A Super Sense of Entitlement

Good news, everyone. After the national security hotline ignored 18 calls about Sydney Lindt Café killer, Man Monis, Tony Abbott is now tightening up Australia’s Terrorism laws. I feel safer already.

Never underestimate a politicians’ desperation when their job is on the line. Abbott is now using that old chestnut, fear, to push for more laws aimed at reducing individual liberty.

I know, I know. We need protection against the ‘terrorists’. Well, a good start on that front would be not to get involved in their wars in the first place. Australians are at much greater risk because of our troops on the ground in Afghanistan and Iraq.

It’s a war we have no place in. We can still maintain our alliance with the US without fighting in their wars. This is the root cause of increasing societal fears and more laws reducing our freedoms.

But let’s get back to The Markets and Money’s beat…which is money.

Greece, apparently, has given in to their creditors by agreeing to a four month extension of the bailout program. But they must submit a list of economic reform proposals to secure the extension.

This ‘resolution’ sent stocks surging to another new high at the end of last week. Don’t be fooled though, the Greek saga is only just getting started. The problem will be with us for many more months…

Meanwhile, recent discussions here in The Daily Reckoning are gaining more airplay in the media.

Last week I brought up the topic of the aged pension. Specifically, how is it sustainable for Australia in the context of a structural decline in budget revenues?

By that I mean the commodity boom is over, and the income from the boom that the government has relied on for years is not coming back. This revenue decline is structural, not cyclical.

And on the expense side of the ledger, increases are structural too, based on an ageing population and an inefficient tax system.

Even Joe Hockey admits it. He’s trying to prepare the electorate for a conversation it doesn’t want to have. According to David Murray, author of the inquiry into Australia’s financial system, most Australians don’t think there’s anything to talk about. What’s the problem, they ask?

Hockey sees the problem coming at him like a steam train. He will use the forthcoming Intergenerational Report, due out in a couple of weeks, to try and kick the conversation off. According to Friday’s Sydney Morning Herald, he’s not starting off with pleasantries:

In a blunt warning ahead of the release of the report in the coming weeks, Mr Hockey said Australia faced a downward spiral of rising debt levels and ballooning interest repayments that would break the “compact between generations” of Australians.

In a speech to the NSW business chamber, Mr Hockey promised a “genuine community conversation” about the demographic challenges facing Australia’s ageing population and the threat of lower economic growth without reform.

-Reiterating a point I made last week, Hockey says the report points out that over the next decade alone, the working population will increase by just 12%, while those aged 65 or older will increase 36%!

That, dear reader, is a scary statistic. Something has to give.

But what!

Barry Cassidy, host of the ABC’s Insiders program, made it clear yesterday that there isn’t much on the table. Referring to the government’s refusal to think about including the family home as part of the assets test for pension eligibility, Cassidy said:

Ok, so you don’t do anything about that. No changes to the GST, no changes to penalty rates, no changes to superannuation benefits, they don’t touch negative gearing…where do they go?

This is what happens when you’ve had it so good for so long. When you use the fruits of structural reform and then a fortuitous commodity boom to shower benefits on the electorate, you do two things…

You create a sense of entitlement at the personal level and a national standard of living that is beyond the ability of the country to pay for at the macro level.

The problem with trying to fix things at the macro level is that someone or some group has to pay for it. When this group has a built up sense of entitlement, trying to get them to give up their benefits won’t be easy.

This is a political problem as much as an economic one. So far, it looks like tax perks for superannuation might be the politically easiest reform to take on. The Financial Review reports this morning that:

Almost 300,000 households are sitting on superannuation balances worth more than $1 million, the level where generous tax breaks could start to be wound back, experts say.

Aussie Home Loans founder John Symond told The Australian Financial Review he was concerned that well-off, well-paid Australians were at risk of “milking the cow dry”.

“When the economy is doing it tough and the government has to try to make money spread, putting a cap on certain benefits is something that should be looked at,” Mr Symond said.

That Aussie John says super concessions are ‘milking the cow dry’ is laughable. The soaring price of residential property is milking the productivity of the nation dry. Phil Anderson at Cycles, Trends and Forecasts  says that the productivity of a nation is capitalised into land prices.

That’s true. The income boom from China’s demand for commodities has gone straight into Australia’s land prices. But we’ve also leveraged this income boost with a healthy increase in debt…which has also gone into land prices.

This represents a huge cost to the economy, because the national cost base needs to adjust higher to ‘pay for’ increased land costs. To show you what I mean, Nick Hubble — obviously bored by the weather on the not so sunny Sunshine Coast — sent the following chart to me over the weekend:

 

It shows that Australia now has the highest manufacturing costs in the world. Compared to 2004, when the commodity boom got underway, we have really blown our cost base out. (Check out Brazil, the other ‘beneficiary’ of China’s boom. Clearly, the manufacturing industry in both countries had to make way for the mining sector, by pricing itself out of existence.)

Getting back to Aussie John’s self-serving comments. Tax breaks for superannuation contributions might favour the wealthy, and it makes sense to put a threshold on the amount of contributions that qualify for tax concessions.

But super is about encouraging people to save for their retirement so they don’t have to rely on the pension in later years. We don’t want a situation where people have to plough all of their capital into property at the expense of saving liquid funds for retirement.

So curb the generous tax treatment of super by all means. But it can’t be a one-off reform just because it’s politically easy. Real reform needs to include a whole bunch of stuff, all aimed at increasing the nation’s productivity.

While on the topic of pensions, a reader had a go at me for not having a go at generous public service pensions. Fair enough. So to finish off today, I’ll hand it over to a dear reader…

I read your piece about the pension today, but what always strikes me, is how nobody ever seems to attack the pensions of public servants.

As you are no doubt aware, Australia has massive unfunded liabilities in the form of defined benefit schemes (ie pensions) to those good for nothing public servants at every level of government.

Explain to me how it’s fair that people who worked in the private sector get a pittance of an aged pension, while public servants get something like 80 percent of their final salary for life once they retire? It’s highway robbery. Remember, these pensions are not funded, which is why the Future Fund was set up, although it’s probably too little too late. If there’s to be negotiations, it needs to be across the board, but public servants need to take a massive haircut on the promises made to them.

Australia proudly proclaims its fairness, but there is nothing fair about public servants riding the taxpayer gravy train.

For example, why don’t you scan the employment section sometime and look at the super contributions public servants get. They range anywhere from 12-17.5 percent. Yet anyone in the private sector only gets the minimum 9 percent. So, how about we cut public servants super contributions to 9 percent, it would save a fortune.

Greg Canavan,
for Markets and Money

 

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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