Sunday, May 6, 2018

Time to unwind the superannuation system

It is about time someone was honest about Australia’s superannuation system. This multi-trillion dollar financial monstrosity funnels money upwards to the wealthy via tax gifts while failing on its promise to reduce the ‘burden’ of the age pension.

Let's unwind the system.

The easiest way to unwind superannuation is to allow funds to be accessed by any account holder at any age up to a maximum value of, say, $20,000 per year, tax-free. Half of superannuation account holders would get all their money back in the first year as the median account is just $17,000. Over time this procedure would incrementally give back funds at a rate that is proportionally higher for lower-income households, improving fairness and equity — something the system itself was poorly lacking.

A rough guide to the cash refunds each year is shown in the chart below. In the first year, nearly $600 billion is returned to account-holders, trailing down to about $60 billion in the tenth year, and removing $1.7 trillion from the system over a decade.



Over time, the 29 million superannuation accounts that currently hold $2.2 trillion in assets would be emptied out, allowing people to actually spend the money they have earned the way they want in the real economy (as opposed to the financial markets). The economic stimulus provided by this transition period would be epic, and the resulting boom will create exactly the type of capital investment that the superannuation system itself was intended to create. Unfortunately, misguided economics meant the superannuation system did the opposite — reducing spending in the real economy in favour of institutionalised mass financial speculation.

An added benefit is that asset prices, including property, may fall as a result of billions of dollars no longer being forced into financial markets each year.

To keep quiet the financial bullshit machine that sold us the superannuation system we can instead issue ‘pension options’ to taxpayers to ensure we 'pre-save', just like in the economic myths they recite. Issuing these new financial instruments would replicate the current financial nonsense going on, but in the public sphere, and for almost no real cost.

It would work like this.

When you pay your tax each year part of the money goes to buying a financial asset from the government in the form of a newly created ‘pension option’. Like other financial options, this is a valuable asset that you can hold to save for retirement. In retirement, to get the public age-pension, you must exercise the ‘pension option’ you previously bought with your tax money.

If you are concerned that this asset is also a liability to everyone else, then welcome to superannuation, where we have taken liabilities "off-budget" and into the financial markets at large.

Doing things this way, we get all the financial bullshit that should keep the pre-saving true-believers happy, but it won't cost us nearly $30 billion per year in tax breaks for the rich, and another $30 billion in fees for financial speculators to “manage” our money.

8 comments:

  1. This is all very well and good, but the 'pension option' you're proposing - whereby workers essentially buy a deferred annuity from the government - will significantly increase government liabilities.

    Would you suggest the government fund those expenses on a pay-as-you-go basis? Because that would increase the risk of one of the two below scenarios occurring:
    - promises are only met through significant tax increases imposed on future generations; or
    - promises become unsustainable, and people don't get the retirement income they expect.

    Or, you have to get the government to establish an ever-growing sovereign wealth fund with the money used by citizens to buy the 'pension option' which pre-funds the liabilities (essentially what the Future Fund is doing for historic Commonwealth retirement liabilities), but then all you're doing is destroying one Super system in favor of another, but one without the agility and diversification of investments of the existing one.

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    1. There is no such thing as pre-saving on a macro level.

      Where do you think the incomes from superannuation come from for retirees if not everyone else in society?

      If you account property, the superannuation system is an even bigger liabilities to society than the pension — someone else must pay when people sell the assets in their super account to fund retirement.

      At the moment we have a proposal to increase compulsory super - what is the difference between this and raising taxes exactly? Both systems in real terms are just financial mechanisms to transfer purachsing power, and if one is unsustainable, so is the other.

      https://www.fresheconomicthinking.com/2014/06/retirement-confusion-savings-are-not.html

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    2. I do get the point you're trying to make, even if I fundamentally disagree with it.

      Pay-as-you-go is by its very nature unsustainable, at least in this current demographic environment. While Australia may currently be fortunate enough to see relatively high birth dates, the worker-to-dependents ratio is still lower than it was 50 years ago.

      To work on the assumption that an ever-smaller number of workers in one specific nation can continue to support an ever-increasing number of retirees who will live for longer and longer is to ignore the prevailing demographic trends that have hit countries such as Japan, and are starting to cause problems in Germany and Spain, among others.

      While the fully funded system obviously relies on a manager's ability to sell existing assets to a new owner down the line, they are able to do so globally (barring trade barriers) which increases the likelihood that a sale can occur. I accept that, theoretically, there are also limitations to the ability to sell assets at an ever-increasing price, but if we do hit that ceiling, then we'll have bigger problems to contend with than the collapse of the Australian Super system.

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    3. http://evonomics.com/how-your-savings-plan-fuels-an-arms-race-on-wall-street/

      You good sir have evidently completely missed the point. Savings in private financial assets is only useful to the extent that it creates (non-inflationary) real resource space for more private (or public) investment by deferring consumption spending on real resources.

      Except... you don't need savings to be in private financial assets to lower costs of private investment. Nor do you need people to save in private financial instruments as a means of deferring (or preventing) consumption of real resources.

      Investment is independent of savings. Since banks lending creates deposits and is unconstrained (in aggregate) by savings, the only factors limiting private investment are credit worthy borrowers, and the profitability of investment opportunities. The former is rarely ever in short supply, and the latter can be manipulated through monetary and tax policy. Any country can adopt the BOJ approach and leave its cash rate to fall to 0% through the removal of deposit rates paid on excess reserves, and ceasing the issuance of new Govt securities used in OMOs to drive up the cash rate by creating a shortage of reserves. Thus making borrowing costs of investment negligible. Alternatively you can use a public bank to offer cheaper loans for productive investment as a form of industrial policy, or Qualitative/Window lending guidance (like Japan used in the past).
      Additionally the government can adjust tax policy to make after tax investment more profitable e.g. by taxing rents rather than productive investment.

      Preventing/deferring private consumption today to provide inflation free real resource space for productive private investment is easy - but only needs to be done to the extent existing private investment is causing inflation pressures. Murray's proposal for government annuities is one method (similar but arguably superior to conventional Govt bonds for a number of reasons), taxation is another. Monetary/banking policy to drive up higher interest rates for unproductive lending is another tool.

      Ultimately it is not money, the government's balance sheet or arbitry savings which constrains prosperity - it is real resources. The government can always meet nominal liabilities in its own currency.
      Real resources should be enhanced through policy conducive to productive private investment, but arguably the compulsory superannuation system is a vastly inferior, ineffective and costly system for achieving this. The superannuation system doesn't in of itself fix the rising dependency ratio, productive investment does. Bullshit financialisation has done a lot to misallocate capital through zero sum speculation, rob workers and created a bloated overlay of bullshit admin and financial management jobs in administrating the whole system. Those workers should be redeployed in actual production and research to help offset the rising dependency ratios. Such a vast waste of human capital cannot be fathomed.

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  2. Yes, the system is inadequate and deeply flawed.

    No, liquidating it is a stupid idea.

    I'm not convinced that you understand finance.

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    1. Maybe you can teach me. What's wrong exactly?

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  3. You got me at "financial bullshit machine" and "financial nonsense". That was really eloquent and persuasive. Very fresh so to speak.

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  4. Cameron, your commentators (Jesse excepted) are only trying to get across to you what Paul Ryan was onto here:

    https://www.youtube.com/watch?v=m6MGX1AKFm4

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