When Nobody is Responsible for Your Retirement

The law of unintended consequences is economics’ version of karma. It regularly clips politicians round the ears. But usually they’ve retired by the time it bites the true victims — you. Paul Keating’s superannuation system is today’s example. But it’s just generally true that the law of unintended consequences dominates public policy.

Case after case after case gradually convinced us.. Governments cannot solve problems. They can make them worse. Or they can create bigger problems. But governments never leave society with a net benefit. Even if you ignore the bureaucracy it costs to implement them.

If anything, politics has some entertainment value. And it creates highly predictable investment trends. Neither are worth the money we pay in taxes. Unfortunately, today’s topic doesnt entertain us. But it does leave you with a useful investment conclusion: Don’t rely on your super for retirement.

So our case in point when it comes to the law of unintended consequences is Australia’s shambles of a retirement system. Between super and the old age pension, politicians have removed any feeling of responsibility from the minds of many people to prepare for their own retirement. It also doesn’t work, which creates a dangerous combination.

The very idea of retirement being some sort of right you don’t have to prepare for yourself is bizarre when you think it through. ‘Politicians have got me covered’ isn’t the kind of mentality that has served the typical taxpayer anywhere else. Unless you saved for yourself, why think you can stop working and still get an income? The money has to come from somewhere. And taking it from someone else isn’t considered a viable solution for most problems.

Ah, but you have saved money, right? Part of each pay cheque goes into your Super account. That was the whole point.

Well, unfortunately for you, the government pretty much runs super. Or tells your super fund how to run itself. That means the money is under someone else’s control, not yours. And this is where the law of unintended consequences comes in. It’s very busy causing trouble in the super industry.

Business Day is reporting that too many Australians are outliving their super. That’s the polite way of saying it anyway. What really happens is that they cash out with a lumps sum when they hit preservation age (when you can access your super). With the cash windfall they buy a car or go on a holiday.  Surprisingly enough, they then have to return to work or live in poverty off the pension when they realise there is no money left.

Having spent much of her super lump sum payout on a new car, Business Day reports retiree Christine Leaves blames the government for her lack of super:

‘Leaves says her super didn’t really help her plan her retirement. “The amount was really insignificant,” she said, adding she could never afford to retire completely. “We didn’t have any education (about super), employers never spoke about it, we were never encouraged (to save).”’

This is an excellent illustration of the mentality many people have to their retirement because of super. It was someone else’s responsibility. They took the money during my working life and then left me high and dry with a completely unfamiliar situation.

Isolated case? Not so says the Australian Bureau of Statistics. Half of super lump sum payouts go to mortgages, debts and home renovations. A fifth on holidays and cars.

All this is what happens when you palm off responsibility for saving for your own retirement to a politician’s promises. The incentives are lost. People don’t perceive their savings as something they worked hard to accumulate and shouldn’t blow on a car or holiday. They view the opportunity to suddenly have access to tens or hundreds of thousands of dollars as just that — an opportunity. A real saver sees it as a carefully prepared nest egg he’s managed to avoid spending for decades.

Believe it or not, those using their super to pay off debt might be making a rational decision, probably by mistake. Given the dismal performance of super funds’ investment returns, paying off your debt would leave you better off. Business Day points out, in the five years to 2012, Australia’s pension funds lost 2.5% according to the OECD international comparison. But those 5 years were an anomaly, right?

Of course, the government’s solution to retirees looting their super, having created the problem, will be to change incentives and control how people can access their compulsory savings. So far they’ve only made a move on the first.

For example, the pension age is set to increase to 70. This will stop people from relying on the state too early. They will have to be more responsible. The thing is, this will have precisely the opposite of the desired effect. The law of unintended consequences will strike again. If you raise the pension age, people will churn through their super even faster because they don’t get a pension when they retire.

The whole benefit of super was that you own productive investments which provide an income. The fact that Australians tend to invest in shares for capital gains, not for dividend income, is another problem we’ll leave for another day. If people don’t have high enough super balances to provide them with a significant income from investments, they’re going to have to sell those investments to generate that same cash. Given the returns on offer and the average super balance, selling out will be the norm. This wave of selling will push down prices, reducing capital gains even more.

Another unintended consequence of poor incentives designed by the government is the way in which the pension is calculated. The asset test reduces how much of the age pension a retiree gets. The more superannuation you have, the less pension. The logical incentive is to spend your super before you hit the pension age, leaving you with minimal assets and a maximum pension.

Taking away the responsibility for your own retirement destroys probably the most important incentive there is — price. We don’t have a clue what our super fund is charging us. And neither does anyone else in the office going by an informal survey. But we know what our bank fees are. And our stock broker fees. The result is plain and simple. The Grattan Institute reports our retirement system is the world’s most expensive — $20 billion a year in fees.


Nick Hubble+
for The Markets and Money Australia

Join Markets and Money on Google+

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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