Is the 'S' word back on the agenda?

Politics is akin to cooking. Things go on the boil and off the boil. Other matters simmer and then go into a boil when the right circum-stances prevail.

Politics is akin to cooking. Things go on the boil and off the boil. Other matters simmer and then go into a boil when the right circum-stances prevail.

For about four years, household savings have been very much off the boil as all sides of politics have had their eyes fixed on the merits of comprehensive tax reform in relation to personal income tax, indi-rect tax and business taxation. During the same period, government savings have been simmering as state and federal governments have en-deavoured to engineer budget surpluses to address mounting debt.

It seems that household savings are now on a simmer and that both sides of politics are preparing themselves to develop new policy to address the dramatic decline in household savings levels.

It is well known that household savings, at their current rate of about zero per cent (and that includes SG contributions), are at a 20 year record low. With savings at a low ebb during the current con-sumer boom, it is not surprising that the current account deficit (CAD) is on the rise. The most recent trade data has the CAD nudging five per cent of GDP and showing no signs of easing. The substantial cuts to wholesale sales tax on electronic goods will no doubt fuel additional purchases which should give further impetus to the CAD.

On the plus side, however, it needs to be mentioned that household wealth is on the improve. Strong share market performance, increasing property values, and the raft of demutualisations have combined to boost the financial asset holdings of Australian households. However, a market correction could change this position quite dramatically. And it also must be understood that this increased wealth effect is not evenly spread across the community.

Also playing a role in the simmering of savings is the fact that the major political groupings are beginning to think about the shape and form of the retirement incomes policies they would like to present to the Australian electorate come the 2001 general election. The Labor Party, for example, will need to begin its preparations on savings as soon as its next national conference in the middle of 2000. The Treasurer also has savings on his radar screen as he recently called on IFSA to present its views in coming months.

The same old questions will no doubt be asked again and again during the next few months. Do we need more compulsory superannuation? Should lump sums be converted to income streams? What tax incentives could be introduced to drive up voluntary savings and should the em-phasis be on super or non-super thrift? Overseas reports such as that produced by the OECD will be scrutinised again as will private poll-ing data for the Australian electorate. One set of data which should be on the list of prescribed reading is the quarterly Household Sav-ings Report produced by the Melbourne Institute of Applied Economic and Social Research. Future releases of this report will be spon-sored by one of IFSA's members, Mercantile Mutual.

In 1993, the institute began the collection of data about the ability of households to save or live with their means. Three categories were created - able to save, just making ends meet, and running debt or drawing on savings. With a record lowest outcome for dissaving and a record high for breakeven households, the February 1999 data shows that households are "less worried about saving up for rainy days".

The reason for the savings component of the survey provides some use-ful insights into how policy could be shaped to drive higher savings. Saving for retirement was cited by 29 per cent of the sample compared to 41 per cent two years earlier.

The age break-up of this item should be of particular interest to policy gurus. Less than 20 per cent of those under 35 expressed a priority to save for retirement compared to more than 35 per cent for their older counterparts. It is not only the age profile that drives super savings as, clearly, income level also has an impact. The in-stitute data shows that those with annual incomes greater than $71,000 were more than twice as likely to save for retirement than those in the lower income echelons.

The theme that is simmering within the IFSA think-tank is that there should be a national vision to progressively increase the degree of financial independence of the Australian population, particularly in retirement. This can only be done through improved policy and better education. With its retirement incomes and long term savings task force, IFSA is preparing options to reform Australia's retirement in-comes and savings policies. In future columns, these will be unveiled to Money Management readers.

Richard Gilbert is the deputy chief executive officer of the Invest-ment and Financial Services Association (IFSA).