Yves here. When I was living in Australia now nearly 20 years ago, superannuantion was a vastly smaller fund management activity than it has become, in large measure due to increases in mandated contribution levels.
Note I don’t regard the specific claim made by this article as accurate in a narrow sense. It is not a good idea to allow investors to have unplanned additional ability to withdraw retirement funds in market panic. In order to earn competitive returns, fund managers need to be pretty fully invested all the time. They allow for cash and other liquidity only to pay for expected withdrawals, which for retirement funds, are pretty predictable. The fund managers will not have planned for the possibility of suddenly having to deal with unexpected withdrawals. They’d have to dump assets, which in many cases would result in fire sale prices.
The US goes in the other direction in a crisis. It is now allowing retirees, as it did in 2009, not to make mandatory withdrawals from retirement accounts so as not to force them to sell assets now Mind you, it is an open question as to how much investments will recover, but liquidating when blood is in the street is never a good idea.
However, the “Ponzi scheme” charge is accurate in a broader sense, and not for the reasons the author provides. It’s true for the same reasons that Micheal Hudson argues that periodic debt jubilees are necessary. Unless the investment/lending levels are not terribly significant, returns on capital can’t grow faster than the economy without rentierism eventually eating the economy. It’s a “trees grow to the sky” fallacy.
Now failures or shortfalls on the level of individual investments make this picture less dire in the intermediate term. Rising stock market averages reflect survivorship bias, as companies that mature and stop growing much or founder (remember Polaroid?) get tossed out of indexes. Seemingly sure-fired bets like owning malls can turn into turkeys.
Historically, the reset for capital has been financial crises and wars. The powers that be prevented that after 2008. What has resulted is even more growth in economically unproductive asset management and financial speculation, accompanied with rising inequality and social instability.
By Leith van Onselen, Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. Originally published at MacroBusiness
Labor’s shadow Treasurer, Jim Chalmers, has penned a letter calling on the Reserve Bank of Australia (RBA) to provide a liquidity backstop for cash-strapped superannuation funds so that they can meet member’s redemption requests.
Chalmers’ request has arisen following the Morrison Government’s announcement that it would permit Australians to access up to $20,000 in savings from their superannuation so that they can weather the coronavirus storm:
“Labor is committed to continuing to work with the government so that this scheme is a success, but we fear that the government’s decision to drastically expand the conditions for early release of superannuation could cause liquidity issues that threaten the integrity of our super system for all Australians if they are not addressed”…
“While some self-managed super funds may have large cash holdings, many other funds do not have large cash holdings”…
As millions of Australians lose their job or a portion of their income, super funds would be receiving less incoming cash and this could leave them having to sell equity holdings to pay for the scheme, they warn, saying a “wait and see approach” was not appropriate as funds need to act immediately.
Labor has tacitly admitted that Australia’s superannuation system is a giant Ponzi scheme whose “integrity” is reliant on ever growing fund inflows via the mandated 9.5% superannuation guarantee.
Unless the amount of money coming in from new investors is enough to cover the redemptions of previous investors, Australia’s superannuation system will implode. This is because the level of one’s retirement income is dependent not just on the performance of the superannuation fund’s underlying investments, but also on whether they withdraw their savings while the “bubble” is still inflating with net inflows of new money.
These ponzi dynamics help to explain why Labor so strongly supports lifting the superannuation guarantee to 12%, since this will ensure that net superannuation inflows continue to rise even as more baby boomers retire and withdraw their savings.
Without the increase in the superannuation guarantee to 12%, fund outflows could exceed inflows, pulling money out of the system, deflating the bubble, and lowering everyone’s retirement nest eggs.
Already, we are witnessing the extraordinary situation whereby some funds, like HostPlus, have frozen redemptions citing a lack of liquidity. So basically, Hostplus has told its members that they are not allowed to withdraw their own money.
Thankfully, the chair of the Financial System Inquiry, David Murray, has warned the Morrison Government against bailing out the superannuation industry, claiming it would open up a ‘moral hazard’ and encourage funds to misbehave and take excessive risks with members’ money:
“Were they [the RBA] to provide liquidity they create a moral hazard in super system for the future and therefore they would have to consider whether the terms are suitably tough,” Mr Murray told The Australian.
“Where trustees accept as precedent that in certain circumstances they can have access to this support, that in turn would lead them to make risk management decisions which are likely to be counter to members’ interests,” he added…
Clearly, a business that is based upon the mandated flow of every member’s pay should not:
- refuse to give it back;
- refuse to keep the lion’s share in liquid assets; and/or
- run out of money.
The fact that we have arrived at this point is illustrative of both gross mismanagement and system failure.
Moreover, if some funds have gotten over-leveraged or invested too much in illiquid assets, then they should bite the bullet, sell assets, crystallise losses and fess up to members who will then judge them on their performance.
David Murray is 100% correct. Giving superannuation funds access to the RBA emergency liquidity support does not make sense and will encourage ongoing reckless behaviour.
Superannuation funds are not systemically important institutions. They are merely investment funds, some of whom misread the business cycle and regulatory risk, and over-extended themselves to feed fat bonuses.
Let market forces sort the wheat from the chaff and dictate where members place their money in the future.
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Aussie funds have yet another problem, whic is that their assets are often in non-AUD, while their liabilities are AUD. That could sound like not really a problem right now, with AUD tanking.
Except as the pension funds plan for withdrawals, they hedge. And those hedges are now costing them liquidity, which is costing them money, because they may have to liquidate more than expected to settle the collateral for the hedges (the hedges that are settling now don’t matter, as they just sell the assets they expected to sell, and cash the hedge).
Aussie is volatile, which is why the pension funds hedge in the first place, but their hedging strategies are often rather naive (as in ignoring the liquidity costs).
I respect Leith van Onselen, but in this case I think she is wrong. The Australian Government has just allowed workers who have been affected by the Covid19 downturn to access $10,000 of their super before 30 June. To date more than 600,000 contributors have taken up this offer. This means a $6 billion+ unexpected outflow that the super funds were not expecting on top of collapsing financial markets and a freezing over of long term capital markets.
The problem with Australia’s super scheme are many, but the main two are that it is market based and that it is a flat tax. This is currently 15% on contributions with 0% tax on withdrawal. One does not have to be Einstein to recognise that the scheme favours the rich and penalises those who earn below the taxable thresh-hold.
The weird thing is that as an income earner in the top tax bracket it is in my interest to still put the maximum $25,000 into my super, saving me $7,500 in tax (ceteris paribus) which is a 30% saving, and at my age I can withdraw whenever I like. I can also elect to be in cash or bonds, so no market exposure.
This is not even the most perverse incentive, current rules being extant that allow high-wealth individuals to claim a tax refund on company tax credits received purely because their super withdrawals are not counted as income. I recently had a long discussion with a superannuant in this position, pointing out that he was not self-funding, but relying on government largess to a far greater extent than myself. Stock market volatility has brought much of this undone, thank goodness.
I’ll just add a few notes. The present superannuation scheme is not the first one in Australia. At the end of WW2, a tax of sorts was added to worker’s pay packets and the idea was that this separate fund would go towards these workers pensions at the end of their working career. It even appeared on people’s pay dockets at the time. But then in 1950 these funds were consolidated into general revenue though the money was still being taken out of people’s pay-packets. Probably the money was siphoned off to pay for the Korean war at the time. I can tell you that when superannuation came in and all those older workers asked about those decades of paying taxes and the like, they were not amused when the government officials told them that they had nothing as all that money was spent and still owed the government for their future support..
When it came in, the deal was that workers would forego wage rises and the money would instead go into a super fund which was matched by employers. The amount was raised considerably in the 90s as it was explained that the baby boomers would create a massive swell of retirements as they came of age. There are a few aspects that I would mention. That article said that there was a “mandated 9.5% superannuation guarantee” but that is misleading. The guarantee is not that you will receive it but the actual guarantee is that you have to pay into it. Another aspect has arisen. Superannuation assets totaled $2.7 trillion at the end of the June 2018 and people have noted that our politicians are regarding all that money as their own personal honey-pot for their own white elephants now. For those who want to know a little bit more on the system in Oz, here is one article
https://en.wikipedia.org/wiki/Superannuation_in_Australia
Is this the same problem Picketty pointed out in his book ‘Capital in the Twenty First Century?’ The solution: Tax wealth enough to keep it from growing faster than the underlying productive (real) economy. https://hbr.org/2014/04/pikettys-capital-in-a-lot-less-than-696-pages
I have a problem with the idea of periodic debt jubilees as argued by Micheal Hudson, especially if individuals are allowed to keep any asset associated with their debt.
We already have bankruptcy rules which allows for managed debt cancellations while providing disincentives against abuse, such as keeping unpaid assets.
As someone who is extremely risk adverse, especially since my divorce, I’ve lived extremely frugally, not eating out and cooking all my meals at home, buying clothes from discount retailers (Winners, TJ Maxx, Ross, …). I also never owned a car until my 40s and never owned my any property until my mid-50s, and even this is a modest condo I paid for in cash.
As such, I have never had any debt for my entire life. I always pay my credit card in full before the end of the month, and received a partial scholarship at university which I supplemented with summer jobs.
And yet I see so many others including my peers living it up with wasteful lifestyles through debt, who eat better food, have nicer vacations, drive better cars, and live in better homes than I do. But these same people are living right on the edge and can’t afford any unplanned expenses.
Debt jubilees do nothing but reward wasteful behaviour while punishing those of us who are careful and frugal.
Note that the exception to this is debt from medical expenses, which should be cancelled since everyone should have access to single payer universal health care, single payer universal pharmacare (for medication), and paid sick days. No one should be penalised for getting sick or having an accident, and I am happy to have my taxes fund this.
You do not have that sort of bankruptcy regime in the US.
First, student debt is not cancellable in bankruptcy.
Second, Chapter 7 debt does allow all debts ex student debt to be eliminated after taking borrower cash (up to a certain small level), but you pretty much can’t BK if you have meaningful assets. Some states like FL do allow for a homestead exemption, your primary residence is outside the BK. Ditto retirement assets. But you have to have had below median income for your state.
The alternative is Chapter 13, where the borrow has to adhere to a 60 month repayment plan. That assumes steady income, which is out the window. So a person who had a sorta-kinda OK income and had Bad Shit happen (his or spousal loss of income as the trigger for or during the BK) is screwed. The 60 month repayment plans are draconian. Plus lenders regularly cheat and lie to the court about debt amounts, then hit the borrower right after the 60 months, when he by definition has absolutely no $ because that was the design of the BK. This is a fraud on the court and the borrower that happens all the time yet no one has come up with a mechanism to punish abusive creditors.
Third, did you miss 60% of the bankruptcies in the US are medical, either medical debt directly or income loss due to income reduction to contend with a serious medical condition?
Fourth, as someone who worked in finance, I have zero sympathy for creditors. Not only do they cheat all the time in bankruptcy and engage in incompetent and abusive loan servicing (which can lead to bogus bankruptcies due to not crediting borrow payments and pyramiding bogus fees into a BK(, the nature of lending is some loans go bad mainly due to the three Ds: death, divorce, disability (medical being included). If you suffer too many losses, it’s because you made too many lax loans.
Interest rates are set to compensate for loss risk. All borrowers are effectively paying the banks’ insurance premiums for expected loan losses.
The notion that there are lots of profligate borrowers who go by fancy TVs is false. Go read Elizabeth Warren’s Two Income Trap, where she went through the household spending of families who filed for bankruptcy for details. And that was in an economy with way way way more stable jobs than now.
Yves you make quite valid points about the situation in the USA only, but there are more civilised and less corrupt places in the world.
Here in Canada, we have single payer universal health care, and a majority of parliamentarians at the federal level elected in the last election ran on universal pharmacare. Unfortunately the current pandemic has delayed the pharmacare implementation nation wide, but we hope it will be implemented before the next election.
Separately after 7 years from leaving school, Canada allows student debt to be fully cancellable in bankruptcy.
I would also like to mention that in general, government programs which have the most public support are those which are beneficial to everyone. (Examples include universal healthcare in Canada or Medicare in the USA).
Debt jubilees which only benefit a few will not obtain critical public support needed for adoption. There are fairer and more effective ways to deal with the chronic systemic inequalities you mention.
A decent minimum wage, universal basic income income, universal health and pharmacare, and free public education including training are much better solutions.
Yikes! Being forced to shop at TJ Maxx! How awful!
But this isn’t about you or me – this is about the economy. Hudson is right when he says that debt that cannot be paid won’t be. That debt is going to drag us all down in the future – including YOU! So instead of thinking about yourself, think about what is going to happen next year or the next.
You might stop being so judgmental about others. What you see on the surface may not be what is going on in their lives.
I once got into debt because I moved somewhere to take a new job and the company that I got the job with collapsed after a couple of months so I had to live on my credit cards until I found a new job – and this was during a recession. I did go into some serious debt but would you have rather seen me and my children homeless? Of course, when I got a new job, I did pay that money back, including the 28% interest the credit card charged me. It wasn’t easy, but that does not mean I want other people to feel the pain I did at the time. And yes, I did take money out of my retirement account last year to pay off one of my children’s nastier student loans and no, I would not feel any envy if everyone’s student loans were immediately forgiven because I understand that we have to do something about the high levels of debt before it destroys us all.
Interesting to read that the people who want to judge/decide who is to get money are non-judgmental and the ones who argue that all should get the same are judgmental….
Why, in your opinion/judgment, should only part of the population get help and what criteria should be used when in a non-judgmental fashion deciding who is deserving and who is not deserving of help?
Perhaps because this isn’t about somebody getting some “goodie” that you are not. This is about saving the economy so that we all benefit. Is that such a hard concept to grasp?
I grasp your proposed concept of giving some people money and others nothing, the question is why you don’t want all to be helped equally and directly instead of favouring some over others.
Why don’t you want all to get the same amount?
Why do you want to exclude people from getting direct help?
one aspect to think about is:
if creditors know if they get too heavy handed with loans or make it too hard for people to pay off they will lose money. so it provides a disciplinary aspect to their lending due to the fear the state might feel the creditors are causing unnecessary burden to the economy.
It does rely on the state taking up a lot of the slack in money creation however.
“The fact that we have arrived at this point is illustrative of both gross mismanagement and system failure.
“Moreover, if some funds have gotten over-leveraged or invested too much in illiquid assets, then they should bite the bullet, sell assets, crystallise losses and fess up to members who will then judge them on their performance.”
We seldom get honesty like that. Most of these investment houses act like Donald Trump and never acknowledge mistakes or take responsibility.
I’m afraid I don’t understand the Australian superannuation system.
In Canada we have two streams: public and private.
Public: Canada/Quebec pension plan, linked to lifelong earnings; plus Old Age Security (OAS), linked to years of residence in Canada; and for some Guaranteed Income Security (GIS), a supplement to OAS for low income seniors. No withdawals are allowed for public plans.
Private: employment based plans, some defined benefit, some defined contribution; no withdrawals allowed; plus personal savings in Registered Retirement Savings Plans (RRSP) that are tax deductible going in but fully taxable when withdrawn. RRSPs can be withdrawn anytime regardless of age. I withdrew mine when I was 27 to fund a trip around the world. I saved the tax when it went in but paid none when it came out because my income was very low. I got some RRSPs later when I began working again.
I must say, I think this article is way off beam. I’ve got quite a bit of money in a big Australian super fund so if it’s a ponzi scheme, you might see me on a street corner one day with a hat. But, as I understand it, what has happened is that the Liberal Govt (which hates industry (public funds)) has changed the law so that clients of funds don’t have to wait until 60 to start taking out money. They have allowed them to take out $20,000 or so to help them over the coronavirus downturn. That is an historic change. It required legislation. No Australian government has ever weakened the not-before-sixty rule like that. Its not surprising that the funds (or, at least, the small funds) don’t have tens of billions of cash lying around to pay the $20,000 to whoever wants it. Indeed, they would be failing in their duty to their clients if they did. Further, they don’t want to liquidate fixed assets in a downturn and crystallise the loss of those clients and any other clients (who don’t take out the $20,000) who own a part of those assets. So, they want bridging finance from the Reserve Bank.
P.S. We just had a Royal Commission into the banking and superannuation industries. It was front page news for six months. The private funds got a hammering for conflicts of interest, etc etc The industry funds got a clean bill of health. Nobody even mentioned the word “ponzi”