resources for each future generation.

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File URL: http://cepar.edu.au/media/78193/macroeconomic_and_welfare_effects_of_the_2010.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales in its series Working Papers with number 201210.

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Length: 38 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:asb:wpaper:201210

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Keywords: Compulsory saving; pension reform; dynamic OLG model;

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  1. Hans Fehr & Christian Habermann & Fabian Kindermann, 2006. "Tax-Favored Retirement Accounts: Are they Efficient in Increasing Savings and Growth?," Working Papers 012, Bavarian Graduate Program in Economics (BGPE).
  2. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  3. Guest, Ross & McDonald, Ian, 2002. "Superannuation, Population Ageing and Living Standards in Australia," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 32(1), pages 19-33, March.
  4. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save for Retirement may Backfire," CESifo Working Paper Series 1458, CESifo Group Munich.
  5. Shinichi Nishiyama & Kent Smetters, 2005. "Does Social Security Privatization Produce Efficiency Gains?," Working Papers wp106, University of Michigan, Michigan Retirement Research Center.
  6. Ross S. Guest, 2004. "Superannuation, Owner-Occupied Housing Demand and Private Saving in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 37(2), pages 198-204, 06.
  7. George Kudrna & Alan D. Woodland, 2011. "Implications of the 2009 Age Pension Reform in Australia: A Dynamic General Equilibrium Analysis," The Economic Record, The Economic Society of Australia, vol. 87(277), pages 183-201, 06.
  8. Ellis Connolly & Marion Kohler, 2004. "The Impact of Superannuation on Household Saving," RBA Research Discussion Papers rdp2004-01, Reserve Bank of Australia.
  9. Valkonen, Tarmo, . "The Finnish Corporate and Capital Income Tax Reform. A General Equilibrium Approach," ETLA A, The Research Institute of the Finnish Economy, number 29.
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