Superannuation and the public purpose

This issue of Dissent has two contributions on superannuation. In his article Super for Some, John Legge raises the issue of privatization of retirement incomes. Is it not strange that we cannot afford a universal tax funded pension, but we can afford a more costly private scheme which will progressively take its place? Louise Sylvan, in her article Superannuation - Brilliant System or Consumer Rip-off? shows how people's retirement accumulations are being severely reduced by high fees and charges.

The questions raised in these articles should have been the topic of public debate when the Hawke government introduced compulsory superannuation in 1986. Like many government policy initiatives, it was a pragmatic response to an immediate set of problems. Inflation was high, the government was committed to maintaining real incomes, savings were falling, and the government did not want to add to demand-pull inflation by indexing incomes further. In a deal, stitched together between Treasurer Paul Keating and the ACTU's Bill Kelty, a six percent indexation pay rise was split 50-50 - three percent in cash, three percent in occupational superannuation.

The program has proven durable. The levy has risen to nine percent, many technical problems have been solved, bipartisan support has been demonstrated with the change of government in 1996, and there are various suggestions of how the scheme may be extended - for example to have an extra surcharge to provide insurance for workers' entitlements.

As workers' superannuation balances accumulated, the success of the scheme became evident, helped, in large part, by spectacular stockmarket performance over the nineties. From 1990 to 2000 the All Ordinaries index steadily rose, to double over the decade. Even blue chip shares saw spectacular growth - $10 000 invested in the Commonwealth Bank when it was floated in 1991 would be worth $50 000 by 2000. Property prices boomed, particularly in the capital cities. Even Pooh Bear could have done well over the decade.

The nineties were unusual, in three aspects. One was a steady fall in long-term bond rates as fears of inflation subsided. Such falls are rare events; the previous sustained fall was between 1920 and 1930. Another was a large number of privatizations and de-mutualizations, often pitched, politically, at low prices. (The political gain from undervaluing privatization share issues more than offsets the political odium from stripping public assets.) And another was the tremendous boost in funds coming into capital markets from the superannuation industry itself. Few industries have such an opportunity to create the conditions for their own success.

This run of good fortune has masked underlying problems - problems which should have been anticipated in 1986. Many Australian workers will have been dismayed at the poor superannuation returns over the last twelve months. Some have been devastated by the failure of superannuation funds. The superannuation industry rightly points out that failures in 2001 amount to only 0.004 percent of funds invested in the industry, but to those affected it amounts to 100 percent of their superannuation investment. And for every outright failure there will be many funds with lifetime poor performance. The Australian Consumers' Association modelling suggests that a plus or minus one percent variation in lifetime fund earning can make the difference between luxury and poverty in retirement. Privatization of retirement income is throwing risk back at those least able to hedge against it.

In the wider financial markets there is an air of unease and uncertainty as corporate giants collapse - HIH, OneTel, Ansett, Pasminco. In many instances what looked like strong corporate performance in the 1990s is now seen to be illusory. In many firms generation of impressive financial statements took the place of sustained wealth generation. While capital markets were hungry for good performance results, there was no shortage of firms willing to do whatever it took to provide them.

It is not difficult to generate impressive results, for a few years at least. There are many instruments in the accountant's toolkit. Sale and leaseback of assets will improve the look of a balance sheet (while incurring usurious effective interest rates but that's a problem for later on). Cutting back on maintenance, training, research and similar expenses can always help the profit and loss statement along (for a year or two). Setting high hurdle rates for new investments - some as high as 18 percent are in use - are effective in making sure that the corporate focus is kept squarely on short term performance rather than long term viability. High dividend payouts and capital returns to shareholders are always much sweeter for capital markets than re-investment in productive assets. Corporate acquisitions are much easier and more fun than the hard slog of wealth creation. And to keep the market focussed on the short term, the Commonwealth in 1999 passed the Ralph "reforms" to capital gains tax, which give concessional tax treatment to speculation while taxing the illusory inflationary gains of capital stable businesses. Unless there is substantial reform of financial markets they are unlikely to provide many opportunities for long term investors - the sort of investors Australians would like their fund managers to be.

As Louise Sylvan points out, the financial sector has profited handsomely from superannuation. She shows the impact of fees and charges, and the combined effect of superannuation and mortgage commitments - people are lending with one hand in the form of superannuation and borrowing with the other in the form of mortgages. In the process the financial sector does very well.

This is not the only way the financial sector benefits. It is becoming evident that superannuation has displaced other forms of saving. Household savings, which were about ten percent of disposable income in 1986, are now almost zero - the displacement has been almost complete. This is not simply a benign exchange of one saving instrument for another, for superannuation savings are inaccessible. People without an accessible reserve of savings are vulnerable. A car accident, loss of employment, illness, emergency repairs hover over us all as risks. With some accessible reserves we can handle these from our own resources, but without them the only option is to insure to the hilt; again the financial sector benefits. And one had better be compliant at work - walking out and telling the boss what to do with his job, or joining a two week strike, is not very attractive when one has no buffer of savings. Few people are able to make major purchases, such as cars, with cash - yet again the financial sector benefits through consumer loans. In spite of rhetoric to the contrary, the government discourages savings - welfare payments and services such as legal aid have savage spend-down provisions, and there is a 30 percent penalty imposed on those who save for their own health care contingencies without insurance. If a government had deliberately designed a set of policies to impose corporate feudalism on the Australian workforce, it could hardly have done better.

While the most obvious macroeconomic impact of compulsory superannuation has been to increase the burden of society's overheads - specifically the financial sector - it has also contributed to other economic distortions. Australia is facing a severe infrastructure deficit. Those who were caught out by the Ansett collapse may have discovered that the train from Sydney to Canberra has an average speed of 60 kph, or that the main road between Melbourne and Sydney still has a 160 km horror stretch of two narrow lanes. The Institution of Engineers has estimated that there is a deficit of $20 billion on our national surface transport, and a $120 billion deficit on other less visible infrastructure - water supply and environmental protection in particular. These sound high figures, but to put them into perspective they are modest compared with the $500 billion invested in superannuation.

Infrastructure, particularly when it has public good characteristics, is not an attractive private investment. While there are returns to the community, those returns do not accrue to the immediate investor. For that reason infrastructure, if not publicly funded, tends not to be provided at all. (Sometimes, with heavy subsidies and high transaction costs, it is possible to entice the private sector to invest in railroads or toll roads, but these arrangements are very limited in scope and they lead to severe economic misallocations.) While superannuation funds are in the hands of private investors we cannot reasonably expect them to be turned to this important task of nation-building (or reconstruction, given the deterioration in our physical assets over the last twenty five years). Australian governments, particularly the Coalition, have been running down public investment to make way for private investment, without appreciating the limits of private investment and complementarity of private and public investment.

Compulsory superannuation seemed like a good idea in 1986, but its shortcomings are now coming to light. Few would dispute the need for a nation to have a retirement savings policy, but is compulsory superannuation the best way; should workers' savings be channelled into a private financial market characterized by a short term culture and unable to finance investment in important, productive national assets? This is the public debate we should have had in 1986; it is not too late to hold it now.