Bad Trade Deficits Typically Indicate Insufficient Saving

Comment on Economist article by Scott Sumner (January 2, 2012) “Bad Trade Deficits Typically Indicate Insufficient Saving”

It is important to realize the impact of policies relating to savings in Australia. Since the late 1980s Australia has had a national superannuation scheme in which every employee is required to put 9% (soon to go to 12%) into a tax protected savings pool. These are then invested (under specific guidelines) into a variety of income generating investments, about one-third of which are offshore. The size of this fund far exceeds the Singaporean model, and its investments are market driven, rather than government directed as in Singapore. In Australia also because there is so little government debt, financing of external deficits are largely done through private banks and are generally “income related” as opposed to financing recurrent expenditures.

The effect of this is that through enforced lifetime savings Australian retirement incomes are substantially funded, and the Australian economy has access to a multi trillion investment pool which it would not otherwise have. It is interesting to note that Australia is one of the few places in the world where retirement benefits for federal public servants past and present are fully funded via a future fund.

The superannuation pool also turns “the man in the street” into shareholders as much of this savings pool is invested in the stock market. It is not an accident that all mainstream media in Australia is obsessed with the performance of shares, in my view more than anywhere in the world.

There are many reasons for the Australian economic success story, but amongst the raft of economic reforms carried out in the last 30 years, the Australian superannuation model is one of the most important.

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