It's seniors vs the RBA

Reserve Bank of Australia assistant governor Christopher Kent issued a challenge last week. He said it would be useful to look at different types of households to understand whether the transmission of monetary policy through the Australian economy was becoming less effective. We've taken up that challenge.

What we've found is there are good reasons to suspect seniors' savings may be dimming monetary policy and helping to explain why consumption is not responding to low interest rates like it did in the past.

"Concerns about possible policy changes to superannuation and retirement income policies appear to be reinforcing cautious behaviour."
Katie Hill, ANZ economist

Saving rates for older Australian households have risen sharply over the last decade. In our view, the prospect of an extended period of low yields following a period of wealth erosion through the global financial crisis has encouraged households nearing retirement to conserve and rebuild wealth.

Concerns about possible policy changes to superannuation and retirement income policies (anecdotally) appear to be also impacting seniors, reinforcing their cautious behaviour.

What's more, with the proportion of households with at least one member aged over 65 expected to rise sharply over the next 15 years, trends in saving and spending among older Australians could have an even greater detrimental impact on monetary policy in the future.


As Dr Kent reminded us, there are four channels through which monetary policy works. One is the cash flow channel – via net interest payments, another is the wealth channel via asset prices and a third is the balance sheet channel via an increased propensity to borrow.

The fourth channel, however – the exchange rate channel – is less relevant in this context. Lower interest rates are positive for cash flow across the economy as a whole as household interest payments are larger than interest receipts. However, this is not true across all age groups.

Net interest payments peak in the 35 to 54 age group when households have the most debt. By contrast households over 65 are net recipients of interest, reflecting both less debt and more interest-bearing assets. For this group lower interest rates translate into lower incomes.

The wealth channel and related balance-sheet channel work in a monetary easing phase by lifting asset values (especially housing) and encouraging households to lift consumption. Higher collateral values make borrowing easier.

As has been well telegraphed, there has been a shift in consumer behaviour post the GFC and households have become more cautious. There has been a sharp increase in the saving rate across all age groups but it has been larger among older Australian households.

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The gross saving rate of households headed by persons aged over 65 rose from 1.8 per cent of disposable income in 2003-04 to 15.6 per cent in 2011-12.

The saving rate also increased significantly in the 55-64 age group, where there was a 14 percentage point increase. It seems likely the shift to higher saving among older households reflects an effort to rebuild wealth after the asset price losses incurred during the GFC.

We expect the GFC had a greater impact on older households given they have high wealth-to-income ratios and are closer to, or in, retirement. Hence they would have less time and less earning capacity to recoup GFC-induced losses.

In more recent years, some of these trends have been reversed, in part due to the impact of easier monetary policy. Since the end of 2011, when commodity prices peaked, the Reserve Bank has lowered the cash rate from 4.5 per cent to 2 per cent.

Rising prices have not been universal across asset classes however. With the exception of the Sydney and Melbourne housing markets, there has been only moderate house price growth in Australia over the last seven years. Also, after halving during the GFC, Australian equity prices have yet to regain their peak.


But here again a closer look at the different age groups is instructive. For older households it is arguably actual income – reflected in yield, rather than capital values – that affects household behaviour.

Lower yields or expectations of lower yields mean households in or near retirement need a larger pool of assets in order to achieve the same income in retirement. Recent falls in yield may have played a more important role than asset prices in putting upward pressure on the saving rate for older households.

Our client liaison suggests uncertainty around the policy outlook with regards to retirement income and superannuation laws may also be contributing to the lower effectiveness of easy monetary policy.

Assets held in superannuation have risen sharply, to $1.9 trillion in recent years, and now account for around 20 per cent of total household assets, up from 14 per cent in 2003-04. Assets held in property and equities have fallen as a share of total assets, suggesting a move to take advantage of favourable taxation arrangements.

Unsurprisingly, superannuation holdings peak in the 55 to 64 age group in dollar terms. The rising importance of superannuation leaves a growing number of older households exposed to uncertainty surrounding superannuation and pension eligibility. These issues have been prominent in the political debate recently, with lower than expected government revenues focusing attention on where savings can be achieved. Clearly, less generous superannuation concessions are part of the debate.

This is an edited version of a research note compiled by ANZ economist Katie Hill, senior economist Jo Masters and co-head of Australian economics Cherelle Murphy.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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