Turns out that Bloomberg is not done with its Crapstralia series. After already rubbishing Australia’s economic structure, productivity, the NBN, the housing bubble, the scrotum share market, the energy disaster, and toxic privatisations, now Satyajit Das has questioned Australia’s retirements system:
Australians make up barely 0.3 percent of the globe’s population and yet hold A$2.1 trillion ($1.63 trillion) in pension savings — the world’s fourth-largest such pool. Those assets are viewed as a measure of the country’s wealth and economic resilience… Other developed nations… have held up the system as a world-class model to fund retirement. In fact, its future looks nowhere near so bright…
The gaudy size of the investment pool, however, masks serious vulnerabilities. First, the focus on assets ignores liabilities, especially Australia’s A$1.8 trillion in household debt as well as total non-financial debt of around A$3.5 trillion. It also overlooks Australia’s foreign debt, which has reached over 50 percent of GDP — the result of the substantial capital imports needed to finance current account deficits that have persisted despite the recent commodity boom, strong terms of trade and record exports.
Second, the savings must stretch further than ever before, covering not just the income needs of retirees but their rapidly increasing healthcare costs… investment earnings have shrunk to the point where they alone can’t cover expenses.
Third, the financial assets held in the system (equities, real estate, etc.) have to be converted into cash at current values when they’re redeemed, not at today’s inflated values…
Fourth, the substantial size of these savings and the large annual inflow (more than A$100 billion per year) into asset managers has artificially inflated values of domestic financial assets… As retirees increasingly draw down their savings, withdrawals may be greater than new inflows, reducing demand for these financial assets…
Fifth, the system has accelerated the financialization of the Australian economy… The more than A$20 billion annually paid in fees and costs is of questionable economic value…
Finally, the system may well fail in its primary objective — that is, to minimize the need for the government to finance retirement. The typical accumulated balance at retirement age is around A$200,000 for men and around A$110,000 for women…
The Australian government will… lose doubly, having already suffered a loss of revenue from the generous tax breaks provided for the schemes (estimated at A$30 billion annually and increasing), which have been used, especially by wealthy individuals, as a way to reduce their tax burden…
The Australian system illustrates the fallacy of all retirement schemes… Such arrangements can only work in an environment of high incomes, strong investment returns and limited post-retirement life expectancy. Alternatively, they are sustainable where a rapidly rising population and workforce finance payments to a smaller group of post-retirement workers.
Fair criticisms, especially the one about financialising that Australian economy and the wasted productivity therein. Although, as pointed out by Das, most of his criticisms are not unique to Australia’s retirement system, but rather a common feature across the globe.
