Compulsory superannuation is fueling household debt

There is a common myth that Australia’s compulsory superannuation system has boosted national savings.

However, Fidelity International has challenged this misconception, arguing instead that superannuation is fueling the growth in Australia’s household debt, which is now the second highest in the world (see next chart), by forcing households to borrow more to offset the forced saving.

According to Fidelity:

Australians have been making compulsory superannuation contributions since 1992. Today, there is around $2.75 trillion dollars in retirement savings in superannuation funds. As a result of the accumulation and growth of this savings pool, Australia now has the fourth-largest pension market in the world. On the other side of the balance sheet, Australians also have the second-highest level of household debt to GDP in the world at around 120 per cent of GDP. Household debt has grown in nominal terms from $217 billion dollars in June 1992 to almost $2.5 trillion dollars today.

Total superannuation assets and household debt have grown at a similar rate since 1992, suggesting that the superannuation saved by Australians has largely been offset by increased borrowing. It appears that the knowledge that most Australians have a pool of money waiting for them in retirement has resulted in the Australians becoming more comfortable with accumulating higher levels of debt during their working lives. Lower interest rates, increases in household incomes, and higher house prices have also contributed to the run-up in debt seen over the past 27 years.

Fidelity’s view was tacitly supported by RBA governor Phil Lowe last week, among others – as noted yesterday by Adam Creighton:

Lowe said as much last week too: “If you have to save more through super, you might save less voluntarily and therefore your consumption doesn’t move.” Trumpeting how much money is in accounts labelled “superannuation” ignores the overall balance sheet.

Michael Littlewood, a New Zealand academic who spent decades studying different retirement income systems in different countries, says German, New Zealand and Australian households have remarkably similarly levels of retirement assets, despite having vastly different retirement systems.

The fact remains that ‘savings’ in superannuation funds are only large because the government mandates it, not because they are inherently special. To quote economist Richard Denniss:

Much is made of the enormous size of Australia’s $2.9tn pool of superannuation savings, but we talk much less about the fact that the only reason it grew so big was that we literally force the vast majority of employees to spend 9.5% of their income buying superannuation every week. Let’s be clear: if we forced all Australians to get a massage every week or buy a new Australian car every year, we would have an enormous massage and car industry as well.

Truer words have never been written.

Unconventional Economist
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  1. I find that I do not often even understand Richard Denniss but that last quote was so correct. (Shame his AI mob came up with all that BS for the extra super to go above 9.5%, the research report done on behalf of some super union industry body or something!). Not sure one can easily determine who is paying for what these days, the experts are all so conflicted.

    • Strange Economics

      So argument is don’t increase super compulsory because….
      Thats 1% less income for paying mortgages.! 50k on house prices !

      Abolish Super totally , 10 % .. 500k more for house prices. !

      or 10 % less for increasing house prices with paying more interest.
      Mortgages expand until interest = 50 % of household income (median 100k/year household) and Loans 10 times..

      Loan 500k, deposit 100k, minimum house price 600k for a unit.

  2. Surely House prices are on the other side of this balance sheet. Were there no immigration, no foreign buyers and no negative gearing the debt would be lower? What is the collective cost of Australian real estate?

    • Shoot, I’m in agreeance with Fitz; the world must have turned upside down!

      I can’t see how they can come to this conclusion without taking the massive increase in house prices as a ratio of income over the last 15 to 20 odd yrs. If paying 9% super puts you in debt what does having to borrow from the old 2 to 4 x incomes to around 6 to 10 x income today, do to your debt levels.

      • Mining BoganMEMBER

        Concur. However if asked they’ll mumble something about good debt and bad debt and markets then slam the door in your face.

    • Yeah. If anything I’d say our compulsory Super helped restrain our endless thirst for housing debt somewhat. Imagine if Aussie households had an extra 9% to tack onto their incomes to calculate “borrowing capacity”.

      I agree with the MB stance that our Super system is an incredibly inefficient rort that overwhelmingly benefits the wealthy, but I’m not buying the premise of this one.

  3. – One also has to take into account that all that money that goes into the “Super-system” has to be invested into something, like Mortgage Backed Securities (MBS). And buying that MBS paper has enabled the consumer to leverage up even more.

  4. – And those consumer debts can be bundeled up and sold to Super Annuation Funds. In other words the employeee is / could be investing in his own mortgage / consumer debt.

    • That’s right.

      Money “in” superannuation doesn’t actually sit in superannuation. It merely flows through superannuation and gets lent out our speculated on the equities markets. Money is just a system of accounting, remember. Except in very small quantities, it can’t even be saved/hoarded.

      • – One can also put it in a different way. The “investment” is merely a claim on the current / future income stream of the underlying asset. And the value of that asset is determined by a fool called “Mr. Market”.

      • Money “in” superannuation doesn’t actually sit in superannuation. It merely flows through superannuation and gets lent out our speculated on the equities markets.

        And from memory isn’t something like 90% of money in super is just shuffled regularly between about a dozen different stocks of which nearly all are either banks or big miners ?

    • yeah, that’s the great plan … everyone to be vested into the bubble so that people suffering the most under the system are the trying to preserve the system

      last time this was done in western countries was after WWII when home ownership was used to prevent revolutions
      than our elites decided giving homes to people is too much so now they only give a promise they get some of their money after they turn ,,,, 67, or 70 or … 75 … or maybe never but .. hay there is a hope

    • Agreed. But it gets even worse as so much Super money is invested in the stocks of banks making the loans to the resi market. So you have a situation where individuals are exposed to the housing market multiple ways: 1) home ownership 2) equity ownership of banks who could be wiped out if housing market collapses and 3) retirement funds invested in the mortgage backed market. Here in straya we are not diversified at all – most of our eggs are actually in the same basket. Which is why the property market MUST be propped up at ALL costs. A total house of cards.

  5. WhatcouldgowrongMEMBER

    Given the way first home buyer grants work, surely having access to the money locked into super would do would just push prices higher?

    • For young people removing super would push up debt, but for older people not so much.
      A huge chunk of people retiring intend to use that juicy super nestegg to pay out their mortgage. If it didn’t exist they would be far more likely to pay it out sooner or borrow less.

      • Yep, then after paying off the mortgage, they’ll put their hand out for the Age Pension because they’re ‘entitled’ to it. Add the PPoR to the Asset’s Test I say

        • That’s right. Force pensioners out of their homes and let the top few percent accumulate dynastic wealth. Under our present system, the top 10% are getting an average of twice the actuarial value of the full pension in superannuation tax concessions. It would actually be cheaper for us to get rid of these tax concessions and have a universal pension. Currently, Australia is onw of the least generous OECD countries when it comes to share of GDP spent on aged pensions.

    • Exactly. Only worth ditching superannuation if it has a corresponding tightening of lending. Given the government and regulators and not willing to do so then better off leaving the forced savings in place.

      Unfortunately, there are many people like Jessica Irvine that have intentionally over-borrowed and have it as their life plan to use their superannuation to pay off their mortgage in retirement. That tells me we are still on track to have a Greece-like welfare crisis at some stage… and if Labor ever implement their idiotic idea of free access to welfare for migrant parents then we are well and truly f*cked.

  6. We are taking about the future money that would go into super. 10% of future salaries freed up for debt servicing.

    There is only one way that can end, in the current environment. Wheeeeeee!

    • Yep, and keep reducing interest rates so savers actually have to pay to have their money in the bank and yay! Game over for any person not in line for an inheritance.

      • Jumping jack flash

        Reducing interest rates periodically is completely essential to counter the fact that over the past 15 years of rampant debt expansion there seems to be absolutely no link between debt expansion and wage expansion, but it is essential that the debt continues to expand.

        Surely debt money is the same as real money and surely if there was more money around, more would be spent on goods and services and then flow into higher incomes. But no. It hasn’t happened. And this baffles and confounds the RBA.

        As it stands right now the rate of debt expansion is not adequate to prevent collapse, and cutting interest rates has a marginal effect on debt expansion at best.

        Very soon there will be more desperate tricks employed to get the debt to expand at the required rate.

  7. Best to remind ourselves that price is an artifact of a control system that govt choses to impose on us.

    There are other ways of regulating activity, rationing resources, etc. There is the dictator system, the big govt socialist system etc. There are quotas, conscription, rationing, etc.

    However underlying the control system are the actual resources that contribute to human wellbeing. There is land, food, structures such as houses and factories and there are people and their skills and knowledge. Too often the emphasis moves away from the real resources and onto obscure measures of derivatives of the artifacts of the selected control system (changes in dollar values).

    For example with today’s article there is talk about how many dollars have been put “into” various instruments and how many dollars they are now worth, and how many dollars all the houses might be worth if certain dollars went somewhere instead of somewhere else. I’m not sure I even understand what is being asked. Does anyone?

    Instead we should ask: do we have enough land and farms to feed ourselves? Do we have good housing for all? Are our transport and medical systems working well. Are all our systems secure and sustainable or vulnerable. Could we feed, cloth and house ourselves while fighting some sort of a battle against certain other countries or are we dependent on them for key resources? The China virus problem shows how important this question is.

    • Excellent comment. All retirement systems, for example, simply give retirees a claim on the real resources that are being produced when they retire. There is no giant vault filled with cars, pork roasts, television sets, etc.

  8. Isn’t this self-obvious?

    One persons credit is another persons debit

    They all balance to zero in a fiat money system with government debt issuance

      • the interest is a flow, not a stock (from debtors to creditors)

        money isnt destroyed when interest is paid, it just changes hands

        • Jumping jack flash

          Of course. But what flows are taxed to create the interest flow to cover the $2.5 trillion pile of debt that doesn’t do a single thing to generate any additional money for the economy that could be used to repay its own interest?

          You know, the traditional idea that debt is used to invest in expanding production, and that productivity expansion can be eventually used to repay that debt plus any interest obligation?

      • Where does the interest go? It just gets spun around and flows through again, so does it matter where it comes from?

        • Jumping jack flash

          It matters a lot.
          I’d wager the interest payment is coming out of discretionary spending and consumption. It comes out of potential wage increases. It comes out of business reinvestment and productivity growth.

          Look around, the place is falling apart and there’s more debt than ever. Doesn’t that kind of ring any alarms?

          Regarding the recycling of interest back into the economy, it depends on what banks do with that interest. The majority of the interest is used to generate more debt to reap more interest which is not a solution to the quandary of interest. Another large portion is used to repay their own interest on their own debt and this is likely to overseas banks or trapped in the merry-go-round of banking which doesn’t do much for the wider economy at all.

          A small fraction goes into wages for their workers, and this amount is falling due to automation, casualisation, etc. A small fraction is paid out as interest for savers and this amount generally falls too as we all know.

          • The interest that gets paid goes into the pocket of those who own the debt

            They can then invest in whatever they like, or consume luxury cars or watches or whatever

            The money doesn’t leave, it just changes hands

  9. Jumping jack flash

    “Household debt has grown in nominal terms from $217 billion dollars in June 1992 to almost $2.5 trillion dollars today.”

    Nice! That’s quite an accomplishment.

    Think of the interest that gets paid on those 2.5 trillion nonproductive debt dollars each year… Its a tiny bit scary! considering the average mortgage interest rate is between 4 and 5%, let’s say 4.5%, that’s a modest 112 billion dollars. Let’s call it 110 billion, just to be fair.

    That’s 110 billion dollars of dead money that is reaped by the banks to do whatever it is they do with it. Certainly not re-inject it into the economy as free money. Surely most of that 110 billion dollars is resold as more debt to earn more interest for the banks, and of course some is handed over to the banks’ banks as payment for their own interest obligations on their own debt piles.

    The key though is the rate of change of debt. The period between 2000 to 2006 was clearly the golden age of debt, look at it go! It is no surprise that during this time we experienced prosperity like at no other time before or since. We need to get back to that rate of debt expansion. The current rate of debt expansion is not nearly enough to enable prosperity. The colossal mountain of 2.5 trillion debt dollars sucks more money out of the economy than is being created by new debt. It simply cannot do.

    Debt must be created faster or this debt bubble will crush the economy.
    Do your part for your country. Take on another mortgage today!