Labor Admits Superannuation Is a Ponzi Scheme
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.