Superannuation is a giant bubble

Warwick Smith, research economist at the University of Melbourne, has penned a scathing attack on Australia’s compulsory superannuation system, labeling it a “ponzi scheme” that is helping to drive “speculative bubbles”:

If our goal is an adequate and sustainable income in retirement for all Australians, our main priority ought to be ensuring that those remaining in the workforce are productive enough to support themselves, their children, those without work and those who have retired.

In other words, if you’re worried about the economic impact of our ageing population on our material standard of living (and there are reasons not to be worried) you would want our focus to be on productivity, rather than retirement savings.

To the extent retirement savings are used for productivity enhancing investment, that’s good. The reality is much of our retirement savings are funnelled relatively unthinkingly into an already bloated financial system where they expand speculative bubbles.

Elsewhere I’ve referred to it as Australia’s first compulsory Ponzi scheme

The best way [to improve the retirement system] would be to get rid of compulsory superannuation, give all the money back to account holders (slowly to avoid too much inflation), mandate a 9.5% pay rise in its place and redirect the tens of billions of dollars we currently spend on superannuation tax concessions toward rent assistance, a higher Newstart allowance and a higher pension.

Smith’s ponzi scheme claim is an interesting one. Effectively he is arguing that mandating Australians to direct 9.5% of their wages into financial markets necessarily inflates stock and bond prices which, because prices are rising, then encourages more people to pile in, creating asset bubbles.

However, with the large baby boomer cohort entering requirement age, and needing to draw down on their savings, this risks deflating asset prices and creating a situation whereby the level of one’s retirement income is dependent on whether they withdraw their savings while the “bubble” is still inflated.

The obvious short-term solution to this dilemma is to increase mandatory contributions into superannuation from 9.5% of wages currently to the legislated 12%. This will ensure that the net inflows into superannuation continues to rise as more baby boomers retire, thereby keeping the bubble inflated (at least until generations X and Y retire).

While there are certainly ponzi elements to Australia’s superannuation system, there are far bigger problems that preclude it from being a genuine retirement pillar.

First, superannuation is voluntary for the self-employed. Thereby it misses some 2 million Australian workers.

Second, superannuation can be withdrawn in full and spent from 60 years of age – many years before the official retirement age of 66 (rising to 67).

Third, the lion’s share of superannuation concessions flow to those that do not need them, namely higher income earners. This means that superannuation costs the federal government far more than it saves in Aged Pension costs. Moreover, how much superannuation one saves is dependent on long one works and how much they earn, which obviously favours high income earners.

Accordingly, Australian Treasury research shows that the top 1% of income earners will receive more than $700,000 in taxpayer assistance over their working lives. This far exceeds the $50,000 of taxpayer assistance received by the bottom 10% of income earners (see next chart).

Fourth, superannuation nest eggs are exposed to market risks, which means that balances can be wiped out via a stockmarket crash, as we have experienced recently (as well as during the Global Financial Crisis).

Now compare the superannuation system to the Aged Pension, which does not suffer from the above pitfalls and should be considered Australia’s genuine retirement pillar.

The Aged Pension is available universally as soon as one reaches retirement age, provided they are not already wealthy. Since it is means tested, it is targeted towards those that need it most, rather than the wealthy. It is not based on how long one works or how much they earned during their working lives. And it is not subject to market risk.

Given these facts, taxpayer resources should move away from supporting superannuation towards boosting the Aged Pension, which is Australia’s genuine retirement pillar.

Unconventional Economist
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  1. Interesting response by you LVO to Smith’s comments. I’m not sure I’ve got the points of difference? You’ve honed in on pension age & withdrawals. I think Smith targets more the point that an 18 year old earning modest income (was at least before CV19, probs nothing now!) is putting a regulated 9.5% of earnings into some weird arse asset that they know nothing about & its put into assets of no consequence to them such as the M6 or whatever in the UK or Toronto, purchased at some unbelievable price that no-one can prove or disprove is good value. Only way the asset prices are maintained is by compulsion. That is exactly what we have. Heaps of Super Funds with assets marked to make believe & is maintained because we have a compulsory investment scheme. Ponzi stamped across its forehead. Doesn’t matter who leaves at age 60, 70 or whatever it is totally reliant on new entrants. Feed ’em the young…. we need our fees & ticket clips! It is a massive fraud & ponzi all over.

    • I saw Paul Keating explain it a little while back. Australians are now far better off because they have been forced to contribute to a scheme that doubles your dough every 7-10 years. Wacko. Case closed. What he didn’t mention is that this is done by pumping up asset prices and directing investments into non-productive parts of the economy until they attached themselves to our faces like the xenomorph from the film Alien and create a massive system of maladministration that costs many times that of a pension system.

      If the super system had been restricted to industry funds and not made available as a tax haven for the top 10% it might have had merit. But it has fuelled the house swapping and dog-box building economy and massive P:E of stocks. With too much money and not enough productive places to invest it the finance sector in the Australian economy is like the winner of a game of Monopoly with hotels on Mayfair- everyone else has lost their wealth, mortgaged their houses and can no longer even pay the utility bill. They loop around the board hoping to get the $200 – where even staying in jail is preferable. Oddly, the winner of Monopoly kills the economy and society through greed, but we never used to see it that way.

      Hopefully they will land on ‘Chance’ and pull the card that says “Congratulations, someone just had some bat soup in Wuhan…you have received 24 rolls of toilet paper…”

      • factory worker

        Yep if increased Superannuation “savings” are not actually resulting in increased labour Productivity then it really is nothing more then a Ponzi scheme where Asset prices simply climb and climb and climb, as long as the Super cashflow direction remains positive.
        It is well proven that the greatest predictor of future labour Productivity is education differentiation along with education excellence. and on both scores we’re failing badly. It’s not about how smart our top 10% are but rather our labour Productivity reflects how comparatively skilled the bottom 90% of the population are. Unfortunately for close on 20 years now Australia has been under investing (well actually it’s worse then that because we’re just badly investing a very large budget) in education and thereby failing our kids (future productive work force) yesterday’s failure to educate is today’s decreased Labour Productivity and fuels tomorrows social problems.

      • Jumping jack flash

        “a scheme that doubles your dough every 7-10 years. Wacko. Case closed. What he didn’t mention is that this is done by pumping up asset prices and directing investments into non-productive parts of the economy”

        Wait a minute, I think you’re onto something here…

    • ErmingtonPlumbingMEMBER

      These have been my feelings about superannuation since it’s inception Sool

    • One of the myriad issues is this: too many fund managers are farcking shyte at what they do. If an asset is over-valued i.e. its price is not justified by the cash-flows it’s generating and its longer-term prospects, a competent fund manager would simply avoid it, having done the appropriate analysis. But many just plough money in regardless — often justifying valuations with tortured logic and cherry-picking facts and stats. Ya know, because it ‘seems’ the right thing to be investing in. And often times, in this post-GFC liquidity-fueled era: there is nothing else to buy!

      And then there’s the ratings agencies (S&P, Moodys etc). Too many fund managers rely on ratings from these agencies as accurate — well, we saw how that worked out in the GFC. So many AAA-rated securities turned into junk when the clock struck twelve.

      But yes, that’s just one of a heap of issues.

      • “Nothing else to buy” … That’s right. Superb observation, Dom (not kidding, either). Like Chuck Prince said – while the music playing you’ve got to get up and dance.

        Those who sit on the sidelines are looser geeks. Just like those on the sidelines at the discotheque….

        And that’s why housing will always be bid strongly (until it’s not). There is nothing else to buy. And there sure-as-fvck nowhere else to live.

        • Jumping jack flash

          There’s plenty to buy, its just that banks don’t generally like to attach economy-crushing amounts of debt to them, and inflate their prices in the process.

          Banks like property, it usually can’t get destroyed, and its nice and tangible to attach enormous mountains of debt to.

  2. mandatory superannuation was invented by labor to bribe union leaders to stop caring about workers’ rights

    just have a look into it, superfunds are owned by unions or quasi-union enterprises, under complete control of union leadership, filled with management and directors from unions, their family members and mates. they are non-for profit which means they have to spend all those hundreds of millions of dollars of fees income onto wages, trips, perks, bonuses, …

    basically by creating superannuations, Labor converted union bosses into bankers thus made unions champions of neoliberalism who pushed for outsourcing, privatisations, corporatisation, …

    • JaduongMEMBER

      Industry funds are required under SIS to have equal representation on their boards of employers and employees plus independents. They are usually “owned” by a corporate trustee which is not allowed to distribute dividends etc.. and the shares are held according to the equal representation requirements.
      The term “Union Fund” is a misnomer.

      • Whether or not you agree with docX’s terminology, you certainly agree with him in substance.

        Superannuation has been an important way of tricking labour class into thinking that it is also thr capitalist class…”mini capital”, if you like…. and therefore to go along with proposals that are good for capital, on the assumption that it’s also good for “mini capital”.

        Of course labour was and remains labour, even if it dreams that it is capital. The outcome is as miserable as it is predictable.

      • LOL
        equal representation shared between union bosses and corporate owners – hard to say who cares more about workers
        so who is representing employees? Union bosses? who elects them? how? Even if we assume union bosses somehow represent interests of their members (don’t laugh) how about the 90% of employees that are not union members?

        I said these funds are non-for-profit (no dividends) which only means they have to distribute all the money they earn via wages, bonuses, perks, benefits, to themselves, their mates called consultants and extended family members who get employed or subcontracted directly or indirectly by their consultants

        do you want an example:
        I just had a quick look online: EISS is one of those smaller industry supers ($5bn), it pays $13m to a dozen or two of it’s employees mostly executives and $20m to its consultants.

        and who are those consultants? What they do?
        for example, EISS has 4 “investment managers allocated to cash” (it must be so hard to manage cash)
        and one of them is G&C Mutual Bank where EISS CEO Alexander Hutchison sits on the board

        one can only imagine background stuff going on, loans at heavily discounted rates, leasing office space from each others securing stable tenants for their IPs, hiring extended family members, providing perks like holidays, gifts, …

        there is no effective control because the same groups of people is managing and controlling work of the whole industry. every CEO has a board full of people from entities where he or other management members sit on boards.

        • ErmingtonPlumbingMEMBER

          This phenomenon occurs within all institutional structures, and is largely unavoidable, especially ones with minimal democratic accountability.
          It is this fact of human nature that has the likes of Noam Chomsky advocating for anarcho syndicalism as the ideal form of governance for political and instutional organisation.

          A brave New World of increased real democracy could be a bit annoying though,… especially to leadership types.

          • I agree but superannuation system in Australia have no any control mechanisms put in place. A person forced to put money into super has no mechanisms to control how funds operate and who manages them. Many have no option to even change a fund

        • On the Super farm all animals are equal, but some animals are more equal than others – especially the pigs with their snouts in the trough.

          One wonders if they are part of Paul Keating’s new middle class? I used to like Keating. As a child I used to like our asbestos cement beach shack too – until I discovered that asbestos causes cancer. Growing up can really be hard upon uncritical beliefs.

    • Jumping jack flash


      Super was never meant to be a gamble. It was always money in = money out + a bit of compound interest to supplement (and then some time later, replace entirely) the pension.

      Then around the early 2000s people got greedy. This is as far back as my personal experience with super goes. My first super accounts were straight cash, and then we got all these different risk options around 2003/4, I think it was.

    • You are right
      tax law is designed for this to happen
      a person buying a business turning it around and selling after 10 months pays twice as much in CGT that someone holding BBOZ for 12 months

      in no world it can be justified to have the same CGT on things that improve quality of life (investments in food, utility, transport, … industries) and those that make it worse

      • The90kwbeastMEMBER

        Yes. Part of why the 50% CGT discount on secondary market assets needs to go, it just encourages speculation rather than investment in primary markets, whether IPOs, new housing builds etc.

      • Capital gains concessions apply equally to all kinds of “investments” no matter how much they are pure bets.
        Buying foreign currency as an investment entitles one to a discount if held for 12mnths via etf or something similar

  3. Good article. What are your views on super funds investing in productivity enhancing infrastructure? Seems like a better way to go than the usual public private partnerships that end up being majority foreign owned.

  4. A lot of the problem comes from mandating running down the reserves in long term savings vehicles. AMP’s problems started when the gov. forced them to pay out their reserves…..supposedly to policyholders but they used de-mutualisation to rort them for management as well. We used to be quite happy with whole of life policies and 30-40% reserves in guaranteed funds except for the fees but they weren’t much worse than retail funds now and super is just a tax advantaged whole of life fund.

    Same with businesses……when I was young and we were planning a big shutdown the accountants would have the money put away in rainy day funds ready……… they go cap in hand to the banks for operating capital. All tax advantages for borrowing need to go so that the people who borrow can’t pass the cost of it through to others…… well as all tax to be paid at the point of production.

  5. It’s all OK, the savvy ones get it. From a Property Investment forum regarding the ability to withdraw 20k of Super “Definitely going to hit this up, always wanted to get my hands on this money to invest in more property.”.

    • Jumping jack flash


      It makes complete sense to withdraw super and use it to leverage debt to buy property. Property is government guaranteed while super is not.
      Both purport to double you money every 7 years.

      I know what I’d do given the chance.

  6. “… our main priority ought to be ensuring that those remaining in the workforce are productive enough to support themselves, their children, those without work and those who have retired.”

    Support: themselves, their children, those without work and retirees.

    Fck me that’s a lot of people to carry on your back. Just don’t let on to your children — they may not want to work at all, and who could blame them! 😉

  7. Jumping jack flash

    Wow, super a ponzi? Who could have thought that?

    The structure and restrictions around super meant that it was very susceptible to ponzi-like behaviour.
    Guess what happened next?

  8. Smith’s solution:
    [Give super back slowly …] It’d be sustainable so long as we ensured sufficient worker productivity, primarily through full employment, appropriate infrastructure investment and well-supported education, training and research.
    Is he living in Disneyland?