The effects of voluntary superannuation contributions on household consumption

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Developing a model that investigates the effects of voluntary superannuation contributions on household consumption before and after a global financial crisis.

The rising global economic uncertainty and cost of retirement have motivated more Australian households wanting to increase their superannuation contributions.

Since the introduction of voluntary superannuation scheme in 2006, evidence show that Australian households' savings have increased dramatically while the national consumption has declined.

This research will model the impacts of voluntary superannuation savings on household consumption. It attempts to understand and reconcile how changes in households' voluntary savings can affect their consumption.

The key question to be addressed is that to what extent an increase in such savings will influence consumption and negatively impact the Australian economy.

Research questions:

How does voluntary superannuation influence household consumption, i.e. owning or investing in landed property, equity, and durable and non-durable goods?
Have Australians' saving attitude changed since the global financial crisis in 2009 and how such change has affected their consumption? If so, to what extent?

Research methods:

To examine voluntary superannuation in Australia and its impact on consumption for different demographic groups, we will develop a modified consumption model from the Malley and Molana (2006) model. It assumes that changes in life-time income, accumulations of wealth and past consumption have impacts on current consumption. Mathematically, the model is expressed as follows:

(Model 1.)

This project will employ longitudinal data from the Household, Income and Labour Dynamics in Australia (HILDA) survey to generate estimations. The estimations will then be used to conduct forecasts. Unlike time-series data, the longitudinal data provides more detailed information about each household's expenditure and wealth across different time periods. For instance, a longitudinal households' consumption consists of data that reveals the types of households and how each household category changed their consumption patterns across different time.

The research methodology is divided into three stages:

Stage 1 - At the first stage, the study will conduct statistical regressions to generate the coefficients for Model 1. During this stage, several statistical diagnostic tests will be carried out to ensure the coefficients are reliable and accurate. The tests are able to detect econometric modelling issues such as misspecification, unit root, heteroskedasticity, serial correlation and predictive power. The principal reason is to ensure that Model 1 does not omit important variables and can produce reliable forecasts. We expect to spend the first four months (from March to June 2012) to complete the stage 1 process.

Stage 2 - At the second stage, we will use the model to forecast consumption patterns of different types of households. We first create hypothetical scenarios of voluntary savings from each cohort of households. These scenarios comprise of 'what-if' households increase their voluntary savings by 10% and 50%, for instance. Thereafter, the estimations obtained from Stage 1 will be used to predict the households' consumption for every scenario. The process is anticipated to occur between July and October 2012.

Stage 3 - For the final stage, the study will examine whether the global economic crisis in 2009 affected Australians' voluntary saving behaviour and how this can influence their consumption patterns. We will compare the Australian households' voluntary savings before and after the crisis and measure to what extent that consumptions have changed since the event. Stage 3 is expected to commence in November 2012 and complete in February 2013. All estimations and forecasts are conducted using STATA statistical software.

References:

Malley, J. & H. Molana (2006), "Further evidence from aggregate data on the life-cycle-permanent-income model", Empirical Economics, 31, 1025-1041.
Morley, C. L. (1998), "A dynamic international demand model", Annals of Tourism Research, 25, 70-84.
Song, H. & K. K. F. Wong (2003), "Tourism demand modelling: A time-varying parameter approach", Journal of Travel Research, 42, 57-64.

Researchers:
Dr Ghialy Yap (Chief Investigator)
Professor David Allen (Mentor)

Funding body:

Edith Cowan University (2012 Early Career Researcher Grant)

Timeline:
March 2012 - February 2013

Edith Cowan University

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