Refuted economic doctrines #4: individual retirement accounts

The news that, on average, superannuation investments lost nearly 20 per cent of their value last year Johnny Got His Gun movie download comes as no surprise, and its likely that there are plenty of unrealised losses still on the books. Still, while the losses on the stockmarket have been as bad here as anywhere, we can take some comfort in the fact that Australian superannuation funds, like Australian banks, don’t seem to be in the same trouble as some of their overseas counterparts. As the government scrambles to keep the financial system operational, it’s natural to ask what, if anything can be done about this.

In the short term, the answer appears to be, nothing, or very little. Fortunately, for most people the losses are, in a sense, notional, wiping out the spurious gains of previous years. It’s only for those at or near retirement that the crash presents an immediate economic problem. Given that the demand for labour is plummeting, the government could perhaps consider an ex gratia payment to people who choose to retire now. There are all sorts of problems with this, and in normal times, such a proposal would never pass muster, but plainly, these aren’t normal times.

Looking to the longer view, this is more than a bad year for superannuation funds. The crash and the way it came about undermines the fundamental premise that has driven Australian retirement income policy for the past decade: that allowing individuals, with good financial advice, to make their own investment decisions on the basis of defined contributions from employers to personal accounts, is the best way of financing retirement. The old age pension, in this view, serves as a residual for those who don’t manage to save enough.

This privatised approach (also represented in Bush’s failed attempt to reform Social Security in the US) is has been largely discredited by the crash. Financial advisers, even the honest ones, have proved to be useless. Lots of investments that were marketed as low-risk have turned out to be little more than junk. Morover, the idea that stocks will always perform better than bonds over the medium term (say a decade) has been proved false. This is a central premise of long-term investment advice.

We need to look again at the alternatives: either a return to employer-based defined benefit schemes, with portability of service, or some kind of national superannation schemes. In the short term, the call for an increase in the aged pension will also gain strength.

Update 27/1/09 The New York Times agrees. And today’s Fin has a piece from Robert Shiller denouncing the efficient markets hypothesis. I’d better get cracking with more refutations, while there are still plenty of doctrines left to refute.

108 thoughts on “Refuted economic doctrines #4: individual retirement accounts

  1. John I think this bit
    “that allowing individuals, with good financial advice, to make their own investment decisions on the basis of defined contributions from employers to personal accounts”
    should actually read
    “that allowing individuals, with good financial advice, to make their own investment decisions on the basis of defined contributions from employers, AND CONTRIBUTIONS FROM THE GOVERNMENT BY WAY OF LOWER TAXATION, to personal accounts

  2. The evidence from the US suggests that employer-based defined benefits schemes are not reliable. Moreover, why tie the fortunes of the elderly to the health of any particular company?

    Also, how are “national superannuation schemes” different to the pension? Where would these schemes have invested over the last 10 years? How differently would they have fared compared to existing super funds in the current crash?

    Finally, I agree with the call to increase the pension.

  3. david harvey has quite a bit to say about this for years,
    it served to embed everyones interest in the financialisation of western economies

  4. For a pension scheme covering many thousands of people it is possible to produce an accurate estimate of the funds needed for a given pension level, using actuarial life expectancy figures.
    An individual, planning his or her own scheme has to allow for a maximum possible lifetime, say 100 years.
    This means that more money than necessary is being tied up in super funds. Might this distort the investment environment? Has anyone done any sums in this area?

  5. This article is the approach I came up with (followed up by this article). I wrote it some years ago, so it is important to remember that the securitisation I mentioned related to packaging up assets matched to firms’ liabilities incurred by setting up their revenue yielding activities, not assets matched to consumer liabilities. Apart from that, and the fact that people approaching retirement now have much less of a saving orientation, I think the article has stood the test of time quite well.

  6. Employer established defined benefit schemes work fine under certain circumstance, PrQ. These include:
    1. Employees expect to be with their current employer for their entire career
    2. No-one works for themselves, everyone is employed by a large company
    3. Market returns are fairly stable to allow for careful planning
    etc. etc. etc.
    None of them apply now, if they have ever really done so.
    The whole reason for individual accounts was to try to ensure contributions to and withdrawals from the schemes could be matched. The “pay as you go” pension schemes that existed up until the superannuation schemes were put in place was that typical big government dodge – making unsustainable promises.
    Having one national “super” super scheme would be not quite as bad – at least there would be some funding put aside the whole way through – but many of the problems with the idea are easy to list.
    1. Funds are likely to be used for pet government projects
    2. Funds may well be directed to meet short-term objectives rather than paying for retirements
    3. The whole scheme would be vulnerable to catastrophic error (all your eggs in one basket)
    4. Active vs. passive investor issues – it is likely to own substantial portions of Australia’s largest companies. Is it going to use it’s influence purely to assure returns or will it pursue “social” objectives and how would the conflicts between these objectives be managed?
    And so it goes on.
    An increase in the aged pension will just be a return to “pay as you go”.
    Investors simply need to get a bit smarter – pull out of equities as your retiement gets closer and move to fixed income products would be a good start.

  7. IME these sort of discussions chronically conflate two issues:
    (1) should pensions (private or public) be pre-funded or on a pay-as-you-go basis?
    (2) if prefunded, who should bear the investment risk – future taxpayers, employers, individuals or some combination of the above?

    Its (2) that’s the crucial issue. The whole point of privatisation of retirement income schemes in the past thirty years has been to shift the investment risk from either governments (ie future taxpayers) or employers onto individuals, all the while pretending that we’re only doing it because we want prefunding. This shift of risk is a feature, not a bug – it accords with the self-interest of employers and (especially) the finance industry.

    What you lose in such a shift, of course, is the pooling of risk. As individuals are now finding out.

  8. #7. I could throw in a spanner here – why noit just pay people higher wages and let them decide how to save for their retirement? Higher income (after all super is just an appropriation of wages) might just lead to higher growth enabling pension affordability supplemented by individuals higher personal wealth accruals over their life. Sure some wouldnt but many would put away. Maybe forced super has contributed to the gouging of such an enormous volumje of funds under control globally by unethical funs managers and governments that it may have contributed to the crisis??? Just a passing gloomy thought.

  9. Super may have seemed like a good idea at the time but a corralled pot of gold that globally ginormous starts to appear very enticing to some…. and I bet it set the old ticker of the profit max incentives racing in those charged with directing it….

  10. We need to look again at the alternatives: either a return to employer-based defined benefit schemes, with portability of service, or some kind of national superannation schemes. In the short term, the call for an increase in the aged pension will also gain strength.

    For most workers – superannuation schemes are a fools paradise. And the people making public policy decisions to develop the average superanuation arrangements have better schemes themselves. Government funded public service and parliamentary superannuation schemes are a separate issue.

    Treasury boffins (and politicians) would not support the superannuation arrangements supposedly enjoyed by hairdressers, carpenters, and cooks, if public servants’ benefits were the same.

    Remember too that under Keating(?) the ACTU bloody-well agreed to exchange wage cuts for additional superannuation. This additional superannuation has now been taken away.

    A sustainable economy does not need superannuation – it only needs decent wages, less debt, and livable pensions. At the moment Australia has none.

  11. Alanna, ‘super’ didn’t seem like a good idea to me at the time, but we were all drowned out by the deafening screams of its strident advocates, particularly those within the trade union movement who were obviously looking to the superannuation ‘industry’ for their future career prospects.

    The ‘Labor’ government’s policy of privatising retirement income, which is what superannuation was, came directly from the murderous Chilean dictatorship, which was guided by Friedman and his acolytes from the Chicago School of economics. (I can’t cite the source, right now, but Kenneth Davidson pointed that out in Dissent magazine editorial about economic neo-liberalism’ some time in the past year and a half.)

    Only a few months ago Paul Keating, one of the principle architects of this legalised theft of workers’ income, had the gall to suggest that the rate of compulsory contributions be raised from 9% to 15%.

    What any of us ever saw in that man I don’t know.

  12. Here is a ridiculous superannuation plan.

    An institutionally organised bonded self funding of ones own residence. In this plan ones employer contribution could be supplimented with an employee’s contribution (rent) to pay for the residence in which the employee lives. The residense would be held within the institutional control to meet superannuation regime requirements and be released upon retirement. This would still allow for relocations under the appropriate arrangements. This would mean that there was less institutional money chasing fictitional high yielding “investments” within the system. Once the residence was paid for the continued contributions would start to build the retirement cost of living accumulation from the employee’s point of view and build the float from the institution’s point of view.

    Stupid, huh?

  13. Or did the heightened competition amongst fund managers place pressure for higher and higher fund returns (ie strategy to stay ahead of the flock – invent irresponsible riskier financial derivatives).

  14. I dont really know what we saw in Keating either… -hes not on my list of favourites because I think he basically set the framework of the pursuit of de-regulation for the miracle of de-regulations sake that Howard took further and further right. More wit than depth.

  15. Re: #10

    Superannuation for the Commonwealth public service used to be defined benefit (x% of final salary), but is now accumulation. Most departments pay 15.4%, which is higher than the legislated minimum, but this depends on terms of employment for each agency.

    Politicians get a defined benefit, which is very generous despite the cuts announced a couple of years back. I’m pretty sure High Court, Federal Court, Family Court and Federal Magistrates Court judges get a pension which is similar to the one given to politicians (although, I could be wrong on this).

    Defence force personnel get benefits that most of the Commonwealth public service don’t.

    One thing is for sure – the majority of people working for the Commonwealth Treasury and the Department of Finance are on an accumulation plan for their super.

  16. “In the short term, the call for an increase in the aged pension will also gain strength.”

    Calls for higher aged pensions will always be popular among people who prefer to ignore economic realities.

    The fact is that if more people have less retirement funds due to an economic downturn then obviously more people will end up claiming an aged pension.

    But an economic downturn will also mean that governments will have less tax revenues to pay for supporting an aging population. You cannot continuously fund more government entitlements off a declining economic base.

    There will always need to be some aged pension as a safety net for people who fail to provide sufficiently for their retirement. But there is no way that higher pensions are affordable into the future.

    In reality, government aged pension schemes are less sustainable in the long term because they rely on the population continuing to reproduce sufficient levels of human capital to provide enough future workers and taxpayers to keep the system going. Yet they provide no incentive for people to do so.

    Today you have a situation where vast numbers of people who have reached retirement age or are close to retirement age have failed to either sufficiently reproduce the human capital or save enough financial capital to provide for their old age. It is not fair that people who will remain in the workforce should be burdened with higher taxes to pay for the failings of previous generations.

  17. CJ

    Just one correction:

    One thing is for sure – the majority of younger people working for the Commonwealth Treasury and the Department of Finance are on an accumulation plan for their super.

    But still Treasury and Finance accumulation schemes are not the same as the accumulation schemes accessible by hairdressers and cooks etc.

  18. Alanna says “I could throw in a spanner here – why noit just pay people higher wages and let them decide how to save for their retirement? Higher income (after all super is just an appropriation of wages) might just lead to higher growth enabling pension affordability supplemented by individuals higher personal wealth accruals over their life.”

    There are a few problems with this. One is that if wages are increased as a share of the economy then the share of GDP going to business profits would decline. This would mean lower returns on investments, so less money in retirement funds.

    The other problem is that higher wages would price more people out of work, in turn reducing the ability of those people to fund retirement income.

  19. Sorry Prof but I’d rather have the misery of a defined contribution scheme than worrying about a company’s ability to pay my pension in a defined benefit scheme. The risk of an Australian industry fund is much better than the couterparty risk of say Bristh Airways, GM or Ford. Some of these companies have pension libilities greater than their market caps! To think that BA is really a hedge fund that happens to have a few planes.

  20. Nick # 18 says “There are a few problems with this. One is that if wages are increased as a share of the economy then the share of GDP going to business profits would decline. This would mean lower returns on investments, so less money in retirement funds.”

    Nick if wages are increased as share of the economy, then presumably people who receive those higher wages can buy actual goods and services and for real producers this is an advantage in terms of higher sales revenue and potentially higher profits.
    The share of business profits would not necessarily decline at all however it would mean lower returns on all those corporate investments in paper and air as has caused us all so many problems. And perhaps thats not such a bad thing right now and we can move away from speculative investments and back to real and productive investments.
    There are two sides to that argument Nick.

  21. Wages would be no higher than that paid now except that the super component would be given to the individual worker (after all it is supposed to be to their benefit) to decide what to do with it and I would suggest that the individual in this case may make better choices than have been made (there are some aspects of individual choices an allocater I agree with).

  22. Wages would be no higher than that paid now except that the super component would be given to the individual worker (after all it is supposed to be to their benefit) to decide what to do with it and I would suggest that the individual in this case may make better choices than have been made by quarantining it outside the individuals “real” control (there are some aspects of individual choices an allocater I agree with). I dont think choice between funds is real control.

  23. Nick K

    Less share going to profits may be a boon if the level of profits is thereby rendered “sustainable”.

    Artificially, pumped-up profits, may be the main underlying problem.

    Profits at a nautural rate (I dunno – guess at 4-5%) are not the problem. Higher profits, or at least the expectation of higher, wreak great havoc in the long run.

  24. Chris, I can see the point that artificially high short-term profits can generate unrealistic expectations about future returns on capital.

    But this is only really a problem for people who aren’t prepared for the occasional market correction.

    For years, no-one complained or asked questions when their super funds were delivering solid returns or when property owners were benefiting from large capital gains. Yet now that there has been a correction, everyone wants to throw in the towel and do away with the whole thing. This seems silly to me.

    There is always going to be some relationship between risk and return, and the sensible investor would switch their portfolio towards lower-risk, lower-return investments as they get closer to retirement age.

    It seems that people just want all the benefits with none of the risks.

  25. Nick K

    We can only talk in terms of a correction after a bona fide recovery.

    Then, with 20/20 hindsight, we can say there was no need to regulate finance, bailout corps, nationalise debt etc. But yet every big business and politician appears to crying for bailouts (to trillion dollar tunes).

    So for some reason the powers that be have decided that big business must be shielded from risks.

    If the context was simply a “correction” then why the trillion dollar feather bed?

    I think the correction scenario is not applicable.

    For me the long-term trend to increase debt from 1920’s is the determinate factor. The bubble preceded the First World War so if it is a correction it is a 100year correction.

    For me, the July article, and online version “The debt trap” in New York Times hit the nail on the head – the chart in particular.

  26. Financial advisers, even the honest ones, have proved to be useless. Lots of investments that were marketed as low-risk have turned out to be little more than junk.

    Bravo! One of the best things you’ve ever written ProfQ!

    As someone who was advised into a CDO-like investment which vanished in March 2008, I can vouch for the fact that financial advisers are indeed useless.

    As for solutions, I can’t see how defined benefit schemes can work for the reasons Andrew Reynolds points out @ 6. The old age pension will definitely be making a comeback in coming years, but its unlikely to ever provide a dignified retirement.

    Frankly I’m completely fed up with being punished for being a prudent saver, while reckless borrowers are rewarded with a tax break. Surely its time to get rid of negative gearing, and give savers a tax break?

  27. I have been very unhappy for years with the compulsory superannuation levy system that requires all of us to lob in dollops of cash every month into superannuation funds who set what fees they liked and muddled along with no other investment strategy but follow the herd (There were a few standouts. Any averaged returns have been mythical, first the gains of the years prior to 2000 were lopped off by the dotcom boom, then they lost money for years until about 2005 and now the GFC has taken this all back to start. Effectively I have had no real return on my funds for eight long years, payed thousands in fees but most importantly apart from a few indifferent fund choices have had little choice or flexibility. We have all had to sit back and watch the government provide via legislation the biggest slush bucket to corporate financiers the world has ever seen, and now the truth is out, it was a con and no high minded or obscurantist explanations can hide that reality. I rapidly approach retirement with the same capital I had 8 years ago and basically given these so called investment managers 8 years of my savings with they have lost and the government only ever managed to provide fund choice as a sop to the discontent. I would have done better if I had been allowed to place the money into a nominated super savings account at the bank at least the capital and deposits would have kept up with inflation. A pox on the lot of them.

  28. I don’t mind so much if the aged pension is increased in value, however the age at which somebody is defined as “aged” needs to be reviewed upwards. Each year we should be increasing the eligibility age by a few months. Especially given the existance of superannuation.

  29. Warning: grumpy ol’ man alert.

    I saved, and I invested. Somewhere along the line I just couldn’t quite bring myself to get a massive loan (the bank was pushing $500k or something ridiculous like that) just for a thunderbox on a bit of dirt in Sydney. Even with the Howard/Costello enticements to do so. A $14k first home ownership grant is a great bubble accelerant…

    Watching people buy houses left, right and centre, and listening to them explaining the virtues of ownership, made it very difficult at times to avoid jumping in. I can empathise with people who were influenced (at least a little bit) by the fear of “missing out” on getting into the real estate market.

    Since then, the stock market began its decline. I moved the “investments” back to cash after taking some initial losses (and gains), and thank goodness I did. Amid all the calls of “Whatever you do, don’t move to cash and miss out on the rebound” or some similar inane comments from renowned economic experts, the market kept on trending down. Collapsing, actually. Perhaps it will rebound substantially but eventually the economic factors should crush it mercilessly. Nothing like a bunch of unemployed, homeless, debt-harried consumers to kill demand. What a mess.

    There is one time to be in cash. When a debt fueled bubble has happened. Unfortunately, our super money is also committed, fed into the very markets that had the bubble growth. What a mess.

    As someone who has had a number of jobs, the cost in terms of my super has been huge. In one job, I had a lousy 3% contribution while the person next to me had 7 + 7 + 7% (employer, employee, matched). Why? Because they joined on a different date to me and were offered a choice of funds. Absolutely nothing to do with my ignorance and their acumen, just a matter of dumb luck. Legislative risk is very real where super is concerned.

    Now the question is where to put the eroded savings…under the bed with Fraser’s reds? Should I give it to the CEO of a bank, since s|he’ll need it soon anyway, and the interest rates are so low as to not be covered against inflation. Perhaps I should put it into my super fund on the assumption “we have found the bottom” (regular comment on CNBC and similar financial channels)? Or spend it in an insane attempt to reignite the economy? What a mess.

    Anyway, what does this has to do with super? Quite a bit. For better or worse, super works when a minority of employees are in it, and preferably in a government scheme protected from market related risks. Once the business sector and their employees have super, the risk of loss of super for the employee goes up. I see no way around that. I admire the sentiment of everybody providing for their own retirement – unfortunately, the majority earn too little and/or are in crap super funds through no fault of their own. Perhaps we should clean up our tax system and increase income taxes for the higher incomes. Then use that to provide for a better retirement system, rather than bailing out companies that choose high gearing as a profit generating strategy.



  30. Chris#25 says “I think the correction scenario is not applicable.”
    I quite agree Chris – if everyone wanted a correction they would not be seeking bailouts. Bailouts prevents the correction happening – but non one wants correction really because its harsh on capital and labour. The point is the market reached unsustainability probably long before the correction but it was neither recognised or an intervention applied before the correction (because we had “adopted” the philosophy that the market alone was the most efficient mechanism for self correction). Now all and sundry seek an interventionist approach so we actually cant correct for human nature. Is that a form of market failure?

  31. Don – I empathise. Where to go? Under the bed just as good as where bank interest is going. Markets too messy and clouded in uncertainty. Super way too suspicious (dont trust any other b….with your money right now??). Bubble bubble double trouble!

  32. Re #7 and #15, there is a big difference in risk-bearing between defined-benefit and accumulation members of the same fund, with those who opted for accumulation when ‘choice’ was the mantra now bearing the risk on behalf of the DBs. That is, until such time as the fund cannot meet its DB commitments, when everyone is down the tube. Does the current performance of the big funds like Unisuper suggest the latter is now a possibility?

  33. rog

    Why does nationalised welfare have potential to drag down whole economies.

    If welfare is funded by taxing surplus, and welfare is used to purchase consumption goods (without credit), and the receipts of welfare reduces crime, then society benefits. There is no disruption of the circular flow.

    The only problem is that the rich are not as rich if some of their riches have gone to the poor.

    Super is in a different category because as investment it invokes borrowing, credit and debt. As this has to compound, this in the long run, jams-up the whole economic system. Compounding debt disrupts the circular flow.

    I cannot see how this happens in the case of welfare – provided governments do not borrow to fund welfare.

  34. rog – I guess the alternative is to stop looking after people – either privately or publicly as either way a cost is borne. Unless of course you see some magic cost cutting in private delivery of welfare. The USA health system is a great example of how large scale private can cost a lot more and provide mmuch less.

  35. Grumpy Donald Oats @ 29 wrote:

    Unfortunately, our super money is also committed, fed into the very markets that had the bubble growth.

    That’s not entirely true. With many super funds its relatively easy to (say) move your super from a balanced growth fund to 100% cash. Problem is, virtually all financial advisers would have advised against doing this in mid-2008.

    After my CDO-like investment vanished in March 2008 (I mean, really vanished, as in lost 95% of its value) I logged onto the Australian Super website the next day and moved my super to 100% cash.

    Don’t blame the super funds. They all offer a range of options from low risk to high growth. The problem is the financial planning industry was (is?) totally corrupt. A planner only benefits from fees. S/he doesn’t lose anything (except your business) if your investments tank, and s/he doesn’t gain if your investments do well. S/he only makes money out of the (usually hidden) fees.

    That has to change.

  36. Alanna @ 34:

    33# Marginal – What is unisuper doing? I have not looked since GFC started.

    Therein lies the problem. People are not taking control of their own destiny.

    I wouldn’t be surprised if most people, particularly older people nearing retirement, haven’t looked (or don’t know how to look) at their super balances since mid-September.

    They’ve left everything up to their financial planner / employer / super fund … and in my experience, when your investments tank, the b*stards don’t even bother calling you.

    Educate thyself and take control.

  37. rog

    PS In a globalised economy (which I do not advocate) can welfare be funded by a Tobin-like tax?

    How would this drag down whole economies worse than debt.

  38. Carbonsink: I agree that the portfolio mix for my super money can be changed by me – in the same fund – but I don’t have a choice in who does the managing of that portfolio. At least CDOs aren’t part of the equation for me.

    I definitely agree wrt financial planning industry. They are promoters for profit, not experts hired by you to help you. The taint of filthy lucre, to steal an expression from the Sex Pistols.

  39. #34 and #39 – Unisuper had a Vested Benefits Index of 103.3% in its DB division at June 2008. Looks like a small margin to me, given where things went after that. I agree with carbonsink that pretty much all we can do is look on and hope. But that would be the case in a nationalised scheme as well.

  40. Alanna @#32 please read and understand #12. This is the good old fashioned “own your own home” superannuation plan with some oomph. I was talking to a guy yesterday who said that his father just got a letter from AMP telling him that his moderate risk super asset had been derated by 40%. Hands up anyone in the $200m to $700m price bracket whose house has been devalued by 40%. It can happen but it is fairly rare. The other advantage of this #12 plan is that there is the option of reducing the in the hand housing outlay by up 9% to 18% (one income or two) in hard times (now) or dramatically reduce the mortgage term using the employer contribution in good times. And as the superannuitant is not paying managers to seek out investment locations the fees would be minimal until the property is paid out. And by continuing contributions at the same rate after the property is free the nest egg accrues rapidly. Some well thought out legislation could make this an integral part of our economic reconstruction. One of the main criteria of such an arrangement is that a participant would have to be able the afford the mortgage on the value of their in hand income alone, other wise the employer contribution would become the cause of a new round of property value inflation and the flexibility would be lost.

    The fact is that anyone can do this now, but it would be much better if there was a legilative environment to enhance the flexibility of the opportunity.

    In the absence of clever money, the very best super scheme was established by my best friends Dutch father in law. He built 4 self contained rental flats under his Sydney north shore house. This added to his property value, added to his income while he was working and supported his wife well after his death. That is good business.

  41. I should add that (last paragraph #43) even his own grandkids rented his flats as they moved out into the world. Brilliant scheme!

  42. Just have friend recently returned from holiday in Dubai. Her story – Expensive cars (mercs etc) are just being left behind, abandoned at the airport as expats leave due to redundancies. The booming Dubai economy has ground to a halt. The cost to ship the car is too great apparently.

  43. Bib

    It sounds to some extent sensible as (in Australia at least) the family home is typically the most major investment people make ( except perhaps in the last decade when they loaded the family home with debt to reno home and garden and sell to someone else or loaded the home with debt to chase higher returns on shares). I do question the wisdom of chasing share returns when the family home still carries a large debt and may be a more prudent investment and functional in that it provides shelter.

    The only thing I have a problem with is that I have seen the most unethical and awful behaviour from executives in large companies facing downturns and trending towards the red – Ive seen and read of employee entitlement provisions being raided in one fell swoop (LSL, annual leave, superannuation laibilities falling due for payment). I saw that in the 1991 recession and it isnt pretty (and accountants have extreme pressure on them to do these yukky things in breach of the accounting standards by even more panicked people above them).

    Its when the going gets tough that I would worry about a fund like that being under the control of the private institution Bib (and to compound it the employee is now adding his own rent – were it to be placed under public control – that may be preferable but even then you would want the books completely open).
    I know the government used to have a scheme where a housing commission tenant could over time acheive ownership through payments of higher rent. I know this is not the same thing you are suggesting at all – but do we still have such a thing now?

    Bib – your Dutch friend had the right idea I think. The rent from his kids goes back to the family unit. Maybe market rents on the lenient side helps the kids save more. Dutch father doesnt burden his kids financially as he ages. Money stays in the family unit more. We could compare this to the days that families slept children two to a room and grandma lived in the third bedroom (in a 3 bedroom post war weatherboard house purchased with cheaper army loans etc). Economies of scale gained by the family. But we are all so precious now! You can get a McMansion built probably cheaper than a smaller place. Two kids in the same room? Forget it and who is looking after Nan? The retirement village.

  44. Marginal#says on financial planners
    “when your investments tank, the b*stards don’t even bother calling you.”

    and when you ask them you get the Paul Clitheroe line…..”you are in for the long haul remember” and “you use downturns as an opportunity to buy more because it dollar cost averages your investment”.

    So you did that in January and now look. I do know a couple of prescient people who resorted to swearing at their financial advisers to “sell the……….lot” in Nov/Dec 08 and early Jan 08 whilst their colleages retirement plans were shelled.

    You just cant trust em…! They work for their own firms or other firms who profit from you staying in the sharemarket and just doing a bit of switching here and there. Off course they wont advise you to sell all (ever). They will advise thus “you can sell some of your shares some of the time but you can never sell all of your shares at one time….” Thats the financial planning secret society oath !!!!

  45. Alanna,
    A properly balanced portfolio will never have more than 50% in shares in any case. If you were all in shares just prior to your retirement last year then you received really bad advice.

  46. Alanna @48 para 2&3,

    This proposal goes contrary to the thrust of this thread. This is entirely about individual superannuation accounts. Most importantly here, the asset accrual is in the management of the superannuitant their self. The rental component pays the interest on the purchase of the asset, the employer contribution pays the accruing asset component of the mortgage which is managed by the the supperannuation fund. In all probability the body who would best engage in this plan is the funding bank itself. Now they are guaranteed by government. It doesn’t get much more secure than that.

  47. But Bib- wouldnt we see the same problems of asset inflation in the property market (rather than the share market)? What if the underlying asset (the house rises in value at a faster rate to wages growth or the employers contribution percentage – well assume percetage super stays constant but wages say fall? Or do not rise as fast as the property asset price? If everyone was doing this wouldnt we expect to see stronger than ususal upward price pressure and who would end up with the family home at the end? The bank?

    What about the problem of everyone chasing the same asset class at the same time? We all charge in one direction like a herd of buffalo and prices for assets in that class get distorted?

    What about individual choice to risk spread? (thats the problem I have with super – you just have to take it on blind faith you have good managers – you dont really know – you get good returns for a few years and then a shock. Then you find out they have really been playing pass the parcel with new creative intangible untranslatable quantitatively modelled and justified toxic bombs in the fund which it now appears accounts for the good returns).

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