Our future Assistant Treasurer Arthur Sinodinos ‘will take responsibility for Australia’s $1.6 trillion superannuation industry’ says The Age. A politician taking responsibility. Haha.
Here’s a big prediction for you. Nobody is going to take responsibility for super. Or Australia’s retirement infrastructure in general. That would be professional suicide. In this Markets and Money, we’ll show you why.
Who’s going to buy your shares? That seems like an odd question. But it might be the most important one your retirement faces. And it might be without an answer.
Australia’s retirement system is built on the assumption that someone is going to buy shares off the retirees who sell them in order to fund their retirement.
But what if nobody turns up to buy these shares? What if you can’t sell your shares to the next generation at a decent price because they’re not interested in buying them, or there aren’t enough young people around?
We recently came across an old chart in a research paper about superannuation. It shows that outflows from the super system will be greater than inflows into the system for the first time in about ten years – right in the middle of the typical Markets and Money reader’s long and prosperous retirement.
Now the chart is a few years old, so the calculations are old too. Plenty has changed since. But the concept is valid, and it’s very dangerous.
Once retirees sell more super assets than young people are buying, that’s going to put an incredible amount of downward force onto share prices. In fact, the most important force pushing up share prices in the past – the inflow of money into super – will suddenly disappear, and then become a steady drain instead. This is likely to tip the balance toward falling share prices instead of rising ones like in the past.
As the problem gets worse, younger people will cotton on and stop buying shares at the rate their parents did. The older generation will make a run for investments with a fixed payout, like government bonds. The downward trend in shares will become a rout as demand plummets and supply surges.
Is all this doom and gloom speculation? Yep. But that doesn’t mean it’s not going to happen. Plenty of credible voices are warning about this future. Government policy is already changing to prepare for this eventuality in two different ways. And we’ve already seen it happen elsewhere.
Over in Japan, the country with the oldest demographics in the world, when retirees figured all this out they made a break for investments with a fixed payout – government bonds. Hence the massive ownership of Japanese government bonds amongst retirees, and the terrible performance of the Japanese stock market. The demand simply wasn’t there to absorb the supply, so the prices moved lower to balance the market.
The same ageing demographics are reaching the western world. Author Robert Kiyosaki, of Rich Dad, Poor Dad fame, says that this ‘will cause the biggest stock market crash in history‘. The Economist refers to it as a ‘time bomb‘.
And that’s why the Australian government is acting already. Influential policy makers are looking to shift Australia’s retirement pool from shares into bonds. And they are steadily increasing the amount of your income going into super too. But it’s a losing battle. The demographic changes are just too strong. Instead of helping retirees, it’s likely the government will wake people up to the reality, causing the crash Kiyosaki warns about.
So the price crash could happen well before outflows are greater than inflows. People will anticipate it and run for cover before reality hits.
What’s really worrying about this is how much retirees are relying on and assuming that high share prices will be around in the future. According to a CPA Australia research report, the baby boomers have in effect borrowed against their future assets. Here are some worrying quotes from an Australian Financial Review article on the report:
‘"They have already spent all of their super before their first day of retirement," says Simon Kelly, a professor and author of the study undertaken for CPA Australia, one of the world’s largest financial services organisations. "Their debts on retirement match their savings. Most people are seeing their annual super savings statement and considering it a way of paying for the lifestyle that is being lived now."
‘"There is going to be a very big reality check," says Lindsay Tanner, a former federal minister for finance and current special adviser for Lazard Australia.
‘Growing welfare commitments are "simply unsustainable", he says. "We live in a society that has become conditioned to receiving presents from Father Christmas. Western governments have been using debt to prop up lifestyles but it can’t go on"…
‘"Boomers always looked after themselves first," says Kelly. "They have been spending in anticipation of receiving a lump sum from their superannuation fund. But they have not thought it through".‘
The more people are forced to save in superannuation, the less they seem to save elsewhere and the more they seem to borrow. In summary, ‘It [superannuation] has failed, so far, to deliver on some of its core objectives,‘ says Kelly. This is a typical example of what happens when government partners with the private sector, creating a bizarre shemozzle.
Putting the risk of a drop in super assets together with the increase in debt leaves Australia’s retirees in a very dangerous place. Borrowing against an asset that will fall in value is a bad idea.
The good news is that while the price of companies’ shares will be falling, their value could be increasing. All those retirees will be spending money, increasing corporate cash flows. There are a few angles on this which can leave you collecting a nice proportion of that cash without having to worry about the crashing share price.
But the first step you need to take is to evaluate whether you’ve borrowed against your expected super payout, and whether your super assets are invested in the right place. Are you exposed to the crash? Who will buy your shares?
for The Daily Reckoning Australia
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