Social democrat

Welfare killed saving | The Australian

EGGED on by the Prime Minister to spend, not save, billions of dollars of Christmas bonuses have now been handed out to families and almost all retirees as a down payment on a permanent pension increase. In our wide brown land of endless handouts, even Christmas lunch now attracts a government dole.

That the Rudd Government, like its predecessor, is expanding welfare entitlements, fuelling expectations by pork-barrelling the grey vote and discouraging private saving is ironic, given how the Left has reacted to the global financial crisis.

Quick to interpret the crisis as a morality play, social democratic commentators have railed against credit-driven consumption or the so-called debt binge that plunged household saving into the red for the first time in recent years. Citing the long-term decline in net national saving from 12 per cent of gross domestic product in the 1960s to about 5 per cent today, the most virulent critics of the "culture of excessive debt and consumption" have welcomed the end of the long boom as an opportunity to revive traditional values such as thrift and living within our means.

The collapse of household saving is an important issue in the context of an ageing population. However, social democrats who complain about low saving and piously bang on about affluenza are hypocrites who conveniently ignore the most critical issues. More than a product of the Australian love affair with plasma TVs, the national saving culture, or lack thereof, is a consequence of the world that social democrats have created with the help of the Howard government.

The story about national saving is more complex than the debt-is-doom merchants allow. But they do have a point. While the recent growth in personal debt reflects rising incomes and has financed the purchase of housing and other financial assets, a significant part of household borrowings have been used to fuel additional consumption in excess of current income. Against the expected trend, saving has continued to decline in an era of unprecedented economic prosperity. Baby boomers were expected to put more of their incomes aside in preparation for their looming retirements. The "forgotten people" of our era appear to be those who have forgotten how to save.

Similar to long-term welfare dependence, this trend is a product of the rights-based entitlement ethic behind the growth of the welfare state since the '70s, which has white-anted what once were core social values. For most of the 20th century, to the chagrin of social democrats, social policy was under liberal stewardship and shied away from unconditional or universal welfare benefits to encourage work, thrift, and saving to cover future needs.

For these reasons, the founders of the commonwealth old age pension system included a means test and good character test in the original 1908 act.

Along with setting the value of the pension at a modest level and alleviating the poverty of recipients judged to "deserve" a pension, these arrangements were designed to discourage improvident behaviour and to promote the expectation that all who could save and provide for their own retirements should do so.

The idea that it wasn't respectable to depend on government doles (due to the stigma of charity) has been undermined by social democrats, who have all too successfully persuaded citizens that they have an unconditional right to receive a taxpayer-funded pension and free health care. Growing acceptance of the principle of government provision has diminished individual responsibility and weakened incentives for saving, just as predicted by liberals who opposed the welfare state for these prospective reasons.

Social democrats have set up a system that encourages thriftlessness by allowing present generations to under-save and transfer their unfunded pension and health liabilities on to younger taxpayers. And yet they still wonder why many Australians have a propensity to spend and not save. The real moral of the story is that promoting the culture of thrift means reining in the corrosive, anti-thrift culture of excessive welfare.

A measure of the cultural shift is the link between the decline in national saving and the growth of the handout culture during the Howard years. Along with the first home owner's grants and generous family payments, more and higher handouts to the elderly, which increased the attractiveness of depending on the pension, encouraged borrowing and discouraged saving.

Even baby boomers approaching retirement have taken on debt they intend to repay using their superannuation, or have double dipped by taking early retirement or blowing their super on cars, holidays and renovations, safe in the knowledge they can go on the increasingly valuable pension and use their political clout to extract higher transfers. In other words, the Howard government undermined incentives for saving and self-funded retirement (just as the Rudd Christmas handouts will do) because it governed like social democrats, and used the windfall proceeds of the economic boom to spree on populist handouts.

The paradox is that social democrats have triumphed at a time when (though they don't admit this either) demographic change has rendered the welfarist model un-sustainable. Pay-as-you-earn taxpayer-funded pension and health arrangements were never designed to cope with the much larger and longer-living elderly populations of the 21st century. This was acknowledged when the compulsory superannuation system was established in 1992. However, we are yet to see a similar superannuation-style transition to meet the even bigger intergenerational challenges in the area of healthcare financing.

Requiring saving-as-we-go and pre-funding health costs is the next logical step in intergenerational reform. As loath as they are to admit the cause or the consequences of the national failure to save, social democrats will like the remedy even less. But getting serious about promoting thrift means ditching the social policy shibboleths that have made living beyond one's means part of the national way of life.

Jeremy Sammut is a research fellow at the Centre for Independent Studies. His paper, A Streak Hypocrisy, is released by CIS today.