Self-censoring on Superannuation

When applying for a job recently I was asked to write a 500 word opinion piece about using superannuation funds for home deposits. I didn’t get the job so there is no reason to waste 500 good words; I’ve published he piece at the bottom of this post.

But that’s not what this post is really about.

I am writing this post to reveal that I severely self-censored in that opinion piece. Those are not my genuine views about superannuation. Like many before me I twisted my words to fit within the Overton Window of acceptable public discourse. Maybe it was the wrong thing to do. But I did.

I want to say what I really think, even if some find it too far outside the range of acceptable conversation.

My view is this: Australia’s superannuation system will not survive another 30 years in its current form, or anything like it.

The reason for that view is that there was never an economic logic for a compulsory superannuation system in the first place.

The modern superannuation system was introduced in 1992 to relieve pressure on the age pension system by forcing all workers to save for retirement. But forced saving does nothing to address the fundamental problem of a shrinking workforce – all the income streams drawn down from superannuation upon retirement rely on purchases of assets from those currently working. The net effect is exactly the same as if the working population simply gave retirees money through the tax system. Any problems with the age pensions system due to demographic change also affect the superannuation system.

Furthermore, the problem of a shrinking workforce has been dramatically overblown. While the age-dependency ratio will increase when baby-boomers retire, this effect will be balanced out by relatively fewer births and a declining youth-dependency ratio. On balance the share of the population out of the workforce under the worst-case population growth scenarios (yes, higher population growth makes the dependency ratio worse), will peak around 70% – exactly the same as the 1960s and 1970s.

To be clear about how the same demographic patterns affect the superannuation system just as they do a public pension system we must think in terms of goods and services produced in aggregate, and assets and their prices in aggregate.

In aggregate, the total goods and services produced depends on the size of the workforce and installed capital. Whether boomers retire in pensions or superannuation incomes, the rate of growth of this total production will be lower as the growth rate of the workforce decreases.

This lower rate of growth of goods and services must still be shared amongst all workers and retirees. Who get what out of the economic pie depends on who has which rights – which claims on incomes streams in any form, either assets, public pensions, or wages. Under a public pension system workers give up some of their rights to wages by paying taxes which would go directly to the pensions of the retired. Under a private superannuation system, workers give up some of the rights to wages to buy assets, which would be sold by retirees who had previously accumulated them, in order to provide a retirement income. The net effect of both of these schemes is identical

Whereas with public pensions it is clear that more retirees in the population requires greater contributions by workers to support them, the superannuation system disguises this element. It does this through incremental changes to the minimum contribution requirement – from 4% of wages in 1992 to soon 12%, along with increases in the preservation age, from 55 as of this year, to 60 in 2024. This means that new contributors to the super system pay more and get less – exactly as would occur under a public pension system when increasing pension funds come from direct transfers from the workforce.

What’s more, the net effect of superannuation as a mere transfer between workers and retirees will become all too obvious when the ever-growing rate of new money pouring into the asset classes held in superannuation accounts begins to fall as the rate of superannuation drawdowns grows faster than the rate of new contributions. In the chart below the benefit payments in green will increase faster than the contributions (the red, blue and purple) as the boomers begin to retire en masse.

graph-7.3

When this occurs, the asset classes that dominate the super system, like Australian shares, will see fewer buyers and more sellers, depressing the inflated prices and reducing the investment income of superannuation account holders. With lower account balances more funding will be needed from public pensions anyway. To be clear about this asset price effect, does anyone think the share market, or even the property market, would be at its current value without the massive inflow of funds from the compulsory super system?

Depressed incomes from super accounts will again see the need to increase contributions, increase public pension funding, or otherwise rejig the rules to inflate asset prices at the expense of wages.

At the moment the music is still playing. But in the next 20 years there will be a generation who puts more than 12% of their wages into the super system for half their working life only to find the system requires a complete rethink. They will lose out due to their demographic destiny with the superannuation system, just as they would with a public pension system only. But the super system allows us to pretend that this is not happening by disguising transfers as investment.

This is the big issue with Australia’s superannuation system, and one that is till now outside the range of acceptable discourse. In any case, here’s my self-censored opinion piece.

Hockey’s housing ideas are anything but super

If you think home ownership is out of reach for the average family in Australia today, you ain’t seen nothing yet.

If Federal Treasurer Joe Hockey has his way, superannuation funds could be used by first time buyers as a home deposit.

Taken at face value, Hockey’s idea reveals a deep misunderstanding about not only the role of superannuation in the welfare system, but of the housing market itself.

Worse still, allowing access to super accounts will increase prices above even their current astronomical levels.

Compulsory superannuation was introduced in 1992 to anticipate and counteract the age pension tidal wave as baby boomers entered retirement.

Yet one big issue we are seeing as this demographic tidal wave approaches, is that many retirees have low superannuation savings, but very high home values, yet they are unable to tap into their home value to generate a retirement income.

The great majority of retirees prefer the stability of their own home within their local community, and are unwilling or unable to use their home as a source of income during retirement.

Directing more retirement savings into home ownership will only amplify this problem, rather than amplify retirement incomes as superannuation was designed to do.

While reforms could improve the ability for retirees to utilise their home values to generate retirement incomes, one thing that cannot change is the economics of the housing market.

Hockey’s proposal would produce a massive boost in buyer activity and turn superannuation funds into subsidised quasi-home deposit accounts, with associate tax savings advantaging the highest income earners.

Like many home buyer initiatives, such as the First Home Buyers Grant (FHBG), increasing buyer purchasing power has a clear and definite effect of increasing home prices, negating its supposed benefit and passing it directly to the home seller.

To see how this works, imagine you are at a home auction, and after great excitement and fanfare, the bidding has stopped at $500,000. The final two potential buyers are now on edge as they decide whether to tip their hats one more time.

In one scenario the second buyer stays quiet and the home is sold at that price.

But in another, the government steps in and allows the last two bidders to use their super accounts to help buy the home, or alternatively give them a FHBG. What do they do?

The extra funds allow the auction to continue as the losing bidder sees value in outbidding the previous winning price, and the previous winner is able to also outbid that new price.

This only stops when the extra buying power from the new regulations is completely absorbed into the price. If it was a $7,000 FHBG, the sale price would be $507,000.

It is clear then that Hockey’s proposal is at odds with the intention of using superannuation to provide retirement incomes, and by making the housing market more expensive, will completely contradict its intentions of facilitating home ownership and saving.

Comments

  1. “If it was a $7,000 FHBG, the sale price would be $507,000.” Really?! The $7k would be leverage up to give a final price of $570,000……

  2. LabrynthMEMBER

    Your maths on the $507,000 is wrong. Banks allowed the grant to make up part of the deposit. In turn that 10% deposit of $50,000 turned to $57,000 which means that the first home owner can afford $570,000.

    Giving access to another $30k or $40k in young people’s super will absolutely make things go astronomical.

    • Thx to you and Janet for the clarification.Does the same logic work on rate cuts from the RBA too? Like a .25 % rate cut gives another 50k value for new buyers or existing property?

      • arescarti42MEMBER

        Potentially, but the effect isn’t likely to be as large for something like a 0.25% cut, and it comes down to whether banks take it into account in their mortgage serviceability calculators.

        As an example, someone who could afford to borrow $400,000 at 5% can afford to borrow ~$412,000 at 4.75% (with the mortgage repayment staying the same).

  3. Stormy Waters

    Constructively…I call bullsh!t. Your first, uncensored, argument that a tax payer funded system is equivalent to a self funded system in terms of transfers only holds under the assumption that super is 100% invested in domestic assets. To the extent that super is invested in international assets then the demographic impact of a surplus of Australia retirees selling super assets relative to working Australians buying assets via compulsory super contributions depressing prices falls apart – net purchases/sales by Australians on global markets are unlikely to materially move asset prices.

    • Yes, that’s right. The effect of offshore investment into the Australian market offsets domestic outflows, perhaps this does not happen perfectly, but at times (particularly from a relative yield perspective) that foreign investment will account more for the increase in asset prices than new funds flowing from superannuation.

      EDIT: Of course, this highlights the political challenge that the country must accept and actively encourage ever increasing levels of foreign investment despite the misgivings of voters and impacts on some sections of the community.

    • Cameron Murray

      You have a valid point, but our domestic efforts at investing abroad are being mostly offset by increased foreign investment locally, hence the net ‘national savings effect’ is relatively tiny compared to the internal redistribution effects. The question is really about the counterfactual. Given the evidence the counterfactual situation in my view would have had very similar net international flows. This is informed by the evidence that gross national savings rates are basically unchanged during the era of growing superannuation funds.

      http://www.rba.gov.au/publications/submissions/fin-sys-inquiry-201403/graphs/graph-7.8.html

    • Ronin8317MEMBER

      I believe that is the point of the article. We are not investing our super in overseas asset as much as we should.

  4. Downloaded a pdf by James Doughney some time ago.
    http://epubs.scu.edu.au/jesp/vol10/iss2/3/
    Note; Page 6 Chart 4 Actual and Projected “dependency ratio” Australia 1950 – 2051.
    I am 67. This chart shows the dependency ratio is projected to be lower for the rest of my life, than when I was 26 (1974),

    Could it be possible for a Government run, well targeted, pension safety net to be the best option?
    FIRE please note. Usual hysterical reaction will entertain.
    Neo-con sloganeering coming back to haunt us in the real world?

  5. ErmingtonPlumbing

    “My view is this: Australia’s superannuation system will not survive another 30 years in its current form, or anything like it.”

    Born after 1970, Im no boomer and I have always felt, instinctively in my gut, that for my generation and below, super is a scam designed to enrich the financial sector of the economy by robbing working people. The fact that so many boomers have benefited, being due only to early entry into the successful pyramid/ponzi scheme.

    Now being self employed ( pty ltd company), I resent every cent I’m required to pay into it and feels like an even bigger theft than all the Insurance Im also required to pay for.

    At least dividend payments to the wife and my self avoid this super and workers comp ripoff.

    http://www.youtube.com/watch?v=6oBo8CJxatQ

    • Well good luck with your retirement planning then. Your comments show a lack of understanding about Super & what it is intended to achieve -pehaps par for course for most “Tradies” Sure there are problems & rip offs by the A$$holes managing funds but just about anyone posting here should be able to run their own Fund at minimal expense.

      It’s really about putting aside a large enough slice of income to see one through what may be 20 + years of NO income. More importantly it’s about having it in a place where it can’t be accessed easily prior to age 60 (currently) & with the additional benefit that Super is completely protected from creditors. Every $ YOU put into something outside of Super will be Taxed one way or another by this & any other Government. The Tax breaks of Super are being tightened & that’s not a bad thing -but I’ll bet $ that even modest Tax breaks in Super will beat anything outside of that investment. I stress again I’m talking about taking control of your OWN destiny & running your own fund.

      • ErmingtonPlumbing

        I’m planning my retirement in 20+ years time quite well thanks AU . What I dont want to do, is accept a tax discount on MY MONEY now, only to find I can’t do shit with MY MONEY accept receive a piddling annuity from its meagre earnings until 10 years before average life expectancy is reached.

        That Tax discount gives the government sanction over YOUR MONEY……………….. do you really trust them that much?

    • @ErmingtonPlumbing
      “That Tax discount gives the government sanction over YOUR MONEY……………….. do you really trust them that much?”

      No I don’t trust Govt BUT there is a LIMIT to what they will ever be able to do to Super -without having a revolution. I believe that those with sufficient $$$ in a Super Fund will still have access to that Fund at any time after 60 even down the track. Those expecting or relying on the Age Pension will have to wait to age 70 or whatever AND it will as always be a meagre existence. I was in the Super Industry & the same reluctance to putting $$$$ aside in a Super Fund were being expressed by most I had to deal with & that was 30 years ago!
      On the other hand I saw the advantages in putting $$$ aside & not altogether living for the moment which is the attitude unfortunately of the average Australian. We have a bad savings mentality period. All I can say is that it is imperative to have a fund that is for retirement only & protected from creditors.

      IF you don’t believe that & think like most I met that they would SELL the home- Make a big profit – downgrade to a smaller place & live happily ever after — then again – Good luck.

  6. Cameron, many may be sorry that you did not get the job. Hope you now much wiser as to why you did not get that job, and more attuned as to what you may need to improve upon in your next job applications. All the best and good luck for the future.

  7. SweeperMEMBER

    On your uncensored article:
    I could be wrong, but I think It is possible that compulsory super could reduce the burden on the current and future workers/taxpayers. It depends on a counter-factual – what would national saving/investment have been absent compulsory super? If investment has been higher than what it would have been,,all else equal, potential GDP will be higher as well, reducing the burden on future workers/taxpayers of providing for retirees. So it’s more a question of whether compulsory super changes the consumption/saving behavior of current period workers.

  8. I’m pretty sure that most people born after the locusts (Boomers) are of the mind that Super is just a stupid tax that you can’t get out of – too many people are bought into the Matrix to listen to the flawed logic behind it. No one under 60 really thinks that Super money will actually be there in 20 years? Do they?

    • Even StevenMEMBER

      It’s not stupid to take advantage of it on an individual basis (there are clear advantages). But Cameron is proposing that on an aggregate basis it doesn’t help/makes no difference. I’m still mulling that proposition…

      (And yes it will still be there in 20 years, and I’m under 60)

      • Oh yes it will still be there, and I’ll be able to see it, but I just won’t be able to have it.

    • I don’t totally get this argument, which is often made.

      IF the govt steals or taxes or otherwise restricts Super, then you have to ask WHY is it doing that and WHAT will it provide instead. If the situation is so bad that this is necessary, then either a) people are all equally poor in which case socialism has won OR b) people who had more in the first place, will still have more in this case, even if its not as much as they might have.

      I don’t think many people are predicting a wholescale move to socialism, so I wonder what set of circumstances they are envisaging?

      What I DO see happening is govts chipping away at Super over time AND it not delivering enough return in the future. But again, it would be better to have some than not.

      And when it comes to voluntary contributions, you’d have to believe that any future govt actions would outweigh the tax benefits you give up in the meantime. You would need either a very solid return elsewhere OR a strong belief that the govt is going to get nasty on it.

      • drsmithyMEMBER

        You should get a futon – I’m sure you’ll sleep easier with less worry about the reds under the bed.

        What “govt” will do is restrict the ability to pull out super lump sums, and maybe put some sort of cap on annuity payments to average them out over a person’s expected lifetime.

        They will do this to avoid having to “spend” money on pensions or any other form of welfare. That way more of it can be given to the wealthy as tax dodges.

    • “I’m pretty sure that most people born after the locusts (Boomers) are of the mind that Super is just a stupid tax that you can’t get out of”

      B for Bullshit ! — Most so called locusts went through some very hard times to arrive at retirement age.
      Name calling & blaming previous generations is such obvious crap that it’s not very bright to use it.

  9. there is lots of issues in this article:
    Doesn’t account for international capital flows and effects on asset markets and yields as we are seeing now.
    A pension system (variable and unpredictable contributions BUT defined benefits) based on taxing young to give to old….is a more rigid system and doesnt account for economic cycles, whereas the super system(defined contributions BUT variable and unpredictable benefits)..which is really based on whatever the prevailing yield in capital markets is does self-correct with economic cycles….and we dont get problems like europe, where you have to promise or condition people on expecting generous pensions when a down turn hits. it reduces burdon on government…so long as compliance standards are maintained.

    • Cameron Murray

      “Doesn’t account for international capital flows ”
      These are very minimal, and in my view there is little net effect from compulsory super.

      “we dont get problems like europe, where you have to promise or condition people on expecting generous pensions when a down turn hits”
      That’s right. We don’t (though there is still an old age pension, but a very different system to most of Europe). Old people just get less of the pie. That’s a value judgment.

      But instead we have a superannuation system that is inflated due to the flow of funds into the major asset markets that will deflate when this net flow reduces. People expect their super to be there, just as Europeans expect their pensions to be there. Yet the demographics will hit both systems equally.

  10. Abolish super.
    Raise taxes by 2-5%. Use it for the pension.

    Raise pension to minimum wage (or whatever).

    Earnings over XX,000 a year don’t get a pension

    • Im sure it would be cheaper. I believe the cash back payments ie super concession are soon to cost more than the current state pension costs.
      What could be amusing though is the main recipients(the already richest 20% of us) of super largesse re tax handouts will have the most hived away and when they start selling…….and as states, who is big enough to buy this stuff at projected (speculative) value.

  11. The aggregate demand for goods and services as a result of an ageing population seems to be missing in just about any paper I read – we are about to go into a deflationary environment for a period of 10-12 years as GDP falls (Gen X hit their peak spending) – somehting no one seems to see coming.

    Fact is that if you multiply the “age pyramid” by the average spending lifecycle (available in the USA – but would be near identical in Australia) – you can get the best estimate of the demand for goods and services into the future.

    Beacuse the age pyramid looks more like a “space rocket” … and eventually will look like the “hands of god” (in about 40 years) – the current system is completely flawed – an overhaul of the tax system is the only way to prepare for the future and provide fairness.

    Tapping into assets such as the family home for super is a MONTY – as is the elimination of lump sum super payments (the current behaviour of 75% of the population to take a lump sum and spend it in their first 5 to 10 years of retirement – and then claim the full pension with their house securely tucked away to pass on to the next generation.

    Make no mistake – the protection of assets that have accumulated massive tax free (house) or tax concessional gains (super) over the ast 30 years is going to be targeted. To suggest it is something to be passed on to the next generation will create a country of bluggers and is simply not right – why should they reap the benefit of these tax concessions – the windfall is surely to support retirement and nothing else!