Super elephant in the hearing room

The biggest, heaviest, fattest elephant was in the Royal Commission hearing room.  But sadly, it was not seen or named.

The most offensive and egregious behaviours that were identified by the Hayne Royal Commission happen in other countries and other jurisdictions.  The ones related to financial planning and wealth management.  But why is it that they are systemic and institutional in Australia?  Why was that question not asked or considered?

Because it would challenge faith in the biggest economic sham in Australia, bigger than the need for Australia to commit economic suicide by, independently of any other country, ratcheting up the cost of energy.  That economic sham being compulsory superannuation.  Not superannuation, but compulsory superannuation.

As was eloquently written this morning in the Oz by Judith Sloan and equally eloquently written previously by Adam Creighton, the costs of compulsory superannuation exceeds the benefits.  Especially for low income workers.  Paul Keating can bleat and blubber all he likes.  The evidence is not on his side.  So much for fact based policy.

But for as long as you have a sector of the economy that benefits directly or indirectly from the giant flows of super monies, no matter how badly they perform, no matter how badly they behave, no matter how poorly they treat their customers, then you get what you paid for.

Sprinkle in a regulatory regime designed to create a compliance state, the Australian Financial Services Licence regime (thank you Mr Howard, Mr Costello and Mr Hockey – Financial Services Reform Act of 2001) and you get an industry that is disconnected from its customers benefiting from a licencing regime that provides a false halo as to both the quality of the service provider and the ability of the regulator to oversee it.  And again, you get what you paid for.

Compulsory superannuation plus financial services licencing has delivered an industry with HUGE HUGE HUGE returns to scale and guaranteed business flows, requiring amongst other things, independent financial planners to consolidate thus creating distance between customers and executives (see bank case studies).  None of the bank executives or director actually had to lower themselves to look into the eyes of the people from whom they were stealing.

Much like the global financial crisis, those with a bias to state intervention and regulatory reaction will blame the market and capitalism for this mess.  And much like the global financial crisis, they will be wrong because this mess was created by poorly designed and poorly implemented regulation.  Regulation that has not benefited customers and investors, but has benefited the armies of accountants, lawyers, compliance officers and regulators.  Not to mention the tax collectors and and not to mention the lower quality end of the financial planning industry who, without compulsory superannuation would otherwise be selling used cars.  Or running for parliament.

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30 Responses to Super elephant in the hearing room

  1. Pyrmonter

    Indeed.

    Add as a coda: the political economy of super is vicious: Labor (and the Greens) profit from the industry funds; the supine exponents of market liberalism (cough, cough) on the right have been duchessed by the private funds, when they themselves have not been employed by the managers.

    Howard and Costello could have cured this; in yet another example of their pusillanimity (Medicare, education …) they barely touched the field, and when they did they allowed the ‘Financial Planners’ to carve out rents for their supposed ‘advice’.

  2. stackja

    Super Paul? Helping mates?

  3. Peter K

    Basel 2 and cheap housing policies in the US led to the GFC (with a lot of help from greed, which you have to take as a given, and complex securitised loan products put the person who sold the dud loan many links in the chain away from the person supposed to receive the benefit of the income stream from the loan).

    How can the rivers of gold feeding into our financial sector from compuslory super not cause distortions in the stock market, the value of licensed trustee groups, and who would expect those things not to combine with factors like greed and complexity?

  4. https://australianactuary.com/2017/06/18/relief-for-the-lower-paid-requires-relaxing-the-superannuation-guarantee-rules-not-tightening-them/

    and many other pieces, ad nauseum. the best recommendation for the super side that Commisioner Hayne could have made: abolish compulsory superannuation. Hey, I work in this sector!

  5. vlad

    Paul Keating can bleat and blubber all he likes. The evidence is not on his side.

    That’s never stopped him any other time.

  6. max

    Compulsory superannuation has been an absolute honeypot for institutions — industry and retail funds alike.

    A recent study by University of NSW economist Nicholas Morris estimated the financial industry had extracted around $700 billion in fees from the national savings pool since 1992, when compulsory superannuation was introduced.
    ‘Given the total pool is now worth just over $2.6 trillion, that’s an extraordinary proportion — almost a quarter.’
    Obviously, people have to be paid for services.
    Administration. Trustee. Funds management. Provision of advice.
    And, don’t forget the marketing budgets.
    The question is ‘how much is reasonable and how much is too much?’
    And that’s subjective.
    It depends on the services offered, performance delivered (in accordance with individual risk profiles) and the size of the account balance.
    https://www.marketsandmoney.com.au/self-managed-super-or-not/2018/10/22/

  7. C.L.

    The biggest, heaviest, fattest elephant was in the Royal Commission hearing room.

    Give me his name.

  8. RobK

    Thanks for that link David. A good read.

  9. David Brewer

    Well, yes, it does make you sick that so much has been creamed off by union hacks, financial planners, advisors etc.

    And no doubt the regulation is poorly designed; it always is.

    Still, what exactly do we do about it? Abolish compulsory super? OK, but who picks up the tab for the resulting massive increase in use of the age pension in 20 or 30 years’ time?

    Yes, I know lower income earners get slugged 15% on their compulsory super, like the rest of us. But they also get free cash to put into their super. And yes, if they pile up enough it will reduce their age pension entitlements. But they will still be better off than if they had nothing but the pension, and the pension is not just some magic money tree, it has to be paid for out of current taxes, and the more it costs the more those taxes will be.

    I also know there is a huge churn of low-value or no-value administration, advice, and shuffling going on. But does it have to be? Can’t workers just nominate a super fund, have all their super in that fund no matter what jobs they have, and end up paying very modest fees on what will eventually be large nest-eggs?

    And don’t forget the point of super, which is to generate a real return. A decent balanced fund should beat inflation by at least 3% over the long run (i.e., 30 to 40 years), even with fees deducted. That’s a lot better in principle than having workers save nothing and then rely on the government to tax the hell out of future taxpayers to pay age pensions to what might eventually be 25% of the population.

  10. Entropy

    Still, what exactly do we do about it? Abolish compulsory super? OK, but who picks up the tab for the resulting massive increase in use of the age pension in 20 or 30 years’ time?

    Mr Brewer, that is the point. The irony is most people end up on the pension anyway. Like four out of five. We might as well be honest about it.

  11. Mark M

    Too big to fail and too big to go to jail.

    I don’t want any of my wages placed in any of the these unaccountable banks before I get it.

    Where is my choice?

  12. Ƶĩppʯ (ȊꞪꞨV)

    wrong fred

  13. Terry

    “wrong fred”

    Or was it?

    How long before a similar punishment is dished out to failed politicians for doing exactly the same thing to our economy?

    Now, where’s my yellow vest and pitchfork?

  14. Iampeter

    Super elephant in the hearing room

    Yea that’s what it is. Super. The source of all our problems. You’ve figured it out. If only we’d listened.

    Much like the global financial crisis, those with a bias to state intervention and regulatory reaction will blame the market and capitalism for this mess.

    You mean people like you, who openly call capitalism Utopian and support socialism?

  15. Tel

    Mr Brewer, that is the point. The irony is most people end up on the pension anyway. Like four out of five. We might as well be honest about it.

    And pissing away their money today in fees and regulatory crap, does not magically make the pension any more affordable for taxpayers in the future. Pretending that we have industry when most of the effort goes into circular tail chasing does not make Australia competitive.

    The only good thing I will say about our system is that the USA has a worse system with totally centralized Social Security and when that thing blows, the shockwave will be staggering.

  16. Biota

    The existence of compulsory super has also contributed to (and will prolong) our power price debacle with some funds heavy investment in ruinables.

  17. Tel

    Can’t workers just nominate a super fund, have all their super in that fund no matter what jobs they have, and end up paying very modest fees on what will eventually be large nest-eggs?

    No. There is no such thing as a risk-free investment … but worse than that … there is not even a safe place for parking wealth in any shape or form. Wealth that can be accumulated without attracting the attention of those who would snatch, grab and/or sneak a share. These pilferers will include a mix of public and private agents, but they will surely come and keep coming. Envy politics guarantees this … and human nature is unlikely to change.

    The only answer is for people to each keep an eye out, same as you remember to lock your car. The moment someone tells you not to worry, it’s all running nicely, nothing to see here … you can be 100% sure it’s a scam.

  18. David Brewer

    Some estimates about the long-term effects on the pension of compulsory super:

    As the superannuation system matures and people accumulate more superannuation assets over their life, the projected proportion of the eligible population receiving the Age Pension will fall.

    Graph 7 shows that the proportion of the eligible population receiving the Age Pension will fall from around 69% in 2017 to around 56.6% in 2038. This fall is comprised of a significant fall in the proportion of the eligible population receiving the full rate of Age Pension (from 51.0% in 2017 to 29.1% in 2038) and a relatively smaller increase in the proportion of the population receiving a part-rate Age Pension (from around 18.0% in 2017 to 27.5% in 2037).

    Same trend but slightly different figures: the Audit Commission projects that the percentage on a full pension will have fallen from a peak of 60 per cent in 2009 to 30 per cent in 2050.

    This won’t happen unless super remains compulsory. I don’t like it either, but as long as the age pension exists, the choice is only between compulsory super and compulsory increased taxes to fund pensions for many more old people who have not provided for themselves.

  19. John Bayley

    Not defending the compulsory super clusterf*ck, but spare some thought to just how much the same could be said about just any sector one wants to look at.
    To give just two examples:
    How much is spent every year on accountants helping us arrange our affairs so as to navigate the byzantine tax system?
    How much is spent by small to medium sized businesses on keeping up, and complying with, the ever growing pile of regulations?
    Is either of the above productive in any way?
    Does it add to overall wealth?
    Note that one of the recommendations of the Hayne report is to create another regulatory layer – to ‘oversee APRA & ASIC’.
    We have learned nothing and I fear only a total collapse of the system will cure the disease.

  20. John Bayley

    @David Brewer:

    OK, but who picks up the tab for the resulting massive increase in use of the age pension in 20 or 30 years’ time?

    David, the sad truth is that superannuation has singularly failed to make any real dent into future expected Age Pension eligibility of the vast majority of Australians.
    The recent changes to the Assets Test and other distortions the system continues to produce have made it even more sensible for those who are not poor enough to get everything from Centrelink and not rich enough to not care – i.e. the semi-independent centre – to spend up big at the start of retirement so as to qualify for the Age Pension.
    You’re better off with some $400K in savings, $2M home and the almost full Centrelink pension than having $850K, smaller home and no Centrelink.
    Yes, the politicians – Liberals in this case, but who’s surprised – really are that stupid.

  21. Zatara

    The only good thing I will say about our system is that the USA has a worse system with totally centralized Social Security and when that thing blows, the shockwave will be staggering.

    Comparing the Oz and the US retirement/pension systems is not an easy task as they don’t quite match up.

    US Social Security is a tax paid by all workers to provide for people who are disabled, lazy, or are too stupid to save for retirement. Yes, everyone who paid in is eligible to get some back. But those in the middle class and above will have paid in much more than they could ever pray to get back.

    Yes, it’s a bomb waiting to go off because the Congress can’t keep their greedy mitts out of the pot of gold to bail themselves out when cash strapped. Thus it is badly underfunded. Is it a ponzi scheme? Of course it is. Any govt program providing money for nothing is. But had Congress kept their hands out of the till, hadn’t passed various legislation enabling rorting, and properly invested/managed the funds it would be doing fine.

    In short, any US worker depending on Social Security to fund their retirement is a fool. It might still be there and it might not. That’s why the voters insisted on more options that the govt couldn’t get their hands on and fark up.

    So now Yanks who actually give a damn about saving for retirement have tax deferred IRAs, 401Ks, etc. which they can self direct to varying degrees and deposit in numerous savings/investing instruments. IRAs are individual accounts in every way. Self funded, self directed, etc.. 401Ks are company provided plans and generally feature the company matching the contributions of their workers as an incentive and several options for investment of the money. The accounts have very low maintenance fees and the govt gets none of it until they begin to pay out at retirement, and then it is paid at taxable income rates.

    Some data points on US retirement programs from this article:
    – One hundred percent of workers have Individual Retirement Account plans available to them.
    – Fifty-seven percent of workers have a retirement plan (401K, etc) available to them through their job.
    – Ninety-one percent of workers who have access to a workplace retirement plan are using it to save.
    – Middle-income households with access to a 401(k) have 30 times as much in retirement savings compared to workers who don’t have a plan through their employer.
    – The average 401(k) balance reached $97,700 in the second quarter of 2017.
    – Twenty-one percent of workers still don’t contribute enough to their employer’s plan to get the company matching contribution.
    – Over 43 million households owned an individual retirement account in 2016.
    – Thirty-five percent of households contributed to traditional IRAs, while 36 percent contributed to Roth IRAs.
    – Twenty percent contributed to more than one type of IRA, while nine percent contributed to a SEP or SIMPLE IRA.
    – The average IRA balance reached $100,200 in the second quarter of 2017.
    – Twenty-one percent of savers who have an IRA make maxing out the annual contribution limit to their plan a priority (As of 2017 you could save up to $5,500 annually in an IRA, with an extra $1,000 in savings allowed if you’re 50 or older).
    – Fifty-five percent of Americans save for retirement with a regular savings account. Sixty-three percent of millennials prefer cash to stocks or mutual funds for retirement savings.
    – If you’re eligible to contribute to a Roth IRA, you could withdraw that money tax free in retirement. A traditional IRA, by comparison, would offer tax-deductible contributions.

  22. Eyrie

    “The only good thing I will say about our system is that the USA has a worse system with totally centralized Social Security and when that thing blows, the shockwave will be staggering.”
    Even worse I believe in the US the worker’s retirement funds are on the books of large companies. Isn’t that how GM went bust?
    The shock when these go bust is also huge.

  23. Fat Tony

    Anyone know how much super money is going into “renewables”?

  24. Zatara

    Eyrie, as I understand it two possible situations exist regarding what you suggested about US worker retirement.

    Pension Plan = Retirement pay from the company you worked for
    Retirement Plan = Distributions from your retirement investments

    There are US companies which still offer the traditional sorts of pension plans which pay retirement stipends and those are indeed susceptible to the success or failure of the company as the income derived is purely dependent on the solvency of the company rather than a return on money invested elsewhere. This is the situation you described as worker’s retirement funds being on the books of companies.

    On the other hand, the norm now is companies which offer a 401K retirement plan*. Workers contribute X amount of their pay and the company will match some percentage of that contribution. These plans contain various investment options from savings accounts to stocks, bonds, etc. Unless the worker falls into the trap of selecting discounted company stock as an investment of his plan then no, the 401K is not dependent on the company as the money is invested completely separately.

    A wise lady once told me “Trust nobody to properly manage your retirement funds but you. Being dependent on the company for your salary is risky enough, keep your retirement money under your own mattress.” Keeping that in mind, I once worked for a US corporation which often offered stock to its employees at a 50% discount as part of its “retirement plan”. I would buy them by the bushel and promptly sell them on at full value when the restrictions had passed.

    Bottom line, in the US system in general you aren’t trapped into having your retirement dependent on the success or failure of a company unless you want to.

    * Some companies can, and do, offer both pensions and 401Ks which the worker can participate in simultaneously.

  25. Biota

    Anyone know how much super money is going into “renewables”?

    It’s a many-headed monster. Just do a DuckDuckGo search on renewables superannaution to get a feel for it.

  26. Fat Tony

    Biota
    #2925784, posted on February 5, 2019 at 10:31 am
    Anyone know how much super money is going into “renewables”?

    It’s a many-headed monster. Just do a DuckDuckGo search on renewables superannaution to get a feel for it.

    Just had a quick look. The heading below sums it up pretty well:

    Australia’s super nest-egg could deliver 100% renewables by 2030 …

    So much for the super funds….

  27. Diogenes

    nyone know how much super money is going into “renewables”?

    I want to find an “unethical” fund that does not invest in renewables(they all do) , and invests in coal miners, armaments and tobacco. No fund does, and then the funds that don’t have an even more “socially responsible” fund.

    I want a fund that actively manages its own money & doesn’t employ others to do it

    I want a fund that doesn’t see its responsibility do “good” in the community and pee my money up the wall by giving its staff “community volunteer” days (not referring o SES or CFA here, but taking a day to work in homeless shelter) or scholarships, or breast cancer walks, or …

    And then … I am finally at that point in my life where I don’t have a mortgage, and have a small inheritance to invest, with the stupid f…ing libs bowing to ALP pressure to cap how much I can put in my super at a decent tax rate, I can’t redirect what were my mortgage payments into super. Only 7 years 6 months and 10 days till I draw a pension. In the meantime , the house is being renovated, so that when I do retire, it will require minor maintenance, and taking LWOP to go on holidays. thus “electricity Bill” will have less to loot !

  28. Tel

    Isn’t that how GM went bust?

    Yes, and a number of cities too like Detroit going bankrupt under the weight of ridiculous pension promises.

  29. Superannuation is another passive battleground which we do not need to have. I remember reading an article quoting Paul Keating the objective of compulsory super was to get capital in to union hands – the industry funds and there fore greater control of the finance industry and how this money is controlled by government. The result is the industry funds pay no tax as they are a charity and will be allowed to offset the franking credits against their income, retail funds will be able to do the same but SMSF will be unable to do this.

    Real super reform will require the constitutionally protected super funds to pay tax on members contributions when they hit the funds bank account. This concession adds 15% to the returns year in and year out, the compound effect of this staggering.

    Further govt employees are paid 14.5 to 17.5 super contributions where as private industry is to contribute 9.5% at present. Notice also the caps for individuals to $25k for deductible contributions and $100k for non deductible contributions.

    Finally notice how govt employee wages have been increasing each year with award wages while business owners and non award employees have not had wages increase and had their hours reduced. The result is the young are pouring into government jobs.

    SMSF provide the best vehicle to own a rental property. I have had instances where people will own their rental property outright before they pay out their homes. Rather than taking 30 yrs to pay off a home loan it could be between 21 year and fastest I have seen it 9 years. Of course the banks did not like this borrowing so there was a 40% penalty applied to the interest rate, 7% instead of 5% because its complicated. Further a law firm which had three of the big 4 banks as clients put forward the spurious argument that you need to have another company and trust for a SMSF if there is borrowed money involved.

    So there you have it, how govt does not want you to get ahead with regulation after regulation after regulation.

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