Question

The current age pension system in Australia is best described as a pay-as-you-go system (PAYG). An alternative system is a fully-funded social security system.

1. Explain the two systems.

2. The Australian Federal Parliament has approved the early access to the superannuation fund up to $20,000 before 30 June 2021 in order to help people adversely financially affected by COVID-19 Crisis. What motivates the Australian government to make such a move? Discuss the impact of this policy on Australian output per worker and the growth of output per worker in the long run

Answer 1

a. Pay as you go system is a plan where the individual decides how much he or she wants to contribute. It does not guarantee how much money is received when the individual retires. The individual is told when he would retire and based on that can opt how to receive the retirement money. A fully funded social security system on the other hand endures that the individual saves or pays an amount atleast equal to the tax rate. A fully funded system meets all the future obligations.

b. The reason behind this move of the Australian government is to increase the money supply in the economy. During this pandemic, many people lost their jobs and these funds will act as a safety net. People can withdraw the funds to ensure they have the food and other essentials they require. As many young Australians are using the fund now, they will work more productively to earn more in the future. The output per worker and the growth of output will be higher in the long run as workers work to save money in the fund again.