In 2020, in response to the exceptional situation presented by the COVID-19 pandemic, the Australian Government made the controversial decision to allow citizens to access a portion of their Superannuation early. Withdrawing super funds will always be a risky measure because the system is not designed to be used as an emergency saving fund but aims to encourage savings for retirement. In response to situations like these, in which short-term demands cut across long-term investments, researchers at the University of Sydney are developing more realistic economic models to improve decision-making around economic policy.
Over the last 50 years, economists have drawn on mathematical models to understand how different economic policies impact society. The way this works is that researchers build controlled environments that resemble the world we live in. These perfectable models allow economists to test different macroeconomic scenarios and understand the implications of mooted policy changes on the whole economy. This method of mathematical modelling has influenced the development of many economic interventions, such as monetary policy, taxation and fiscal stimulus.
To date, the economic predictions produced within these controlled environments are made on the basis of how they affect average households. This type of modelling is called Representative Agent (RA) modelling. The problem is that these models work with an underlying assumption that all households are equal or that, on average, they have the same economic assets.
It doesn’t take a mathematician to see the issue here. We all know that households are not the same. But precisely because our societies are diverse and multifaceted, it makes it difficult to account for all levels of variability. Indeed, the attraction of mathematical models in the first place is that they are a simplified version of reality that can assist governments in evaluating policies that are impossible to test in the real world.
RA models are not the only type of models that inform economic policy. In the last three decades, economists have recognised the value of adding household diversity into their models. Models that incorporate the diversity of households are termed Heterogeneous Agent (HA) models. HA models recognise that not all households are the same: households earn, spend, and save differently.
While both Representative and Heterogeneous Agent RA and HA models have been useful in identifying some general policy impacts on the economy as a whole, they offer a limited understanding of how specific economic policies will impact different household realities. The good news is that economists are now developing a new breed of macroeconomic models to identify which households win or lose from changes in macroeconomic policies—these are termed HANK models, which is short for Heterogeneous Agent New Keynesian models. By combining aspects of previous approaches, HANK models advance macroeconomic analysis by accounting for the distributional effects of policy changes on specific households. For example, HANK models can be used to analyse what your household or my household would have saved under a different superannuation policy.
Greg Kaplan, Aarti Singh, Christian Gillitzer, and Mariano Kulish are researchers from the Unversity's Sydney Social Sciences and Humanities Advanced Research Centre (SSSHARC) and are applying the HANK models to evaluate the Australian Superannuation system. This enables researchers to study how our national superannuation system integrates existing household wealth (your household, my household) and the three mechanisms used to motivate individual savings: mandatory contributions, tax concessions on contributions, and preferential tax treatment of earnings inside Super accounts.
Proponents of the HANK modelling approach argue that it is vital to understand the interaction between these elements to know how policy trends, such as raising mandatory contributions, increasing savings benefits, or changing the age of retirement, will affect actual households, not the spurious average household. This new level of specificity will help shape a more nuanced approach to macroeconomic policy that takes into account the existing diversity of Australian households and identify any propensity in policy that will disproportionately amplify wealth differentials across time. This would allow policy-makers to prevent a situation in which fewer and fewer households get wealthier and wealthier while more and more fall further and further behind. Findings from this research will also help people understand their superannuation futures in relation to their specific circumstances rather than how they sit against a notional average.
Currently, the big discussion in public policy is around the achievement of the Australian Superannuation system’s main goal—enhancing savings for retirement. But approaching this goal in the aggregate may mask inbuilt propensities in the system that produce and amplify social inequality into the future. Government Economic policy-making decisions in this area will affect the lives of all Australians Using the right approaches and methods to guide decision-making is crucial to ensuring economic security and longevity for actual households not statistically perfect ones.