A thought bubble on superannuation

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.

About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
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Nicholas Gruen
14 years ago

Thx Richard,

The point I thought you were going to make, but did not, is that what aged people need is not quite what their savings will be producing – labour to look after them. That’s going to be a big issue.

14 years ago

“labour to look after them. That’s going to be a big issue.”
Really? It sounds intuitively reasonable, but if you look at societies much further down the aging process than Australia, it certainly hasn’t been the end of the world for any of them (Europe, Japan), or at least it isn’t aging and lack of labour to look after old people that has caused most of their problems.

14 years ago

Conrad is right, the problem is not labor supply, these things always self-correct. The problem is that it sets up a massive financial implosion down the road.
Universal retirement is a flawed model. No matter how you shuffle the numbers, swap jam jars for investments or whatever, you’ve still got too many people earning no money.
What happens if, as medicine advances, we really punch through the longevity barrier? Should someone waltz around with no earning capacity for 50 years? How long a retirement is too long, from a practical point of view?

14 years ago

We are fixing the labour imbalance in the most obvious way by large migrant intake (legal intake was large through the Howard years too, regardless of numerically minor but politically huge intake of boat people).

Frequently we bring in young foreign students then offer them a chance to stay if they keep a job. They discover that housing is very expensive so they have to work hard, which effectively pays back the Super investment. Although as pointed out above, “investment” is the wrong word; bubbling up the house and land prices is not really investment, it is merely shuffling the accounting of wealth to denominate against a physical entity. It just so happens to be a physical entity that lends itself to conversion back into money and/or labour by filling those houses with young working immigrants. It’s a strategy that will work for the old folks, providing the immigration door stays open.

I’ll point out that for the 30-something Australian workers, closing the immigration door would be a personal boon — resulting in higher wages, and cheaper housing and very low unemployment. This creates a deep and fundamental inter generational conflict of interest. Interesting that the Baby Boomers demanded free education from Whitlam and now they demand free healthcare and cheap labour. No doubt it will take about 5 seconds for someone to scream “racist” here but actually the supply/demand balance has no relation with the skin colour of people coming in, only the total numbers.

There are deeper problems with the whole concept of super. Firstly, it is built on the presumption that citizens are too stupid to either save or invest. These same stupid citizens are entitled to vote, drive cars, and run all of the machinery of our entire society but too stupid to make any plans for their own future. There’s an insulting arrogance in the very heart of the Super concept which should rightly bother a lot more people than it does.

Then there’s the problem that individuals compensate for the investment-by-force, changing their behaviour with regard to personal investments. With Super on the scene, people have that much less money to invest and that much less inclination to do so.

Now the question of whether Super creates worthwhile investment for the nation as a whole. This needs to be seen in context of Capital Gains Tax which is a massive disincentive for any working individual to attempt to invest their money — it is barely possible to beat inflation thanks to CGT hitting every investment at your marginal rate (or half that for some longer term investments). The additional tax paperwork involved forms further disincentive especially if you buy and sell shares on a regular basis.

Thus we shift the decision making capacity away from many individuals, and onto a handful of fund managers. About half the super funds are run by the unions, the others are run by the big banks and all of the investments are heavily regulated by big government. Thus the ability to direct funds in our society (and the power that this entails) has been taken away from the population (because they are stupid) and this power has been given to that triumvirate of big unions, big government and big corporate banks (who are somehow less stupid).

As with all central planned designs, the new directors of funds react slowly, make ultra conservative decisions, and think more about their own career, political aspirations and personal connections than they do about the owners of the money they are holding. Back to that Agency Problem all over again…

The situation gets worse when you consider that the one place Australia desperately needs investment (and hasn’t been getting any) is investment in our young citizens. Given that we don’t believe in slavery, there is no mechanism for a large corporate entity to invest in people, nor is there any incentive for a large union to invest in people. The government chose not to put money into education all through the Howard years (and only small improvement in recent years) because it wasn’t a vote winner with that all important Baby Boomer generation.

The way our society is structured, the best placed people to invest in education are the people being educated (investing in themselves) and close family (parents, siblings, etc). These are the people who can reasonably expect a direct return on investment, without needing a mechanism for slavery. But these are the very people who have had all of their spare money snarfed by the fund managers. The state maintains its power by weakening traditional family and tribal allegiances.

14 years ago

“These same stupid citizens are entitled to vote, drive cars, and run all of the machinery of our entire society but too stupid to make any plans for their own future…”

Why should that be so surprising? We vote, drive and run machinery in order to achieve short-term goals that however millions of years of evolution has adapted us well to focusing on. It doesn’t surprise me at all that we’re poorly adapted to properly determining the correct current behaviour to ensure our needs in 30 or 40 years’ time are met.

Nicholas Gruen
14 years ago

Richard, I think I’m against having a ‘population policy’, and I wasn’t suggesting any policy response to my observations. It was just an observation. Having said all that, I’m not sure productivity growth will quite so smoothly ‘free up resources’. Those generating the productivity will want their share of the gains, so there is that much less to be ‘freed up’. That having been said, obviously higher wages in aged care will do the trick, but 1) that may crowd out volunteer labour which is important in the sector and 2) we don’t know how much higher wages will need to go.

But I’m not proposing to do anything about it.