by Chris Becker
I contend that the jury is still out on the long term effectiveness of the experiment called superannuation in Australia. Although in its 21st year, compulsory superannuation has not yet had the length for its impact to be examined fairly across differing generations – i.e those solely reliant on the Age Pension, those transitioning and those who are paying for all of the above plus their own retirement (Gen X/Y) in the rear (sic).
It cannot be denied however, that a very large pool of “savings” has been accumulated, $2 trillion and counting.
What is interesting is when vested interests within the superannuation industry point to the success and rising wealth of superannuation. Conflating it with the biggest bull market in shares and property in Australian history, they conclude that all is well (if only we could increase our contributions!) and the future will repeat, with zero consideration of any macroeconomic factors.
Here’s an example “Superannuation and our growing wealth”:
(superannuation) Assets will pass $2.2 trillion this year, from less than $100 billion 30 years ago.
At the end of 2013, approaching half the superannuation assets were in local shares (where they control nearly 60% of the ASX by capitalisation), 17% in overseas assets (including shares), 14% in bonds and other securities, 13% in cash and deposits, and the balance in property and other assets.
I have long disparaged this gross misallocation of funds in superannuation, where almost 70% is in speculative secondary assets and only a modest amount are in income producing activities – actual investments. This is due to the slavish devotion and capture by the funds management industry, who merely take in the compulsory contributions (and clip the highest management fees in the developed world) and then buy and sell already existing shares from each other.
This has mainly underpinned the epic bull market in stocks since the introduction of compulsory super and the largest in Australian history:
And a housing market with no comparison that too has created “wealth”:
Further I find this examination and celebration of the composition of assets in “retirement savings” as bizarre:
Indeed, financial assets (in household wealth) – including super, shares and deposits – are poised to overtake all hard assets (property, equipment and durables) within a few years. Some 25 years ago, financial assets represented 35% of net worth (including 11.4% in super). By the end of this year, the ratio will be over 50% with 24% in super.
This is a very positive development, as hard assets only yield a modest rental return plus capital gain, and never match the returns from active assets, notably shares.
Again, this is where the industry is confusing speculation (buying and selling shares and houses) with investment (purchasing bonds and directly investing in infrastructure, IPOs and venture capital) and will have its arse handed to it as the majority of superannuants move from accumulation phase (make me lots of money!) to retirement phase (I don’t want to lose any money!) as insufficient income producing vehicles are available.
As the population ages in Australia, with more dependents and less workers to support them, and an unwillingness to tax the retirement sector, it will be up to that large “pool” of assets to fund this huge burden. But how?
Note that the employment to population ratio chart below very closely tracks the equity bull market, and the former will fall in the coming decade:
The rest of the article, like most, focuses squarely on “how much do you need” but does not address how the ongoing income is to be achieved in retirement, with only a throwaway line of “taking out 6% per year” with an implied “dignified balance”of $830,000 implying that meeting retirement income will entail liquidating assets (i.e selling shares) within super.
It does highlight however the gross imbalances within superannuatin that I mentioned at the top of his post, that is which generation is actually benefiting from the current system:
Currently average super sits at around $100,000 per person or $240,000 per household in 2014, but this includes young people and households as well as retired ones.
The even-older households are generally pensioners, with less than $75,000 per household in super (much of it via Life Offices).
Being averages, a minority of these age groups live comfortably, but most – perhaps over two-thirds – would be living a more abstemious lifestyle.
The younger Baby Boomers are currently the best-off in super, with over $400,000 per household and the capacity to improve on that level with a continuing working life for a decade or more. Their average could edge up towards 55-60% of the desirable level if they work long enough. Again, some retirees in this age bracket will easily reach a comfort zone.
Generally, only a third or so of Baby Boomers (49-71 years) will retire with their wished-for comfort and dignity.
Of course, the younger generations have 2/5ths of sweet FA in super – around $40K to $100K each and are expected to grow this while paying for the recent retirees, and the tax concessions that support the most expensive housing markets in the developed world.
To repeat the successes of their parents super will require another record breaking equity bull market just as the most “wealthy” Australians start selling down their portfolios of shares and houses. The bear market in shares that followed the previous bull market lasted a generation and barely made 1% pa in real terms. What will that do to a sub-$100K superannuation account?
The article ends on a gloriously delusional note about the fate of these forgotten “squeezed” savers:
In theory, provided (Gen X/Y and Net) have super and assuming no interim catastrophes and set-backs…they will retire comfortably.
In theory there is no difference between the theoretical and the practical. In practice there is.