Australia’s superannuation bubble bursts

For nearly 30 years, Australia’s compulsory superannuation system has provided strong tailwinds for the Australian share market.

Since compulsory superannuation was first introduced in 1992, mandatory contributions have grown from 3% of employee wages to 9.5% currently.

In turn, this strong inflow of contributions caused superannuation funds under management to grow almost exponentially, as evidenced by Australia’s total superannuation savings pool ballooning from around $200 billion in 1992 to $2,800 billion as at December 2020:

The lion’s share of these superannuation funds have flowed into Australia’s share market, thus increasing demand and inflating share valuations.

However, the Morrison Government’s early release policy, alongside falling inflows as Australians lose their jobs due to the COVID-19 shutdown, means that net inflows into superannuation could turn negative. This would place significant downward pressure on share valuations, according to investment bank UBS:

Workers who have lost their jobs or been stood down are eligible to withdraw up to $20,000 from their super by the end of September under emergency coronavirus crisis measures. The federal government estimates 2.3 million people will withdraw $29.5 billion from their super.

UBS equity strategist Jim Xu said this figure represented 1.1 per cent of total super balances.

Local funds had 27 per cent of their assets tied up in Aussie stocks before COVID-19 struck, indicating that about $8 billion in shares listed on the Australian Securities Exchange will need to be sold, he said…

Such an outcome, combined with slowing contributions due to lower employment and emergency withdrawals, would halve the amount of money from contributions and dividend income that super funds had to invest from $89 billion last financial year to $44 billion this financial year, Mr Xu said.

“Funds’ ability to purchase assets could fall significantly,” he said. “Super funds are the only sector to have increased their ownership of Australian shares over the past 20 years.

“Hence, any decline in the ability of super funds to purchase Australian shares could be negative for demand for Australian equities.”

The long-run outlook is also negative. Baby boomers hold the lion’s share of Australia’s savings. Therefore, as they retire they are likely to become net sellers of financial assets in order to fund their retirements. This would place downward pressure on valuations, other things equal.

These dynamics may help to explain why Australia’s superannuation industry lobbies so hard to have the superannuation guarantee lifted from 9.5% to 12%. Not only would this increase funds under management (other things equal), lifting superannuation management fees. But it would also help put a floor under share valuations by offsetting withdrawals from the large baby boomer generation.

Put another way, raising the superannuation guarantee to 12% is a guaranteed way of maintaining positive net superannuation inflows, thus keeping Australia’s superannuation bubble inflated.

Unconventional Economist
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Comments

  1. Willy2MEMBER

    – Agree. Superannuation is a Ponzi Scheme. Because it worked as long as the inflow of money was larger than the outflow of money. But it applies to ANY retirement system.

    • exactly
      investment based retirement systems in that regard is no better than pay as you go
      if the ratio of those paying into the system gets smaller there is less money in budget (in case of pay as you go)
      if the ratio of those paying into the system gets smaller share prices and other income streams reduce so there is less money to pay out
      even if one saves in cash that cash becomes worth less once there is larger ratio of those needing care than those providing care

      investment based approach may work for while while luring into the system more people from outside the country, e.g. by investing into countries with younger population, but those countries are by a rule poorer and more volatile so that approach often backfires even sooner …

  2. Ok, increase to 12% to support asset bubbles in Australia. Further destroy living standards for young people (under 50).
    How is this good for the economy? Is slowly crushing people to death better than losing a limb and then moving on? Fk boomers. Covid clean up.

    • You are buying into the narrative from the politicians and the mass media that this is an intergenerational issue rather than a class issue. Most baby boomers are just ordinary people who have never had the slightest say on anything important and don’t own much more than a very modest family home, bought when they were going cheap, if that much. According to the Australian Superannuation Funds Association, the median superannuation balance for people retiring in 2015/2016 was $110,000 for men and $36,000 for women. The benefits of superannuation essentially go to the top 10% of retirees with a few crumbs for the next decile down.

      https://www.macrobusiness.com.au/2020/02/industry-funds-admit-12-superannuation-will-benefit-rich/

      Below that point, Centrelink claws back much of the benefit of superannuation with aged pension means testing.

      Some of the real culprits are baby boomers, of course, which is about as relevant as their hair or eye colour. Plenty of them have been older or younger.

      • It is a class issue. But the classes aren’t exactly the same as they were previously.

        And whether you like it or not, the boomers are predominantly in a higher class stratum than the younger generations. Even if said boomers only ever worked as a cashier at a supermarket….

        The boomers have unearned wealth that has been created partly through expropriation of younger generations. They have benefited. Whether they like it or not.

        • Nonsense. The retired cashier would have little more than a small house in a formerly unfashionable neighbourhood, bought for 3 or 4 years of the median wage, and is doubtless on the aged pension. Australia’s aged pension is one of the least generous in the OECD. It is superannuation that makes our retirement income system enormously expensive.

          https://data.oecd.org/socialexp/pension-spending.htm

          Who exactly did your cashier expropriate? Young people are disadvantaged by neoliberal government policies, which are essentially bipartisan, on trade, immigration, urban planning, industrial relations, foreign investment, landlord and tenant relations, etc., etc. You can blame most baby boomers for being conned or frightened into voting for the major parties, but the same applies to younger voters, who outnumber the baby boomers by more than 2 to 1.

          https://www.populationpyramid.net/australia/2020/

          • Everything you say is largely right.

            But the fact remains that the boomer cashier is sitting in an owned house (bought for 3 times salary), and receiving aged pension whilst watching TV or whatever.

            The young cashier is working 40+ hours a week, paying tax to allow the boomer cashier to get the pension, also paying 30% of income in rent to live in a shared apartment. 3 times income won’t even buy a crappy apartment.

            So boomers have it better. If there is any redistribution/equal sharing, it can logically only go one way….

            The question of fault doesnt even come into it.

      • if you were a boomer, and you didn’t manage to get rich, you really deserve to stay poor

        It couldn’t have been made any easier for them

        • It isn’t that easy for someone to get rich with a very average IQ, not much education, no connections, and very little capital, especially if he or she isn’t a psychopath. And what about the clueless younger people who refuse to vote out the neoliberal politicians who really are ruining their lives?

          • Haven’t those younger people believed what they have been told by the Boomers? Doesn’t the cashier Boomer also say the same things and vote the same way as the other Boomers, thus further reinforcing the narrative to the younger people?

            Yes, younger people should be more discerning – but when all their elders say the same things, and the property ponzi has run for ~30 years, the responsibility of younger people for not voting out the pollies that proliferate the consumption of the young is mitigated vs the responsibility of older people (who feed on them to yield disproportionate gains).

          • The boomer cashier’s house will be worth peanuts if he or she doesn’t live in a major city. High house prices, in any case, are of no benefit to owner occupiers unless they intend to sell up and move far away to someplace where housing is cheap (and very few want to move away from their friends and families, who are often dependent on them for free child care). All that they get out of it otherwise is higher rates and insurance. premiums. Reverse mortgages are a scam. Only the top 20% own investment properties.

            If children always believed what their elders told them, I would have fewer grey hairs. If you are old enough to vote, you are old enough to make up your own mind about the issues. In fact, it was more excusable for the young baby boomers to be taken in by Hawke’s and Keating’s nonsense about bringing home the bacon, because they had no experience of neoliberalism. Most people in every age group vote for the major parties, and there are people in every age group who don’t. I am an old lady and have been putting those @#$%! last for decades. Until more people start demanding accountability and doing the same, nothing will change, no matter how much you whine about baby boomers, because you are mostly blaming the wrong people.

          • kannigetMEMBER

            Even a small house in OuterBumFark is still “valued” at up to 7 times median income
            e.g. https://www.realestate.com.au/property-house-nsw-bowraville-132828034 they want $300K for it, its not the worst in town but its near the bottom of the barrel. median income according to census ( https://quickstats.censusdata.abs.gov.au/census_services/getproduct/census/2016/quickstat/SSC10537?opendocument ) was $38500

            I lived in that are for years, In general the cost of living is not to bad, rents are relatively high but if your smart food is reasonable.

            One of the crazy outcomes, and a good indicator of a property bubble is that even the worst house in the worst locations of Australia dont escape crazy speculative pricing values.

  3. Teignmouth Electron

    As I posted a few days ago, my fund (Colonial) has taken steps to ‘starve out’ members in 100% cash.

    • I doubt that there is much cash in this option……mainly cash equivalents depending on the RBA to turn them into cash. Most funds are the same. I am hoping with the AOFM persisting in offering $ 5 billion a week in Australian Treasury Notes that Vanguard will set up a separate fund with just these Notes in them……you really don’t want bank bills etc. going forwards. If not I will probably have to talk to FIIG or someone to set a ladder of these Notes in a SMSF for me, though I think they are being supplied as safe paper for the banks and might be hard to get for us plebs.

    • I do hope the MB crew are in there lobbying hard (a la Alan Joyce/Quantas) that if their badly run competing super funds want a bail out, then well-run MB Super should receive a pro-rata cash injection

  4. Tassie TomMEMBER

    I remember reading an article on MB perhaps 10 years ago hypothesising that due to the demographic shift that over time the demand for cash would increase whereas the demand for investment assets would decrease, leading to the face value of shares/ property to fall such that their P/E falls to around 8X, while cash interest is suppressed.

    This was before ever-decreasing interest rates pushed the face value of investment assets to the moon and endless working-age immigration meant that there will always be more superannuation accumulators than extractors (assuming that new Australians get paid super at all).

    Still, I wonder how the macroeconomic fundamentals of this theory will stand up in time.

    • The money “in superannuation”:
      1) isn’t “in” superannuation
      2) is funny money
      3) isn’t “saving” (I think Cameron Murray had a good post on this some years ago, explaining how value can’t be canned and preserved for the future. Everything we consume has been produced in the last 6-12 months.)

      It can be made to grow, or shrink, at the governments whim. But that growth or shrinkage doesn’t really matter.

      what really matters is everything else that happens outside the superannuation mind trick.

      • Well, value could be canned and preserved for the future if we operated a monetary system that didn’t revolve around ‘funny money’. In other words, if you didn’t want to risk your savings in stocks you could keep them in cash.

        However, as a fiat money system is inflationary, by default, keeping your savings in cash means its value is not preserved so you are forced into assets that offer some protection against the ravages of inflation. Stocks are not a bad option in that regard – but they carry a greater degree of risk, of course.

        • That’s not what I mean, Dom.

          I mean even the idea of “saving cash” doesn’t save you. Money ain’t value.

          Even if we had zero inflation and you saved $1,000,000…. this doesn’t mean that there is
          $1m worth of products (whose consumption you deferred) saved up for you somewhere.

          If you want to use your “savings” buy a loaf of bread or a piece of clothing or a car, it has to be produced in the future. it’s not saved from the past. All your money is, is a claim on someone’s future work. ….Which you hope will be honoured….

          This is not the same as value.

          • If that’s what Cameron Murray said then he’s got it bassackwards. Debt is a claim on someone’s future work, savings are work completed and in the past – deferred consumption, if you prefer.

            Any savings you have can be used to purchase goods in the future — that’s a given — unless, of course, your $1,000,000 has been Zimbabwe-fied, but then that should be obvious. To be clear, the foldy stuff I have in my pocket I don’t call money — because as you suggest, it may not have sufficient value to purchase real goods in the future and spending it sooner rather than later might be the sensible thing to do. Ask any Venezuelan.

            If you look at a definition of money, one of the criteria is that it ‘holds value’, which is why any fiat currency wouldn’t qualify as money. Gold is money, nothing else. If gold wasn’t able to buy you real goods in the future then nothing would.

          • No Dom. There is no such thing as “deferred consumption”, at the aggregate societal level. At least not in practical terms (goods can’t be stored for long periods of time; services not at all).

            There is only the social construct of “savings” whereby if you don’t consume immediately, you get money tokens which mean, everybody trusts, that society will allow you to consume later. But this later consumption has to be matched by later production.

            In theory, future society could also flip you the bird and say “nah”….

          • It’s why, if you were on a desert island all by yourself, to take an extreme example, a pile of gold (or any other form of money) would be absolutely worthless.

            Also, why most people would prefer to be middle class now, than rich 500 years ago. There just wasn’t enough good things to spend money on back then as there is now.

            Which is also why it’s better for society to increase it’s productivity than for a few people at the top to get richer while productivity slides. Are you listening straya?

      • The Traveling Wilbur

        I reckon there’s a good chance Swampy is sitting on some bog roll he’s had for a lot longer than 12 months.

  5. drb1979MEMBER

    If there is $29.5bn of withdrawal requests, why is he saying only $8bn of Australian shares would need to be sold?

    They cant easily sell their unlisted assets, so I would think most of the $29.5 would come from liquid assets and Australian shares being most of that.

    That being said, given liquidly these days I doubt whatever figure it is would have a material impact on the market.

    • Mr SquiggleMEMBER

      Most money in super is held in a Balanced fund, with roughly 30 to 40% allocated to aust. Shares. $29.5bn x 40%= Etc

      • drb1979MEMBER

        Yes but they can’t easily sell the “non shares” part of their asset base to meet the urgent demand for liquidity do they’ll have to sell a lot more shares to compensate

        • Mr SquiggleMEMBER

          Yes, I agree with that part. Some of these Industry Funds have been carrying up to 20% in illiquid assets with very subjective valuations. eg infrastructure or property. Its usually been done on the premise of ‘”ínvesting in your industry” or “helping Australia grow’, but from my perspective its been a bit of a con. The downward re-valuations of these assets is a red flag indicator to watch. By comparison, Retail Funds are having no issues providing the cash, their challenge has only been the administrative steps of processing so many claims within the 5 day requirement.

          • Mr Squiggle, please provide your evidence that retail funds have had no problem and industry funds have.
            So far all I have read is speculation.
            Are you also saying there are no illiquid assets in Retail funds? I would like evidence of that as well.

  6. The long-run outlook is also negative. Baby boomers hold the lion’s share of Australia’s savings. Therefore, as they retire they are likely to become net sellers of financial assets in order to fund their retirements. This would place downward pressure on valuations, other things equal.

    This is the biggest issue I reckon – esp for funds with large unlisted components. As the pool increased, there was an incentive to overvalue unlisted assets because the new money coming in would effectively subsidise those already there (classic Ponzi). It is a known feature of the Industry Fund market that if you want to put money into your fund, you should do it before quarter end when the revaluations occurred.

    Now that the net flows look like flipping (or at least slowing) you have to pay the exiting accounts at the inflated NAVs. This doesn’t mean that you have to sell those assets if you can fund the cashflow elsewhere – but you do have to give value for them. So effectively the remaining investors are selling to the leaving investors at inflated prices.

    This will eventually result in actual assets having to be sold and probably at a discount to book. The Trustees saw what happened to MTAA during the GFC and are probably now scared sh1tless that they will suffer something similar.

    • Jason, I am inclined to agree. There must be actuaries generating numbers for the inflow to from funds and retail property. I haven’t seen self funded retirees go on spending sprees I would like to know what numbers have been put out there for outflows, tax and re-investing in the hands of the not so younger generation.