How Your Superannuation is at the Mercy of the Government

The Reserve Bank of Australia is worried about getting caught financing a house price bubble. It’s shifted the policy stance on interest rates to ‘neutral’. That supposedly reduces the chances of further rate cuts in the foreseeable future.

The future isn’t foreseeable of course. So the central bankers just mistake the past for the future. Inflation and other economic indicators rose recently, reducing the need for future interest rate cuts. (Most people consider inflation to be a bad thing, but if you’re a central banker, it’s your job to create it.)

Foreseeing a different future from the same past, Joe Hockey didn’t appreciate the RBA’s policy change: ‘The central bank has been informed directly of Treasurer Joe Hockey’s displeasure, reports the Australian Financial Review.

The Treasury is worried about the Australian dollar, which is surging lately. That squeezes exporter’s profits, which kills jobs, which kills votes. (The fact that importers make more money and hire more people is never mentioned.)

The solution to both a high Aussie dollar and absurd house prices is of course a recession. But you’d be burned at the stake for saying it. By the way, we’ve discovered an early warning signal for when a housing bubble-triggered recession will hit Australia in The Money for Life Letter. More on that next week.

Any recession would sink the Aussie dollar. But we doubt it was what Treasurer Joe Hockey had in mind. It’s funny how a strong currency used to be seen as a good thing. Everyone complained about how high the Deutschmark was and envied the Germans for it. Now economics says a high currency is a bad thing.

So what’s changed? Perhaps it has something to do with the relative importance of jobs and consumption. In the end, human action as far as economics is concerned is about consumption. You wake up and go to work to put food on the table. You save and invest so that you can consume in the future.

Back in the old days, people understood this because it was literally a matter of putting food on the table. A strong currency meant more consumption for the same dollar. Going by the good old economics books, it meant more wine from Portugal, cheese from France and silk from China.

Today, consumption is all about signing up for the pre-approved credit card in your mailbox. There is no immediate constraint to consumption in a world of fiat money and unlimited credit. What’s important is finding the job that allows you to pay it off. Jobs, not currency strength, have become the key to consumption. Politicians understand this, so they listen to the economists who promise job creation. One of their crackpot theories says that a devalued currency will spur exports and create jobs.

So now a lower currency is better, which is why politicians and central bankers turn to inflation, the corollary of currency devaluation.

As we love to mention, all this manipulation has side effects. Only a few understand them. And one man is warning  what they’ll do to the price of your investments eventually.

Of course, it’s not just the RBA messing with our dollar. Foreign central banks move currency markets too. Money printing is now normal.

Then there’s the fact that the currency reacts to the economy, not just the other way around. Perhaps the high Australian dollar reflects our prosperity instead of interfering with it.

At least the two arms of government — the monetary and the fiscal — are at odds with each other. It keeps them from conspiring against you.

We spoke too soon. The Australian Institute has put out some research comparing the fiscal drag of the pension versus Superannuation tax concessions. In other words, how much the pension costs the government in terms of outflows versus how much Super’s 15% tax rate costs it in terms of lost tax revenue.

The conclusion is that Super tax concessions will soon cost the government more in lost revenue than the pension will in spending.

The great thing about this research is how everyone can see their favourite topic of discussion woven into it. Everyone can argue and debate all day long without any sort of prospect for resolution or compromise, because nobody is on the same playing field.

For the fiscal conservative, the debate is all about the budget surplus. Debt is bad, as Europe is demonstrating. Some fiscal conservatives say increased taxes or reduced tax concessions will solve the problem by generating more revenue and less outflows. Others say reduced taxes and increased concessions will increase prosperity and tax revenue in the long run. It’s the same contradictory views on the government spending side. Sometimes spending money costs money. Sometimes it creates more prosperity than it costs. Not to mention the inherent contradiction in the words ‘fiscal conservative’.

For the Marxist, the super and pension debate is all about inequality. Super tax concessions overwhelmingly favour the rich. Richard Denniss in The Australian Financial Review sums up the data: ‘Treasury also estimates that about 30 per cent of the benefit of [Super] tax concessions goes to the top 5 per cent of income earners. Indeed, the top 1 per cent of income earners gets three times as much benefit in the form of their superannuation tax concessions than they would have ever received from the age pension.

Yes, paying a high rate of tax on your income means you get a bigger break when you pay an equal rate of tax as everyone else. In other words, equal tax rates are ‘inequitable’. Hmm.

We also have to wonder how many peoples’ pensions those top 1% of income earners support with their income tax.

For us the pension and Superannuation crisis is all about demographics and ageing. It doesn’t really matter terribly much what government policy will be. Whether the baby boomers crash financial markets by selling all their assets without enough people to buy them, or bankrupt the government by relying on pensions without enough taxpayers, or both, we’re in trouble either way.

Here’s the interesting bit from Denniss’ article: ‘Every $1 billion extra we spend on tax concessions for super saves less than $200 million off the age pension budget.’ We’re not sure about tax concessions being ‘spendable’. And it’s impossible to calculate the figure quoted because you can’t know the ‘counterfactual’ — what would’ve happened without the super system. But it is obvious you won’t recoup savings in the age pension by letting people save in super. After all, it’s part of a financial advisor’s training to ensure their client somehow receives pension funds.

What seems to get lost is that it’s all the meddling which created the problem in the first place. First the problem was a lack of retirement savings pushing the pension costs too high. The solution was to create the Superannuation system. Now the problem is the loss of tax revenue in Super. So the politicians will have to solve the new problem their last solution created. And then they’ll need a new solution for that problem. This is why the politicians and their bureaucrats are the only ones who consistently win in the end.

But at some point, all the government’s solutions and problems begin to dominate the rest of the economy. With a shrinking pie, it’s no surprise everyone begins to fight over their share. The poor want money from the rich. The rich want to make more money but have to turn to crony methods. The politicians are the intermediary, taxing and creating crony businesses like the Super industry.

The only real solution is to stop the government from solving problems. Or come up with your own solutions.

For now, we’re stuck with the Super system and the pension. And at the mercy of those governing them. As the Retirement Panel Discussion at World War D showed nicely, this leaves us all with tough decisions.

But the predictions and questions which came up at the panel have become relevant faster than any of us expected. The politicians are about to stage a raid on your Super. The journalists are testing the water with Marxist and fiscal conservative arguments. The budget is coming.

Of course, it will be a slow gradual grab. But the final resolution is quite clear. Once demographic issues get out of hand, the super funds you’ve been saving away to take advantage of tax savings insider the super system will only be made available to you as part of the pension system. Those with a pension supported by their own savings might receive a higher fortnightly payment, but you still won’t own or control your own money.

If you’re relying on your super, you’re already in the trap. The campaign for springing it has begun.


Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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