Compulsory superannuation was introduced by the Keating government in 1992 as a way of dealing with the ballooning age-pension costs resulting from an ageing population and the looming retirement of hordes of baby boomers. As it turns out, the superannuation scheme we now have is costing the government more money than it’s saving. How could this be and why aren’t we doing anything about it? An examination of the growing financial sector in Australia and its increasing resemblance to a giant Ponzi scheme provides some of the answers.
Ponzi schemes are named after Charles Ponzi who, in the United States in 1920, offered investors fantastic returns on money he said would be used to buy international reply coupons in Italy, where they were cheap, and cash them in for stamps in the US with profits of over 400 per cent. Instead, he took investors’ money and used it to pay previous investors (as well as taking a cut for himself, of course). Using money from current investors to pay previous investors’ returns is the core element of a Ponzi scheme.
Why do I think this is relevant to superannuation in Australia? Super is clearly not solving the problem that Keating claimed it would, and yet we are planning to pour more and more of Australia’s wages into it. The Australian government is currently spending about $32 billion per year on superannuation tax expenditures (taxation based incentives for superannuation contributions). It has been estimated, by the superannuation industry, that this $32 billion in tax expenditures is currently saving the government about $7 billion in pension costs. So, if we dumped all of the superannuation tax concessions, we could not only provide pensions to all of those who would become eligible but also increase payments to provide a more comfortable retirement. Similarly, a CPA Australia report concluded that the current superannuation arrangements are having a ‘minimal impact’ on retirement savings and that high levels of household debt mean that many retirees will still be reliant on the age pension despite contributing to super all their working lives.
If super is not protecting government coffers from blowouts associated with providing pensions to the baby boomers, who really benefits from the current superannuation arrangements? To find out, we should follow the money. Let’s consider Australian superannuation in its entirety, not just the compulsory part, as this gives us the full context of the compulsory component. About 38 per cent of the superannuation tax expenditure goes to the wealthiest 10 per cent, which means that by 2014–15 the top 10 per cent of income earners will receive over $17 billion in tax concessions. So why exactly are we planning to spend $17 billion per year helping the wealthiest Australians save for their retirement?
Even those staggering figures don’t really explain who benefits from the current super arrangements. Seventeen billions might seem like a lot but the total assets currently in superannuation funds approach $1.5 trillion. We know private fund managers reap massive rewards at the expense of their customers and we know firms that help the wealthy manage their Self-Managed Superannuation Funds (SMSFs) are laughing all the way to the bank, but they are still just skimming the surface of the massive super-pot.
In 2011–12, about a third of super was invested in Australian shares, about a third in overseas shares and about 10 per cent in real estate. Most of the rest is in interest bearing investments of various kinds. This means that about $500 billion has gone from wages into the Australian share market. More money is pouring into super funds every payday. A substantial proportion goes into shares, regardless of what’s happening in the broader economy, simply because there aren’t many options and because that’s what many default portfolios do. At this point, the Ponzi scheme comparison begins to emerge.
How much of this investment is based on the underlying value of the companies whose shares are being purchased? Individual decisions about investment may be directed by the relative value of one stock versus another but are often not based on absolute value. In an inflated share market just about everything is overvalued, yet that doesn’t matter if people are still buying, because returns will be generated by capital gains, not by dividends.
Because money is constantly flowing into the share market due to mandatory superannuation contributions, the likelihood of capital gains is artificially raised. This makes buying shares an even better prospect so more get on board, thus driving prices up further. This disconnect with the actual value of the underlying asset is the very essence of a Ponzi scheme in which your return is reliant on money flowing in from future investors.
Ponzi schemes usually unravel when the amount of money coming in from new investors isn’t enough to cover the payments to previous investors. Here come the retiring baby boomers, needing their super and pulling that money out of the share market. How will we prop up the Ponzi scheme? Simple: the Australian parliament has already passed legislation increasing the mandatory contributions from 9 per cent of wages to 12, as more and more baby boomers retire. This keeps the extra money coming in despite the fact that there are not enough people entering the workforce. The Henry Tax Review panel concluded that it was not necessary to increase super contributions above 9 per cent and gave clear reasons why. But we’re doing it anyway. Why is that? I’m pretty sure it’s got more to do with protecting the financial sector than protecting retirement incomes for wage earners or protecting government coffers.
I don’t mean to imply that that the entire equities market is one big Ponzi scheme; more that it has Ponzi elements that distort the system, and prevent it acting as initially intended. Instead of being a vehicle for companies to raise revenue and for small investors to have part ownership of large companies, share market investments are predominantly speculation on price increases, many of which are driven by factors which have no bearing on the underlying value or performance of the companies being bought and sold.
Compulsory super has dragged every Australian wage earner into this game of bubble blowing with the level of their retirement income being dependent on whether they retire while the beautiful bubble is still in the air. Do we really want our retirement incomes to depend on the activities of major speculators? The ironic thing here is that our super funds have become some of the biggest players in the speculation game.
If we go back to the central concern and focus on providing a reasonable income to retired Australians then there are definitely more appealing options than Ponzi schemes. One is obviously the public option of providing broad access to an age pension. While this has serious budgetary implications, as highlighted at the beginning of this article, these are not nearly as severe as they are made out to be once you acknowledge how much is being spent providing superannuation tax concessions.
Another option, as recently floated by super industry giant IFM, is to use the money in superannuation funds to pay for important infrastructure projects. The government could facilitate this at relatively low costs by providing guaranteed returns. Instead of governments borrowing the money to pay for infrastructure, super funds could provide the capital. Interest that governments would have paid on loans could instead be supporting the retirement incomes of its citizens. There are many models through which this could occur, from the issue of dedicated infrastructure bonds through to more direct investment in infrastructure projects – and the outcome would be roughly the same.
Superannuation is now a massive industry in Australia and has, as a result, become a powerful political lobbying force which resists any move that might decrease its importance in the Australian economy. The genie can still be put back in the bottle if we do that rarest of things in politics, which is to stick to the principles, but there’s no sign of that happening at the moment.