By Mick Le Moignan
Elected politicians have two jobs. The first is to cater for the current population. The second is to look to the future and ensure that public funds grow, so generations to come can enjoy even higher levels of services and facilities.
In the past month, a flurry of articles, opinion pieces and editorials in the JEP have questioned Jersey’s readiness to face its financial future. Concerns were expressed about the wisdom of depleting the Social Security Reserve Fund for current expenditure, the economic impacts of increasing longevity, rising numbers of public sector employees and a fall in banking profits.
I was interested to read an opinion piece by Neil MacLachlan, which recommended Australia’s way of funding our national health system, Medicare, by a 2% additional tax on income, which is returned to anyone who takes out private health insurance.
To an outside observer, 17,00km away, it all suggested a fresh level of anxiety about the Island’s future.
It is wise to start worrying about such matters sooner, rather than later. The classic answer to the old question “when is the best time to start a garden?” is “40 years ago”. The same applies to economic policy.
The gold medal in this area goes to Norway’s two Government Pension Funds (Global and Norwegian). They were set up in 1990 to sequester some profits from the country’s huge petroleum resources and invest them for the benefit of future citizens. The Global Fund is now the world’s largest sovereign wealth fund, measured by assets under management. It is estimated to hold an enviable US$340,000 for every Norwegian. Of course, they were smart enough to start 35 years ago…
Australia has been less successful than Norway in taxing its natural resources, being generous to a fault where multi-national miners are concerned. Many have been allowed to shift profits offshore and pay little or no tax, but last November, Jim Chalmers, Prime Minister Anthony Albanese’s capable Treasurer, levied a minimum 15% tax on all multi-nationals with an annual revenue of more than 750 million euros.
As for supporting an ageing population, the great strength of the Australian system is its compulsory superannuation scheme, set up in 1992 by Paul Keating’s government. As Bob Hawke’s Treasurer, Keating is widely credited with putting Australia on the path to prosperity by floating the Australian dollar in 1983. This gave the Reserve Bank power to use monetary policy (setting interest rates) to control inflation.
It was not all smooth sailing. In 1990, interest rates peaked at 17.5%, unemployment passed 10%, several banks and other financial institutions collapsed and there occurred what Keating memorably called “the recession that Australia had to have”. Happily, that was followed by 30 years without recession, until the 2020 pandemic.
Even so, the universal superannuation scheme is now rightly seen as Keating’s greatest – and possibly the greatest ever – contribution to Australia’s future prosperity. It compels all Australian employers to pay a percentage of their workers’ wages into designated investment funds which they cannot touch before reaching retirement age. Over the past five years, the percentage has been stepped up from 9.5% to 12%.
There is an Aged Pension, but it is means-tested, so only 65% of Australians over the retirement age of 67 draw a partial or full pension from the state. The rest rely entirely on their own “super fund”, accumulated over their working life.
Taxpayers can choose to have their “super” paid into a not-for-profit “industry” fund (associated with their line of work), an independent, for-profit fund or a personal, self-managed fund. The money received is then invested in shares, property or other approved classes of assets, and held strictly in the name of each individual and for their benefit.
Importantly, any money earned by the fund is tax-free.
At first, there were angry complaints from employers, who saw the measure as a disguised wage increase legislated by a Labor PM. Many workers saw it the other way, as the government forcing them to save some of their wages for retirement.
Thirty-three years on, both sides agree that the arrangement is beneficial, although political parties on the right sometimes suggest that young people should be allowed to dip into their super funds for a deposit on a house, arguing that such an investment would also increase in value. Others argue that, once released, the money could also be frittered away.
Older retirees often try to conserve their super funds, hoping to leave them as legacies to their children, but this is judged not to be in the national interest. Accordingly, annual withdrawals must be made, increasing from 5% pa at age 67 to 14% pa at 95. On death, the balance passes tax-free to a spouse or other dependents – but it is taxed at 17% if left to non-dependents. The strict regulations act as a reminder that the purpose of a super fund is to support retirement, not to create a nest egg for others.
Naturally, some retirees have amassed much larger super funds than they could reasonably need to fund even the most lavish retirement. In a modest adjustment, earlier this month, Treasurer Jim Chalmers announced that in future, earnings on balances over $3 million would be taxed at 30% and earnings on balances over $10 million at 40%.
The system goes a long way towards funding the needs of Australia’s ageing population – but the greatest economic benefit is an unseen one. The total held in super funds is now AU$4.2 trillion. In another 40 years, it will be more than AU$38 trillion. Much is invested in overseas shares and brings back dividends and profits, massively boosting Australia’s balance of payments. It is effectively a huge sovereign wealth fund, but owned by individuals, rather than the state.
I’m no economist, but it seems to me that Jersey would do well to adopt a similar scheme – ideally, about 40 years ago, but failing that, before the Island’s magic goose (the finance industry) stops laying golden eggs.
