Goldman: Shares to fall as superannuation ‘Ponzi scheme’ unravels

Matthew Ross of Goldman Sachs estimates that up to $44 billion could be withdrawn from superannuation funds by people who have been financially hit by the pandemic. This is based on 10% of superannuation members withdrawing $20,000 of funds.

Ross’ estimate compares to the federal government’s forecast withdrawals of $27 billion and the superannuation industry’s estimate of between $50 billion and $65 billion.

Ross contends that the early access scheme could result in liquidity issues for some super funds, which could in turn be forced to reduce their exposure to shares. In turn, this could place downward pressure on share prices and reduce the benchmark S&P/ASX 200’s market ­capitalisation by around 0.45%.

From Ross:

“The early withdrawal policy will nevertheless leave super funds in a worse liquidity position than before, with over half of the funds largely depleting their cash balances under our $44bn scenario.”

“This liquidity position will be further worsened by the extent of member-switching towards more defensive products, and the fact that illiquid assets may be especially hard to liquidate in the current environment — meaning any future portfolio rebalance will need to come from selling liquid assets.”

It is unknown whether these forecasts have taken into account the full effect of a downturn in employment and wages, which will necessarily also crimp compulsory superannuation inflows. If not, the impacts on liquidity and share valuations could be much worse.

What this analysis also highlights is that the long rise in Australia’s superannuation pool (see next chart) has increased demand and helped drive-up share prices.

That is, mandating Australians to direct 9.5% of their wages into financial markets via the superannuation guarantee necessarily inflates stock and bond prices which, because prices are rising, may also have encouraged others to pile in.

Because of these dynamics, Melbourne University research economist, Warwick Smith, described superannuation as Australia’s first compulsory Ponzi scheme.

Smith warns that with the large baby boomer generation entering requirement age, and needing to draw down on their superannuation savings (to which they hold the lion’s share), this risks deflating share prices.

Therefore, lifting the superannuation guarantee from 9.5% to 12% is a sure fire way to maintain positive net superannuation inflows, thus keeping the superannuation Ponzi going.

The COVID-19 economic collapse, alongside the Morrison Government’s early withdrawal policy, has obviously put a short-term spanner in the works, as illustrated by the widespread liquidity problems experienced by the superannuation industry.

Unconventional Economist
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  1. I would love to have a look at the country’s aggregated Super portfolio to see how/why it is they can’t pay out $44bn — even $100bn — with ease. Staggering.

    • DingwallMEMBER

      I would love to know how much of our ersatz stockmarket is owned by Superfunds….. ASX is riding on hot air still with real estate pricings showing no problems as yet, banks delaying advising markets of Covid impacts, retails sales thru the roof (lol)…………

  2. Move the index by 0.45%? The index did that in about half an hour today.

    Anyway, I got my $10k today!

  3. ChristopherMEMBER

    There are still some pretty massive monthly and quarterly inflows in to super funds even if we have a higher unemployment rate.

  4. thefatgeneralMEMBER

    Honestly doesn’t pass the sniff test.

    1) a lot of those who will withdraw from super (foreign workers, young etc) won’t withdraw the full $20,000 – or anywhere near
    2) I suspect in the end a lot who would be eligible still won’t as they will receive other payments (jobkeeper, seeker etc)
    3) they have lowered the compulsory withdrawal rate – so some funds will see less outflow
    4) as has been raised a lot ‘inheritance preservation scheme’ people tend not to withdraw so much when retiring.

    I think the biggest risk is more that people might move their default account to cash only as opposed to balanced or australia shares/growth etc – this happens in a big way and the funds will need to move. I’m aware a bunch of the more savvy ones moved from growth to cash funds early on (and so missed out on the unlisted assets etc getting revalued) – but even here, the benefit of the inertia most australians hold for their super will help the funds out – most will still just sit in the standard default fund.

  5. With Dominic on this one. How could super be put under stress by this? Doesn’t make actual sense. It’s only $50Billion. Billions don’t even count as an amount anymore, we have devalued numbers big time. But then again that idiot running Hostplus has been full of it for years & told everyone he could suck eggs & still make sh!t loads with no need for cash & bonds.
    They get Karma. Unfortunately so many punters just whacked their money in with no plan. These guru’s in Financial Planning did not say at anytime that when markets everywhere hit all time highs in Jan/Feb it was time to go some cash. They just could not do that as cash does’t earn them any money. They are all in the same boat. I have seen some Financial Planners advise for defensive positions (i.e. contrary positions in case of share market decline) & they are laughable. Most of the defensive bullsh!t has tanked more than shares. And of course the “defensive bullsh!t” is all Unlisted heavily marketed/spivved crap. Always was & always will be.