Bloomies Crapstralia series targets Aussie retirement system

By Leith van Onselen

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.

Comments

  1. world bankers need Pinochet to replace the old pay as you go retirement schemes with personal investment based retirement schemes. They will need someone else to replace personal investment based retirement schemes with something else. Post bubble burst Australia may be good place to do that.

  2. The simple fact about retirement is this:

    1) Current consumption is always sustained by current production. That is to say, everyone alive today is supported entirely by the today’s workers.
    2) We don’t store food except for a few strategic caches. Thus “savings” can be entirely imaginary in a real crisis. Food is priority two, behind water. No one will spend their lunch money on a hard asset.
    3) Your past savings and assets are only as valuable as current producers/workers decide, which is directly related to their comfort and lifestyle.
    4) Current producers will out-bid past savers on consumption (on average)

    So the ability to retire depends on the wealth of the people who work while you’re retired, and how much they value what you have saved.

    Get a nice little crisis like a food shortage and you’re taking the back seat to the workers every single time. In all likelihood, your assets will crash to meaningless levels and you’ll be fleeced to zero in months.

    • You need take an MMT view of retirement plans – i.e. money isn’t scarce can readily be created, but labour, resources, land, energy etc are. If everyone had $10m of super when they retired it would be meaningless, it would only inflate the price of everything they wanted to buy. Yet there is an arms race created by the funds management industry, encouraging (or forcing) people to save more of their income into super. The race for assets raises their price, thereby reducing their yield, meaning people need to save even more to compensate for lower returns.

  3. 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.

    Sounds great BUT what exactly have we invested in?
    Do these investments, in any way, help to secure our future?
    I’m of the opinion that a modern society can only ever invest in its Human Capital and on that score our investments are all miserable failures.
    The value of our Human capital is not measured by balance sheet entries but rather through the myriad of complex interactions by which we better ourselves collectively. We need to be measuring the value of our pension systems in terms of business diversity / connectivity and opportunities that this pension support “investment” enables.
    For pension savings to even exist, in any sense, they must enable structures / capabilities that would otherwise prove impossible. Looked at in this sense have Aussies saved anything, do their pension systems contain any investments at all? Are these Pension Assets anything but a neat accounting entries balanced only by debt they created? Think of Residential Housing asset inflation in these terms and suddenly the whole game makes some sense, unfortunately it’s just not a scheme that’ll deliver value to the next generation matter of fact net-net it delivers nothing but debt slavery. wow, a present liability that creates an even larger future liability, so we call it an asset. and I thought I had a reasonable understanding of complex derivatives till I discovered Pension accounting.

  4. Maybe get rid of super. The benefits overwhelmingly benefit the wealthy due to its tax treatment and the fund managers due to fees. The rest will be relying on a pension or part pension for their retirement anyway, so there is hardly any benefit to the system.

  5. I suppose what clever Das is really saying is that Australia would be far better off if there was nothing saved but we still had all those debts he has mentioned.

    Das does not seem to have the mental facility to identify solutions to what he has perceived as national problems (problems which they may well be). All he can do is to keep sneering at Australians (basically white Australians) while cheering on unfettered immigration from Asia (with a preference for his own kind) – and some foolish Aussies pat his back for what he says.

    Unfortunately Das’ views of economic conditions is vastly over-rated, and we continue to believe he shared something extraordinary about the finance industry’s contribution to the GFC. However, there were many bloggers who saw the GFC coming (in my case it was Bill Bonner’s Agora group that first woke me up in 2006 to the coming financial storm and that enabled me to go into cash in late 2007.

    Das’s real strength comes from his knowledge of the financial products that were at the centre of the GFC, but one would expect that since he worked in this field. I do not think he adds anything substantial to the macroeconomic debate for Australia.

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