Lets imagine someone facing the end of a working career. They’ve built up a large jam jar of money. With these savings they can buy the goods and services they need/desire despite no longer producing anything to exchange in the market for them.
Now imagine a society with a bulge of people in a certain age demographic. Each of these has a large jar of savings. When they retire they will proceed to spend spend that money.
Except there’s a problem. They’re using that money to buy the goods and services of the remaining working population. Money is only as good as what is able to be there to buy. More money would just bid up the prices of the output already possible. Digging up the money is no different to printing it.
In another society however, savings don’t go into jam jars, but into the financial system where they are used to purchase other assets, financial and otherwise. This allows the money (and resources not consumed) to be used by other people while it is not being used by the saver. Hopefully the financial system will allow these savings to be invested in the economic sense, spending that increases the amount that can be produced in the future, by education and purchases of machinery and infrastructure etc.. This way the greater output of those future workers can support both themselves and the non-productive retirees with no drop material quality of life on average and without the need for government expenditure.
In the financial pages the aging population is often given as a matter of fact explanation of the need for superannuation and the expansion of superannuation. This is helped by the fact there’s a large industry to hire people to argue that its own promotion is good policy. Whilst other reasons have been varied (such as reducing the Current Account Deficit, remember that?). But if the “saving so we can afford an aging population” explanation has currency, then there are fairly large issues about how we’re handling these savings.
The important question then is not savings but whether genuine investments (in the economic sense) are taking place. Is the capacity of the future economy being expanded enough to support the greater proportion of non-productive people without dollars returning to consumption merely sloshing in or over the capacity of an economy reduced by retiring workers.
The statistics published by APRA on assets held by super funds distinguish between shares, property, fixed interest and cash. Each of these have issues.
It’s relatively safe to presume that many of and probably the bulk of the shares bought are already listed. Buying them won’t direct funds to the issuing firms who might actually invest the resources. It shuffles money around. It could possibly allow the people the funds bought the shares off to then direct the money to places where it could be invested or the raised level of the stock market in the whole might inspire firms to seek funds for investment through the stock market. These are fairly indirect ways considering the amount of funds we’re forcing to be saved.
Property is appealing since, despite bubbles and bursts it tends to hold and increase its value for a simple reason. There’s only so much land. Buying land won’t increase the amount of land around, and it won’t increase the future capacity of the economy.
Bonds are more promising. If a firm issues a bond the firm has a certain task in mind. Hopefully its investment. But it might just be an acquisition, boosting CEO ego and salary but not future capacity. It might be paying dividends out of borrowing. It might be a bond bought from someone else. Anyway, according to APRA only 11% of the assets held by Superannuation funds were in Australian fixed interest assets.
There’s also a whole range of derivatives and dark offerings of the shadow banking sector. Opaque ways of shuffling the above offerings.
Super funds are, broadly speaking, doing their job as they see it and have had it described to them. To take a bag money and provide a bigger bag when the client retires. It’s understandable. Many things that increase capacity, like infrastructure, education, technology, innovation and others have highly uncertain returns or require a long term commitment to ensure there is one. Investment doesn’t just need funding, it needs expected returns to make funding it worthwhile. It’s not surprising funds don’t tend to find their way there. There are more familiar returns in stocks and property. They need to hand over that bag of money.
But money is comparatively easy to make. It’s the ability to make something to buy that we want.
There have been suggestions about creating a super fund that governments could draw on for infrastructure projects. This immediately raises the question of how using compulsory super for this is materially different to levying an equal percentage of tax (income or payroll) and paying a higher pension in the future. The distortions would be the same and if an infrastructure project is worth making, it’s worth making anyway regardless of the source. Amongst aging countries even the debt laden Japanese state does not have any problems selling its debt, so why bother using super and allowing an extra level of administrators to take fees when the investment decisions are ultimately government anyway.
Or we could save offshore with a current account surplus, but this doesn’t really work. Foreign savings would allow purchase of foreign goods and services, yet so many of our needs and wants are non-tradable. This is especially the case for the elderly. They need medical care and nursing staff amongst other things. Even if we used that money to pay guest workers, they would still need to buy housing and get haircuts and pay for other things here that can’t be imported and exported. Foreign savings won’t help there. Assuming we could live on imports alone, who would we run this surplus with? Our similarly aging trading partners? Or would we run a trade war against the developing world? Why not just keep natural resources in the ground so we could exchange them for these imports when we need them, rather than now. They’re not going anywhere unless we move them!
There’s nothing profound here, its born mainly from irritation about the countless times I’ve read a vacuous but matter of fact assertion about the need to save for the population bulge without thinking about the underlying issues. The government is making occasional noises about productivity, but that’s not much against the power of a vacuity much repeated.