June 14, 2019

Horse 2558 - Charity, Superannuation, The Old Age Pension, And Why Relying On Charity Is Rubbish

As the financial year is drawing to a close and the kinds of people who think that there is a magical pot of money which they think that they're entitled to, start asking questions about deductions, I draw the spotlight today to the subject of donations.

Charitable donations are an allowable deduction for income tax purposes. As with any deduction, they reduce the headline value of someone's assessable income and therefore they are in effect a reduction in the amount of tax payable on that last dollar. As we have a set of progressive marginal taxation rates for individuals in Australia, the net taxation benefit is most effective when someone has a higher income. Sort of. When looking at average rates of taxation, because the denominator of that fraction is smaller, charity actually has a greater effect on lowering average rates of tax for people on lower incomes.

Even so, charity as a thing is terrible at actually meeting the needs of people. If that sounds scandalous, I shall now demonstrate why, by just looking at one carrying cost of society - the Old Age Pension.

The Old Age Pension was introduced in Australia in 1911. Admittedly it was brought in in a time when the average life expectancy was only 65 and the statutory retirement age was 55; which meant that as a means of monetary transfer, it wasn't expected to do a lot of heavy lifting. The average life expectancy in 2019 is all the way out to 84 now; which means that if the 1911 rules still applied, then someone might be due to be paid the Old Age Pension for 29 years, which is equivalent to more than three quarters of their active working life.

Some time in the 1970s, the idea of a private superannuation fund was brought in and that was given special treatment in tax law. By 1992 we had made it compulsory and by 2040 we can assume that every single person in Australia will have paid into superannuation for their entire working life.
Here's the rub. It wasn't stated in 1992 but it has been hinted at recently, the superannuation if it wasn't intended to originally, will be intended to replace the Old Age Pension. That in principle sounds fine but in reality is awful.

The amount of capital that someone has in superannuation is entirely dependent on the amount of income that they had during their working life. This means that almost by design, we are very deliberately rigging retirement in favour of people who are already rich. If you happen to be a poorer person, then that will follow you into retirement and since the rewards due to capital are currently greater than wage growth, that inequality continues.

This also falls on to women because in general they select lower paid jobs (even though officially wage discrimination between genders doesn't exist, it totally does in the real world), it doubly falls on women because they are more likely to have a break in employment because they are more likely to stop work to look after small children (to the rate of more than sixty times), and it triply falls on women because they generally live longer.

Superannuation as a completely rational and selfish private expense, was tariffed at 9% of income originally and currently sits at 9.5% and is expected to be pushed out to 12% in the future never never. Employers generally hate superannuation because they hate having to pay employee entitlements.

If we are trapped between compulsory entitlements and the carrying costs of government, then the argument put forward is that if we allowed government to get out of the way, then people will be more charitable. This is generally bunk.

There are some interesting things about charity to consider.
Charity as a proportion of income, generally drops off with higher incomes. Granted, there are some people with fantastic fortunes who give away money by the cartload but across the income spectrum, the bottom four quintiles are more generous as a proportion of income than the top quintile.
Charity as a proportion of income, is marginally higher among people who report to have some kind of religious faith. Depending on what your conception of the tithe is religious people apart from the tithe generally give more money to charity. I suspect that this is because they have a higher degree of civic phileo, and because they already know what community can do, they are more generous in spirit.
Charity as a voluntary mechanism across society, is actually rubbish at paying for the big societal projects. In Australia, charitable giving accounts for about 1.7% of GDP. In the United States where tithes and church donations are an allowable tax deduction, that moves to 2.0% of GDP. The Old Age Pension in Australia costs 5.3%¹; so if all government costs were left to voluntarily charity, then not only would we not be able to fund the Old Age Pension but all other government functions would cease.

Charity is rubbish as a thing to actually pay for societal projects because the heart of the problem is the ingenerosity of people. It is not unreasonable to assume that religious people at best are being charitable to the rate of 12%. Irreligious people who don't have that immediate philial pull on them, will tend to have a slightly lower upper limit.
There are probably only about 10% of genuinely sold out religious people in Australia. If we assume that they are all tithing 10% then the other 90% of people account for just 0.7% of charitable donations as compared with GDP. If that somehow sounds insane that most people are giving 0.007% to charity, then look at your own tax return. 0.007% of $50,000 which is almost a working poor wage and well below AWOTE², is $350. If you genuinely asked most people if they gave $350 to charity in a year, the answer would still be 'no'.

Societally, we are fine with that.
We have the same attitude to charity as we do to paying workers, the way that we treat asylum seekers, and the same attitude to civic institutions generally. There is certainly a degree to which society is becoming more and more belligerent to the vulnerable and this is being manifested in the rise of the economic right, which by definition is the position of ownership of the elements of the economy in private and individuals' hands rather than the government.
Charity ultimately can't work at building massive societal projects because individuals are mostly selfish. I think that it took the cost of more than 100 million lives as blood payment for western societies to realise a kind of national phileo for a while but those generations of people are rapidly dying out.
We are actively engineering a more ingenerous society and expecting charity to meet the needs of future people, is awful because it runs counter to our brutish nature.

- Assuming that GDP is running at $1323bn
²AWOTE for 2018  was $83,740

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