By Brody Viney
A fundamental aspect of economic inequality, highlighted by Thomas Piketty’s Capital in the Twenty-first Century, is the unequal distribution of capital ownership (wealth). This not only undermines the welfare of individuals with low wealth, but exacerbates the distributional consequences of a declining labor share of income. However, policy responses to wealth inequality remain underdeveloped. This paper considers how policies that increase the private savings of low- and middle-income individuals can complement more traditional taxation and redistribution approaches. As a case study, it explores the distributional effects of Australia’s superannuation system, a private retirement savings scheme that sets a compulsory minimum savings rate for all employees. Superannuation has contributed to a more equal distribution of wealth in Australia, particularly by offsetting declines in other kinds of wealth among those at the low end of the distribution. However, loopholes have also allowed high-income individuals to use the system to save in a low-tax environment. Further work is needed to investigate the effects of compulsory savings rates on those with very low incomes.
“When the rate of return on capital exceeds the rate of growth of output and income,” writes Thomas Piketty in Capital in the Twenty-first Century (hereafter Capital), “…capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based” (2014, 1). Since its publication, Capital has spurred a significant body of research on economic inequality, with much of this work focused on the mechanisms driving a rising capital share of income. Yet even more central to Piketty’s theory of capital and inequality is extreme inequality in the underlying distribution of capital ownership, or wealth. The implication of Capital is that overall economic inequality cannot be addressed without addressing this underlying distributional problem.
Piketty and others have generally focused on policy responses to wealth inequality that rely on taxation and redistribution, with proposals including progressive wealth taxation and greater taxation of inheritances. While these policies are important, this paper seeks to explore an alternative and complementary approach: measures to increase the capital ownership of middle- and low-income earners through increased private savings and investment. As a point of focus, the paper explores in depth the compulsory retirement savings system known as “superannuation,” which has been in place in Australia since 1992. Australia has a relatively even distribution of wealth by international standards – the eighth most even wealth distribution among 28 OECD countries (Productivity Commission 2018a, 77). Importantly, there is substantial evidence, explored in detail in this paper, suggesting that the superannuation system has contributed to this outcome.
In simple terms, superannuation is a system of compulsory private retirement savings intended to increase national savings and complement Australia’s means-tested public pension scheme
In simple terms, superannuation is a system of compulsory private retirement savings intended to increase national savings and complement Australia’s means-tested public pension scheme (see Chomik and Piggott 2016; Murphy 2017). Since 1992, Australian law has required all employers to contribute a percentage of employees’ earnings into a designated superannuation fund on their behalf, with this percentage increasing over time to reach 9.5 percent in 2014. These contributions, and earnings within the fund, are taxed at concessional rates and may only be accessed upon retirement, at which point the money can generally be withdrawn tax-free (though bequests from superannuation are subject to some tax). Members may choose their fund and may even set up their own “self-managed” fund, providing a mechanism for some individuals to invest in small businesses, agricultural land, and even residential real estate.
Several features set superannuation apart from other savings schemes. Employer contributions are mandatory for almost all employees, at a minimum rate, allowing the system to achieve significant scale and almost universal coverage. In addition, a large proportion of superannuation assets are managed by not-for-profit “industry” funds -- run jointly by employers and labor unions -- which provide employees with an indirect mechanism of control over investments and have been shown to achieve better returns for members (Productivity Commission 2018b, 9). Together these features have ensured superannuation assets have contributed significantly to growth in household wealth across the wealth distribution, and particularly at the lower end of the distribution.
In order to establish the extent to which superannuation addresses the concerns Piketty raises, the paper progresses as follows. First, the paper reviews Piketty’s analysis of the role of capital accumulation in the production of inequality and subsequent research on the capital share of income and the distribution of wealth. Second, the paper identifies key criteria for policy responses to wealth inequality, reviews the tax and redistribution policy approaches, and explores how policies to increase private savings fit alongside these approaches. Third, the paper assesses Australia’s superannuation system against the identified criteria and explores its effects on the distribution of wealth.
It is worth noting briefly two things that this paper is not seeking to do. First, it is not an attempt to defend or assert the accuracy of Piketty’s theory, though it does identify key findings that remain intact despite critiques of his work. Second, it is not a comprehensive assessment of the overall policy merit of the superannuation system. Rather, it seeks to build a clear understanding of the framework of inequality proposed in Capital and to situate superannuation within that framework, demonstrating that, with some caveats, it presents a possible policy model that can contribute to building a more equal economy.
Wealth Inequality and the Capital Share of Income
The role of capital in producing economic inequality has become a major focus of economic research, spurred in large part by the publication of Piketty’s Capital in 2014. There are two planes of inequality at stake in Capital. The first is the division of total income between the returns to labor and the returns to capital, with Piketty concluding that “capital’s share of income increased in most rich countries between 1970 and 2010” (221).
The second is inequality in the distribution of wealth and income across the population. On this measure, Piketty’s finds that “the distribution of capital ownership (and of income from capital) is always more concentrated than the distribution of income from labor” (244). In general, “the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth…whereas the bottom 50 percent of the wealth distribution owns nothing at all, or almost nothing” (244).
Piketty proposes that this outcome is the result of a dynamic process, driven by three “fundamental laws of capitalism.”
Piketty proposes that this outcome is the result of a dynamic process, driven by three “fundamental laws of capitalism.” He theorizes that, when the rate of return on capital exceeds the rate of income growth, the accumulation of a large capital stock causes the capital share of income to rise. This in turn allows wealth accumulated in the past to be recapitalized more quickly, causing existing inequalities in the distribution of wealth to become more dramatic over time.
Theories of the Rising Capital Share
A central finding underpinning these dynamics is that the return on capital has been fairly stable at 3 to 6 percent on average, decreasing only slightly as the capital stock has accumulated. This implies an elasticity of substitution between capital and labor greater than one. While Piketty proposes that this reflects increasingly productive technology, King summarizes that this conclusion is at odds with established research, as “almost all empirical estimates have [the elasticity of substitution] less than unity, rather than the 1.3 to 1.6 that is assumed to be the case in Capital” (2017, 6).
Subsequent work has investigated this inconsistency, challenging Piketty’s conclusions on a number of fronts. For example, Galbraith (2014, 77) has criticised Piketty’s definition of ‘capital’ for encompassing all market wealth, including land and housing, rather than just focusing on ‘productive’ capital. Rognlie (2015) takes this angle further and decomposes Piketty’s data on returns to capital by capital type. He finds that much of the increase is attributable to increasing returns to housing, suggesting that scarcity of land and housing stock, rather than the increasing accumulation of wealth, is responsible for the apparent increase in the capital share of income.
A further critique is that the broad definition of capital not only merges the stock of productive and unproductive capital, but also obscures the neoclassical distinction between returns to capital and “pure profit” or “rents.” Research by Barkai (2017) and De Loeker and Eeckhout (2018) finds that decreased competition and increased market power has allowed firms to increase this “pure profit” in the form of mark-ups, at the expense of returns to both labor and capital (in the productive sense). Decomposing the capital share of corporate sector value added, Rognlie finds a similar trend of rising pure profits. Together, this research suggests the increasing concentration of capital ownership has played a significant role in the decline of the labor share of income and rise of the non-labor share (the capital share for Piketty, or the capital-plus-profits share for Barkai and others).
While the scarcity and concentration hypotheses present compelling alternatives to Piketty’s theory of a high elasticity of substitution, it is possible that all of these mechanisms have contributed to the returns to capital remaining elevated as the capital stock has grown.
Understanding the mechanism underpinning the rising capital share of income is important for understanding the dynamics of capital and inequality and, as is explored further below, also has implications for assessing policy responses to the challenge of wealth inequality. While the scarcity and concentration hypotheses present compelling alternatives to Piketty’s theory of a high elasticity of substitution, it is possible that all of these mechanisms have contributed to the returns to capital remaining elevated as the capital stock has grown. This paper draws on each of these theories and accounts for their possible implications when analyzing policy approaches to wealth inequality.
Inequality and Controlling Ownership
A more philosophical question, related to the concentration hypothesis, is about the nature of capital ownership and control. In his book Inequality, Atkinson (2015) argues that there is an important distinction between beneficial ownership of assets and ownership of assets that comes with some aspect of control. When it comes to inequality, he writes, “the locus of decision-making will be of considerable significance” (104). Without providing workers with some element of control over the use of capital, Atkinson argues that beneficial ownership alone will not prevent the suppression of the wage share of income and the preferential investment in technology that replaces, rather than augments, the employment of labor.
In particular, Atkinson highlights that housing and financial assets constitute much of the wealth of the population but convey little or no control over jobs and investment. By treating these asset types the same as all other forms of capital and wealth, Piketty obscures this distinction between beneficial and controlling ownership. In doing so, it may be that an important factor in producing unequal outcomes is lost.
There is a large body of research on the possible benefits of greater worker power over economic decision-making, broadly described as “economic democracy” (see Dugger 1987; Dow 2003; Johanisova and Wolf 2012; Malleson 2013). With the declining membership and power of labor unions frequently highlighted as another possible contributor to the declining labor share of income, employee empowerment may be desirable to mitigate further declines. For this reason, as with the importance of scarcity and profits, this paper considers the role of control when analyzing policy approaches.
The Importance of the Wealth Distribution
In each case, these critiques emerge from a deconstruction of the broad methodology employed in Capital, so it is worth recalling that Piketty employs a broad definition as “…a necessary first step in the study of inequality” (2014, 51). At the heart of Piketty’s dynamics of capital and inequality is the idea that elevated returns to capital allow existing wealth to grow more quickly than labor income can be saved, a process which causes any existing inequalities in the distribution of wealth to be exacerbated over time. The returns to capital and capital share of income are just one part of this process, which also depends on wage growth, savings rates, and the historical distribution of wealth.
Refocusing on this process, two central conclusions identified in Capital remain valid and important regardless of the mechanism underpinning changes in the labor and capital shares of income. First, the empirical finding that the distribution of wealth is consistently and substantially more unequal than the distribution of income, both across time and across different nations, remains intact. Other studies have similarly found extreme and growing wealth inequality in the United States (Keister and Moller 2000, 67-69; Pfeffer et al. 2013, 99-101; Wolf 2014, 25-27; Saez and Zucman 2016, 551-55; Sutch 2017, 599-603) and across the developing and developed world (Skopek et al. 2014, 446-47; Chesters 2016, 271-76; Kus 2016, 520-23).
Given these findings, tackling the persistent wealth inequality identified by Piketty and others must be a core element of any attempt to reduce overall economic inequality and improve well-being.
Wealth provides households with economic security and greater scope to smooth consumption over time, not only through periods of unemployment but also between working life and retirement. Greater wealth is also associated with a range of other positive outcomes including better educational achievement and labor market outcomes, transitions to home ownership, and even better health and mortality, as well as impacting social capital and political power (Neckerman and Torche 2007, 340-45; Killewald et al. 2016, 390-92). Including wealth in composite measures of economic well-being can significantly alter distributional outcomes and reveals much greater inequalities in economic well-being across demographic groups (Wolff and Zacharias 2007, 70-73). Given these findings, tackling the persistent wealth inequality identified by Piketty and others must be a core element of any attempt to reduce overall economic inequality and improve well-being.
Second, regardless of the underlying mechanisms, it remains the case that the labor share of income has declined and the share received by the owners of capital – whether derived from productive activity or not – has increased. Other research (for instance, Dao et al. 2017) confirms this finding. This further reinforces the importance of minimizing wealth inequalities. Capital ownership is the mechanism through which capital income is distributed, so an unequal distribution of wealth means the benefits of a rising capital share of income are accruing to a small subset of the population. Another way to think about this is that, if wealth were to be distributed perfectly equally, a declining labor share would be of less consequence as the returns to capital would be shared equally as well. In addition, a declining labor share and rising capital share accelerates the dynamic of reinvested returns exacerbating existing inequalities in the distribution of wealth, with the potential to create a spiral of worsening inequality in both wealth and income.
The power of these findings informs the purpose of this paper, which is not to adjudicate theories of the rising capital share, but rather to focus on the role of policy in producing a more equal distribution of wealth, such that the capital share of income is distributed more equally and more households have access to the well-being benefits that accompany wealth over the course of a lifetime.
Policy Approaches and Private Savings
A broad range of policy responses have been proposed to tackle the challenge of economic inequality. As the following section explores, policy approaches to wealth inequality have typically focused on progressive taxation of income and wealth. These approaches have many strengths and are a valuable tool to combat inequality, but can be difficult to implement and rely on the transfer system to redistribute wealth back to low- and middle-wealth households.
Policies that aim to bolster private savings of low- and middle-income earners could provide a useful and complementary tool in these efforts. While implementation challenges remain, private savings policies have the potential to reduce wealth inequality by building the wealth of those who are lower in the distribution.
Criteria for Policy Analysis
In order to assess policy options, it is useful to first develop some stylized criteria that capture the key features needed for policies to effectively tackle the challenge of wealth inequality. The following criteria draw on the literature on wealth inequality and capital income described above, in particular by incorporating the range of evidence on the mechanisms underpinning the rising capital share of income.
First, policies should tackle the distribution of wealth across all capital types. This reflects not only the centrality of a broad definition to Piketty’s findings, but also the evidence of the importance of housing scarcity and business profits in producing substantial returns to capital. For example, given that much of the rising capital share can be attributed to profits, promoting widespread homeownership alone will not prevent returns to capital from accruing to a select few if corporate stock ownership remains concentrated (and vice versa).
Second, given the degree of inequality in the wealth distribution identified by Piketty, and the near total lack of capital ownership among the lower half of the distribution, policies must have a sufficient scale and coverage to be able to make a tangible impact on the distribution of wealth. This means that policies targeted at a subset of the population, even policies targeted at the lowest income groups, may not be sufficiently broad to rebalance the distribution of wealth between those at the very top and the vast bulk of the lower- and middle-class.
Finally, to address the importance of control over production practices, policies should seek to address the balance of power over economic decisions, at least to some extent. While many redistributive policies are likely to be entirely focused on economic redistribution, providing employees and underprivileged groups with more power over economic decision-making may be an important factor in both securing and sustaining a more equal distribution of wealth.
While assessing the effects of policy on wealth distribution requires detailed analysis of policy effects over time, these criteria provide a broad framework through which to begin such an examination. As this paper sets out, Australia’s superannuation system performs reasonably well when assessed against these criteria, though the details of design and implementation are crucial.
Taxation and Redistribution
As noted above, the most common approaches to economic inequality focus on taxation and redistribution. Measures aimed at the redistribution of income are well understood: governments can levy progressive income taxes on residents, curtailing the highest incomes, and provide benefits to residents through direct payments and the provision of services such as healthcare and education.
Less well-developed are policies aimed at the redistribution of capital. In one sense, redistributing income contributes to this effort by reducing the funds available to those at the top of the wealth distribution for reinvestment. However, Piketty highlights the “clear regressivity in the top centiles [which] reflects the importance at this level of capital income, which is largely exempt from progressive taxation,” as well as growing pressure from international competition on top income tax rates (2014, 496). Modelling of U.S. wealth inequality by Berman et al. (2016, 11-13) takes this a step further, showing that changes in progressive income tax rates have only a small effect on overall wealth inequality. Income redistribution alone thus seems insufficient for the task of capital redistribution.
For wealth taxation to effectively redistribute capital, it would need to be implemented alongside a comprehensive welfare system large enough to meaningfully grow the wealth of the lower- and middle-class.
At the other extreme are authoritarian approaches that centralize the ownership of most or all capital in the hands of the state. Of these Piketty is dismissive: markets “play a useful role in coordinating the actions of millions of individuals, and it is not so easy to do without them. The human disasters caused by Soviet-style centralized planning illustrate this quite clearly” (2014, 531-32). However, there are policy options available for addressing the distribution of capital that fall between these two extremes. Among these options, Piketty focuses primarily on the taxation of wealth, presenting an ambitious proposal for a global, progressive wealth tax. Such an approach would meet the criterion of tackling capital in all its forms, though it is less clear how such an approach would support wealth creation at the low end of the distribution. For wealth taxation to effectively redistribute capital, it would need to be implemented alongside a comprehensive welfare system large enough to meaningfully grow the wealth of the lower- and middle-class.
A more comprehensive set of policy ideas is provided by Atkinson (2015). In addition to annual taxes on wealth, he highlights the role that inheritance and estate taxes can play in the redistribution of wealth, especially when paired with “inheritance guarantees” such as lump sums paid to citizens when reaching adulthood. Such approaches again have the benefit of treating wealth broadly, and may provide a mechanism for transferring wealth to the broader population. However, the challenge of scale remains: Atkinson highlights a sharp decline in revenues collected from estate taxes despite rising intergenerational wealth transfers.
Another gap in these policy approaches (other than centralized ownership) is that in general they do not fundamentally alter the power balance in economic decision-making. Indeed, King highlights criticism from several writers that Piketty’s proposed policy responses “leave capitalism unchallenged or insufficiently reformed” (2017, 9). While problems of scale, implementation, and power do not mean that taxation and redistribution policies should be abandoned – indeed they are likely to remain central to any attempt to tackle economic inequality – these issues nonetheless highlight the need to explore other policy options that can fill these gaps.
Building Capital Through Private Savings
Where taxation-based approaches focus on taking wealth away from those at the top of the distribution, measures to increase private savings tackle wealth inequality in reverse by seeking to increase the capital ownership of those in the middle and at the bottom of the distribution. Usually such schemes are introduced in relation to retirement and pension provision, with savings invested in stocks and other capital assets through financial intermediaries, aligning with Piketty’s broad definition.
Piketty appears skeptical that increased savings can reduce inequality, arguing that “wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved” (2014, 378). However, in Chapter Thirteen of Capital, he notes the potential benefits of providing employees with a greater share of capital income through private pension savings. He writes that if the return on capital is to remain higher than the rate of growth, “…it is tempting to conclude that [existing pension systems] should be replaced as quickly as possible by a capitalized system, in which contributions by active workers are invested rather than paid out immediately to retirees” (488).
Piketty’s central concern is the difficulty of transitioning to such a system, but many schemes do exist. Minns (1996) provides a summary of a number of such policies put in place in the twentieth century. One example is the Meidner plan in Sweden, which proposed a system of union-controlled stock ownership funded by a tax on company profits, with the returns contributing to the central pension system. As Meidner wrote in 1981, the scheme was intended to ensure “highly profitable firms would not be further enriched,” to “counteract the ongoing concentration of capital,” and to “reinforce wage earners influence at the workplace” (309-10). In this sense, the Meidner plan tackled directly the challenge of unequal economic power. However, Minns notes that “the 1984 legislation was greatly diluted” and “by the end of 1990, the accumulated funds amounted to only 3.5 percent of the total value of Swedish company shares” – a clear failure to achieve sufficient scale (1996, 45). In 1991, the scheme was abandoned.
Private pension funds, which exist in many countries, present a different example. Pension funds in the top 22 countries owned an estimated $41.4 billion USD in 2017, with U.S. funds owning more than $25 billion USD (Wills Towers Watson 2018, 9). In 2010, the Wills Towers Watson estimate of U.S. pension assets equated to around a quarter of the total US private capital calculated by Piketty, so the U.S. system far exceeds the scale of the Meidner plan.
Research supports the importance of private savings, and particularly pension savings, in determining U.S. wealth inequality. For example, Berman et al. (2016, 10-11) show that the rate of private savings is the key parameter affecting wealth inequality over time, with higher savings enabling middle-wealth deciles to close the gap between themselves and those at the top. Wolff (2014, 40) finds that pension savings had a moderating effect on declines in overall median wealth in the United States between 1989 and 2010, although the Gini coefficient for pension wealth grew slightly over this period, reflecting disparities in savings behavior. Saez and Zucman (2016, 554-55 and 563-65) likewise find that the rising pension wealth of the bottom 90 percent drove reductions in wealth inequality between the 1930s and 1970s, while the collapsing savings rate of the bottom 90 percent relative to the top 1 percent has contributed significantly to growing wealth inequality in more recent decades.
Even and MacPherson (2007, 551) explore the transition from defined benefit retirement plans, which covered nearly three-quarters of U.S. workers with pensions in the 1970s, to defined contribution plans, which covered 77 percent of U.S. workers with pensions by 2001. They find that the flexibility to choose higher or lower savings rates afforded by defined contribution plans, and particularly the 401(k) system, has contributed to savings rate inequalities and, by extension, a more unequal distribution of pension wealth accumulated at retirement (564-66). Research by the Stanford Centre on Longevity (2018, 22) finds that only around half of U.S. households have at least one member who is eligible for a work-based retirement plan. In addition, contribution rates vary widely with a median rate of around seven to eight percent of income. With limited coverage and varying contribution rates, it is not clear that a voluntary retirement savings system of this kind can effectively and systematically rebalance the distribution of wealth across the population.
The compulsory superannuation system in Australia provides an alternative to the voluntary system. By requiring all employers to contribute at the same rate for all employees, and by providing avenues for employees and labor unions to exercise some control over the management of these assets, the Australian system has features that achieve scale, coverage, and control in a way that other private savings schemes do not.
Superannuation and Inequality in Australia
To assess how the superannuation system performs as a policy model that can address inequalities in the distribution of wealth, this section proceeds as follows. First, it assesses superannuation against the three broad criteria established earlier in this paper. Second, it considers the distribution of wealth in Australia and the distribution of superannuation assets. Third, it considers how superannuation has affected the distribution of wealth over time. Finally, it considers other ways in which superannuation affects issues of economic equality.
Assessing Breadth, Scale and Coverage, and Control
Unlike many other private savings schemes, the superannuation system performs well when compared against the criteria set out above. First, with regard to tackling the distribution of wealth across all capital types, this is certainly true for superannuation. As is the case for most retirement savings schemes, superannuation funds invest in a range of asset types – from stocks to large infrastructure projects – and accrue returns that are equally as diverse. Funds can also invest in housing and other asset types that are not strictly “productive.”
Second, with regard to sufficient scale and coverage, the growth of the superannuation system since it became compulsory in 1992 is impressive. At June 30, 2018, total superannuation assets were approximately $2.7 trillion AUD (approx. $2 trillion USD), equivalent to more than 160 percent of Australia’s GDP (APRA 2019, 12). The system has generated one of the world’s largest pools of pension assets and is among the fastest growing (Murphy 2017, 13). One way to conceptualize this scale is to compare superannuation assets to the total stock of capital in Australia. Piketty calculates that Australia’s total private wealth equated to more than 500 percent of GDP in 2010 (Chart 1). The superannuation share of this total stock of wealth has increased rapidly: from 7.3 percent of total wealth in 1990 (before superannuation was compulsory) to 17.4 percent in 2010 (Chart 2).
Charts 1 and 2: Total Private Wealth and Total Superannuation Assets, Australia, 1990-2010
Source: Australian Bureau of Statistics cat. no. 5206.2 and 5655.0; Piketty online appendix, Table S5.1.
The coverage of the system is also comprehensive, with around 90 percent of employees (80 percent of taxpayers) covered by superannuation (Chomik and Piggott 2016, 484). As such, in contrast to the Meidner plan and U.S. private pension schemes, this system has quickly become a major factor in Australia’s economic system and in the wealth of all households.
Third, with regard to addressing the balance of power over economic decisions, the superannuation system does include elements of worker empowerment at the collective level, though only to a limited extent. As Minns notes, the development of the scheme was driven jointly by trade unions and government “accepting that funded pension schemes have their difficulties but seeking to develop labour-controlled policies and institutions around them” (1996, 48). Around 25 percent of superannuation assets are held in industry and corporate funds – not-for-profit trusts run jointly by employer and trade union representatives – with a further 22 percent managed by the public sector, and 28 percent “self-managed” by individuals (APRA 2019, 12). This does not amount to direct worker control over business activity of the kind discussed by Atkinson. However, it does provide an avenue for employees to influence the direction and ethos of a large pool of capital investment. Large superannuation funds own around a quarter of all Australian listed equities, and trade union leaders have recently argued that industry funds should encourage the companies they invest in to offer higher wages (ASFA 2019; Mather 2019). As the pool of superannuation assets increases, the potential for this kind of influence will only grow.
The Distribution of Superannuation Wealth
From this brief overview, it is clear that the superannuation system performs reasonably well against the criteria set out in this paper for policies to address wealth inequality. The next step is to look at how superannuation assets are distributed and how this distribution compares to Australia’s distribution of wealth more broadly.
As noted in the introduction to this paper, Australia has a relatively even distribution of wealth compared to other advanced economies, with the eighth most even wealth distribution among 28 OECD countries. While pockets of extreme poverty remain (including among remote indigenous communities), total wealth has increased across the distribution since 2003-04. Wealth in the top half of the distribution grew more rapidly than the bottom half over this period (see Chart 3), but wealth inequality increased only slightly, with the Gini coefficient for wealth at around 0.6 in 2015. Extrapolating from the Productivity Commission’s estimates of average household wealth by decile, the top 10 percent owned around 42.6 percent of private wealth in Australia in 2015-16, with the next 40 percent of the distribution owning approximately 44.6 percent of wealth, and the bottom half of the distribution owning approximately 13.2 percent. This compares favorably to Piketty’s assertion that the top decile holds 50 percent and the bottom half holds no more than 10 percent of wealth in most countries historically.
Superannuation has been identified as one of the key reasons for Australia’s relatively even wealth distribution.
Superannuation has been identified as one of the key reasons for Australia’s relatively even wealth distribution. The Productivity Commission summarizes that superannuation accounts for 21 percent of household wealth on average, and much higher proportions at lower deciles, making it the second most significant store of wealth after owner-occupied housing (39 percent) (2018a). Superannuation assets made up 65 percent of household assets for those in the lowest income decile in 2015-16, and 29 percent on average across the bottom half of the distribution.
While the assets held by these households are minimal in absolute terms, the significance of superannuation in these lower deciles leads the Productivity Commission to conclude that “compulsory superannuation is one reason for [Australia’s] relatively even distribution of wealth” compared to other countries (2018a, 76). This conclusion is echoed in the Credit Suisse 2018 Global Wealth Report, which credited superannuation as one reason for Australia’s lower wealth inequality relative to other nations and for its first- and second-place ranking in median and average wealth per capita, respectively (Shorrocks et al. 2018, 55).
Chart 3: Average Total Wealth (LHS) and Superannuation Share of Wealth (RHS), by Wealth Decile, Australia, 2003-04 and 2015-16
Source: Productivity Commission estimates using Australian Bureau of Statistics cat. no. 5640.0, and author calculations.
Effects on Wealth Inequality Over Time
Superannuation assets increased in absolute terms across all deciles between 2003-04 and 2015-16 and, as Chart 3 demonstrates, the superannuation share of household wealth increased across every decile. This increase is in line with superannuation’s increasing share of the total capital stock.
The largest absolute increase in superannuation assets across this period was in the top decile, with average household superannuation assets in this group more than doubling from around $200,000 (US $140,000) to $460,000 (US $325,000). This strong increase in the top decile undermines superannuation’s claims as a leveling force. However, much of this increase can be explained by voluntary additional contributions made by high income earners seeking to take advantage of certain beneficial tax arrangements – not the underlying compulsory system (see Daley et al. 2015, 39-45; Australian Government the Treasury 2015, 73).
The need for careful consideration of tax arrangements and contribution rules is evident: without appropriate regulations and limits, schemes intended to increase the wealth of middle-income deciles can easily become advantageous savings schemes for those on high incomes.
Reforms introduced by the Australian Government in 2016 addressed many of these incentives and loopholes, so it will be more difficult for the top decile to aggregate large balances in the future (see Daley et al 2016). The need for careful consideration of tax arrangements and contribution rules is evident: without appropriate regulations and limits, schemes intended to increase the wealth of middle-income deciles can easily become advantageous savings schemes for those on high incomes.
Chart 4: Absolute (LHS) and Percent (RHS) Change in Average Household Superannuation Assets, by Wealth Decile, Australia, 2003-04 to 2015-16
Source: Productivity Commission estimates using Australian Bureau of Statistics cat. no. 5640.0, and author calculations.
While the absolute increase in superannuation assets was largest at the top, percentage growth in superannuation assets was fairly even across the wealth deciles over this period (Chart 4). In fact, if the top decile is excluded, growth appears to have been strongest in lower deciles and slightly slower in higher deciles. Superannuation wealth more than doubled in every decile except the eighth and ninth between 2003-04 and 2015-16.
Importantly, when looking at contributions to growth in household wealth, the effect of superannuation on wealth in lower deciles is much more pronounced (Chart 5). Superannuation contributed 25 percentage points or more to growth in household wealth in the bottom three deciles. Among middle and higher deciles, the contribution ranged from 12.8 percentage points in the eighth decile to 17.8 percentage points in the fourth. This consistent contribution highlights that increases in the inequality of the wealth distribution over this period were mainly driven by other asset types – both housing and non-housing assets – which contributed positively to growth in average wealth for higher deciles while detracting at lower deciles. Superannuation asset growth had the effect of offsetting declines wealth in other asset types for the lowest deciles.
Chart 5: Contributions to Growth in Average Household Wealth, by Wealth Decile, Australia, 2003-04 to 2015-16
Source: Productivity Commission estimates using Australian Bureau of Statistics cat. no. 5640.0, and author calculations.
Effects on Capital Income, Savings, and Earnings
These findings indicate that the superannuation system does provide a model that not only meets the criteria for tackling the breadth and scale of wealth inequality, but can in practice alter the distribution of wealth. While this is an encouraging finding, it is important to consider whether superannuation wealth provides workers with access to the returns to capital available to other capital owners.
Atkinson raises concern about “the wedge between the rate of return (Piketty’s r) and the return actually received by the small saver” (2015, 167). There is extensive debate about the returns achieved by different superannuation funds and the impact of fees and other costs on the returns to fund members (employees). A recent Productivity Commission assessment “reveals mixed performance,” with not-for-profit funds generally performing better than a benchmark measure for investment returns over 20 years, while for-profit funds performed below the benchmark (2018b, 9). Average annual returns across the whole industry were around 5.7 percent in nominal terms, approximately 3.2 percentage points above inflation. This accords with Piketty’s estimate of a rate of return approximately three to four percent across all assets and suggests that on average, the system does meaningfully provide employees with a share of capital income.
Another risk with a system that incentivizes increased retirement savings through a particular vehicle, such as superannuation, is that additional savings in one vehicle are merely offset by reduced savings in another vehicle. Research by Connolly (2007) investigates this possibility, testing if increases in compulsory superannuation increase overall household wealth relative to individuals who are exempted from the compulsory scheme. This analysis found that an extra dollar invested in compulsory superannuation increases net wealth by between 70 and 90 cents, indicating very little substitution between superannuation and other savings. In addition, there appear to be some positive spillovers to voluntary retirement savings, suggesting that superannuation may increase the awareness or convenience of saving for retirement as well.
The compulsory nature of superannuation at all levels of income is the feature that generates its most significant wealth-leveling effects
Several other distributional effects of superannuation are worth noting, particularly as they run counter to the positive effects outlined above. First, a central feature of the system is that funds cannot be accessed until retirement, and while there are provisions for early access in limited circumstances, superannuation is generally an illiquid asset, providing for income smoothing between working life and retirement but not through periods of income variation prior to retirement. This raises the question of whether compulsory contributions are appropriate for those on low incomes. For this group, additional disposable income in the present may be significantly more valuable than additional savings for retirement, particularly when a publicly funded pension is available. The compulsory nature of superannuation at all levels of income is the feature that generates its most significant wealth-leveling effects; the tension between this effect and the impact on very low-income earners requires further analysis.
The required rate of compulsory contribution is also scheduled to increase from 9.5 percent of wages to 12 percent by 2025. Whether this is necessary or optimal is an open question, and the effects of this transition on wage growth and inequality must also be considered. For example, modeling by Daley and Coates (2018) finds that current contribution rates will be sufficient for the average worker to achieve a retirement income of approximately 90 percent of their pre-retirement income, above most estimates of adequate replacement rates. A contrasting view is put by Clare (2018) who, writing for the superannuation industry, highlights the substantial impact on income in retirement for lower-middle income earners that can arise from small adjustments in contribution rates.
While it is beyond the scope of this paper to resolve this debate, it nonetheless highlights that specific parameters such as contribution rates, as well as contribution limits and tax incentives, play a crucial role in determining the success or failure of a policy of this kind.
As the first section of this paper reviews, the work of Piketty and others has spurred a substantial body of research and debate focused on the declining labor share of income and the drivers of an increasing capital and profit share. Understanding the causes of this trend, and finding policy approaches to reverse it, is of significant importance. Yet a more fundamental challenge underpins the dynamics of capital and inequality proposed by Piketty: the unequal distribution of capital ownership, which provides the channel through which a declining labor share of income perpetuates and exacerbates economic inequality.
While tax and redistribution policies are important, addressing the unequal distribution of capital ownership will require a combination of policies that encompass all capital types, have the scale and coverage to affect the whole population of countries, and rebalance economic control as well as ownership. On these criteria, and with careful implementation, Australia’s superannuation system presents a possible model that can contribute to generating a more equal distribution of wealth and capital ownership. By making a minimum level of employer retirement contributions compulsory for all employees, the system guarantees a comprehensive level of coverage and scale, and by allowing for employee and labor union direction, it also provides an avenue for greater employee influence in economic decision-making.
Superannuation has contributed to increasing wealth across the wealth distribution, and in particular has provided a buffer for wealth at the bottom of the distribution. While regulatory arrangements have previously allowed those with high incomes to use the system to save wealth in a low-tax environment, reforms have addressed some of these risks. Future work on effects on the wages and incomes of low-income earners would provide useful additional insight on the distributional effects of this policy.
While those in the top wealth decile continue to hold the majority of capital, superannuation has played a key role in making Australia’s wealth distribution relatively equal when compared to other advanced economies. A compulsory savings scheme such as superannuation is unlikely, on its own, to generate a totally equal distribution of wealth. However, it provides an example of the kind of holistic approach that can be deployed, alongside other measures, to prevent the distribution of wealth from becoming increasingly unequal in the twenty-first century.
Brody Viney is a graduate student at the Woodrow Wilson School of Public and International Affairs, Princeton University. He would like to thank Professor Marc Fleurbaey, Joelle Gamble, William Sims, Joseph Maloney, Cal Viney, and Emily Stirzaker for their comments and assistance. He can be reached at [email protected].
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