The superannuation system, good for some but not so good for most

The Aba and Gol communities continued to prosper. Both communities were growing, building new farms that increased basic production, producing new and innovative goods whilst borrowing Abacoins and Golcoins through the Abacus technology to undertake the expansion.

However, for many of the old wise heads of both communities a problem was starting to raise its ugly head. These community members were there from the beginning of the communities and had been through the hard times that formed the basis for the good times and now they were getting older and wanted to retire with their partners. That goal seemed to be out of reach because to stop working and producing goods would stop their incomes and reduce the productivity of the communities.

The issue called for a joint state of the universe meeting of the old and young wise heads of both Abas and Gols the next Sunday.

Go who had redeemed themselves and was now a respected community member outlined the retirement issue and proposed a solution.

“The retirement issue is a community problem and needs a community solution.” Exclaimed Go. “The rest of the communities need to bind together to support the old wise heads so that these great contributors to our communities can retire with dignity.”

“That’s some strong rhetoric there Go, but it does not describe a solution” answered No and asking, “What exactly should we do?”

Go explained their idea, “We should create a community fund that everyone contributes to during their working life. The fund will pay each community member a pension when they retire based on their contributions to the fund. Because we don’t currently have a fund, those elderly citizens retiring now will be subsidised by those not retiring.”

“That’s two systems” retorted No, “Sounds complicated and open to rorts. Who’s going to determine who gets paid what and who is going to manage that community fund and what is the fund going to invest in?”

“Good questions, No” Ab jumped in. He could smell an Abacoin from a 100 miles away. “As I manage the Abacus technology, for a small fee I could manage the fund, collect the contributions and record who is entitled to what pension from the fund. No problemo.”

No wasn’t giving up that easily as he pressed. “But what would you invest the fund’s Abacoins and Golcoins in?”

“I’d have a balanced low risk portfolio that would invest in Abaite and Golite businesses and property”. Said Ab.

No wasn’t letting Ab or Go go. “So you’d take contributions from citizens of both communities out of the existing money supply to create a fund, take your cut and then give them back their money as investments to use for the benefit of themselves today and when they retire? The only beneficiary of that circular arrangement is you Ab and your cohorts”.

Crickets, as they say, and as everyone was stunned to realise that against conventional wisdom, No had a point or two. What is to be done?

One of the newer wise heads put up his hand to speak. “Let the young fella speak,” said No.

“My name is Pen and I have a better idea than Ab, but it might seem unconventional”.

“Instead of creating a fund using our own existing money that is invested back into the same communities, why act like the economics of the communities is our continuing investment of all the communities’ money and that as all money is continually deployed its working very well. So don’t upset that apple cart”.

“Great, so how do we pay the retirees a pension” asked Ab.

“Pensions are paid with newly created money as the funds are needed by the retirees. Money is created by Ab using the latest Abacus tech but only for pensions”, suggested Pen, who then paused to let that sink in to the fellow wise heads.

“Over the working lives of the retirees and because they have been productive, the value or purchasing power of the communities money has increased. So even if we create more money for pensions, that theoretically devalues our money, that is just reward and cost for a lifetime of productive input, that also merely levels the playing field for future generations. It does not disrupt the current flow of money but adds to the circulation as the retirees consume and spend new money”.

Ab thought that this Pen person was some smart amigo and that he better get them on their team.

The superannuation system, good for some but not so good for most

Having lived through the creation, amendments and growth of Australia’s superannuation system, this is my take on what super is supposed to be, what it is and, perhaps what it could be.

Ignore the continual, biased rantings of the Master Blaster on the benefits of superannuation. He was the main designer of the system and so is a little on the biased side. Although publicly a strident supporter of increasing current super contributions, privately Paul Keating does appear to admit many of the shortcomings, although he takes no responsibility for them.

Super was sold as a mechanism to plan for a citizen worker’s retirement, paid for by the employer and therefore not a burden on the taxpayer. Superannuation was to create a pool of funds for workers that would enable a reasonable lifestyle in retirement. The government added tax advantages on super contributions and low tax rates on earnings as part of the bargain.

Before we analyse how that’s worked out for citizens, I need to state categorically that super does not create extra Money. Super is an allocation of existing Money into funds that are managed by the superannuant or third parties but is not new Money. Super simply earmarks a portion of Money that is earned by citizens out of the Money balance for future spending by that citizen under specified circumstances. In theory, super seems a worthwhile initiative with benefits across the board, but there are unintended consequences, and from a ‘use of Money’ perspective, it does not appear to have been thought through.

Superannuation is a sub-set of the Australian Money system that is a closed system operated by the Australian government and its citizens. Whilst Australia trades with the rest of the world and has an external account that is negative as we’ve seen, the amount of Money in the Australian financial system is essentially controlled within Australia

So how does partitioning some of that Money today for future pension’s distribution out of the same Money pool become a great social reform? The argument could apply to many future government responsibilities such as defence spending, public servant salaries, or infrastructure. The point being that the Australian economy does not run on providing for future responsibilities today from today’s Money pool. Whilst the fund management industry would love such a situation, it would certainly decrease the circulation of Money and choke the economy. We are dealing with a sovereign country’s economy and not Mother Brown’s family budget.

Super is more of a handcuff than a golden handshake on retirement for most citizens. Let me explain. It’s a system that is set-up on the thesis that individuals can’t manage their own Money or savings, and that the government can’t provide for a citizen worker’s retirement in an efficient manner. It’s very patronising and downright insulting from a nanny state, as well as biased against groups of citizens. Taking money out of what a citizen worker earns and putting that in the hands of third parties that charge exorbitant fees to make investment decisions with that Money would seem to me to be entirely against the interests of citizen workers. This compulsory superannuation is administered and managed under set rules that do not take account of an individual’s circumstances. It is self-evident that many citizens would choose to have Money allocated from earnings as savings and managed by a Money manager, but why is it compulsory and not equitable across sections of the population?

The most contentious aspect of super is the tax concessions that considerably favour high income earners. Although there have now been limitations introduced, historically tax breaks for high income earners and the rich had reached the obscene. The total tax breaks for superannuation now approach the level spent on the aged pension. Is this the most efficient way of managing retirement incomes when the system only allocates Money and doesn’t  actually create it? Especially when it allocates more Money to higher income earners through reducing the tax contributions of those citizens.

The super system is biased against women because of unequal income and those that perform home duties for a large part of their lives. Self-employed and innovative start-up founders can also be largely disadvantaged by the super system. Superannuation is not equitable, and one size cannot fit all.

 Whether you are for or against, the fact is that superannuation exists and that the pool of Money allocated is very large ($3.5Trillion at stated market value). Surely that pool is a very good thing for the Australian economy?

We are the envy of the world in fund management circles. However, the super pool contributions are not extra Money, but an allocation of Money that already existed. Whether it’s good or bad must at least be debateable. Note that the $3.5Tn quoted not only the Money contribution by citizens and investments, but also includes mark to market valuations. Property and shares make up most of the valuation increase. Marking super investments to market is important and as usual has unintended negative consequences if valuations are not based on increasing the value of Money through productivity gains. Value increase recognition from asset speculation sets up a system that to sustain itself must have endless growth.

 The debate should focus not on the number of contributions and the current value, but whether the return to citizens on the Money contributed to super by citizens would increase productivity and be greater if we did not have our current superannuation system.

If we assume that there was no superannuation or another plan like it, then citizen would receive more Money during their working lives, rather than having to contribute to a managed fund. We can be confident that given the choice, more Money would circulate more quickly, creating more economic activity not just in spending but also in nuanced investments. More tax would be collected, a lot more.

Surely superannuation has benefits in lessening the tax burden on future generations, as citizens retire and are able to drawdown super? This is a complex and multi-layered question.

On a simple analysis, if Australia has an aging population, then in the future it could be deduced that fewer workers would be supporting more retirees with a pension. That is mathematically and historically correct, but fails to take account of citizens being healthier, living longer and therefore working longer. It also does not take account of the benefits today. Greater Money circulation and innovative investments incurred by individuals lessens the future burden of pensions on the fewer citizens per pensioner. Greater taxes are collected through a citizen’s life, adding to services and reducing debt while increasing Money value today.

The key to understanding the cost of superannuation, rather than the superficial (intended) benefits, is to recognise that superannuation does not create Money, but allocates existing Money. When allocating existing Money into managed funds, the benefits can only be assessed based on comparisons with what would happen to that Money if there was no superannuation system as it exists today. Let us speculate on a simple alternative system that creates Money and is far more equitable.

 Australia could create a superannuation system that did create Money, through allocating Money from the Central Bank to an individual’s pension fund account with the Central Bank.  The Money would be created by the government issuing bonds to the Central Bank and depositing that Money, perhaps with a Central Bank Digital Currency (CBDC), into each citizen’s pension account created with the Central Bank. At this point the Central Bank has a balanced book of an asset, a Money loan to the government via a bond issue, balanced with a liability, being the CBDC Money in a citizen’s pension account. As the pension was drawn and added to the government, the Central Bank would need to ensure the system maintained its balance.

The government would raise extra Money through increased taxes on the additional Money circulated in the economy that would have been channelled to managed super funds, plus the government’s tax subsidy savings from super contributions. The additional Money would now be circulated through the economy, generating increased Money value and ultimately more supply for the generation of Money from productive debt. The question that comes to mind is whether the extra tax collections from the additional Money in circulation would be enough to meet the governments obligation to repay the Central Bank over a citizen’s life? I’m not sure that the system needs to exactly balance but I can say with certainty that the system described is more efficient, productive, and equitable than the current superannuation system that favours the rich and the Rent seekers.

The pension system described herein would be designed so that pension accounts were more equitable across all citizens than the current complex and biased superannuation system but would still provide a known amount of Money to contribute to a citizen’s retirement. There is no need to create sovereign wealth funds or other mechanisms to provide for repayment of bonds.

The Australian economy is the wealth fund, if we strive to reduce Rent seeking and create productive technology that can be used internally and exported as goods and services. Removing superannuation subsidies and using that Money to incentivise productive uses, as well as enabling more Money to be used on productive purposes by removing Rent seeking, would provide the economic ability to pay for the pension plan.

Sadly, however, we are most unlikely to find out if alternative solutions are better, unless of course there is an economic disaster causing regime change. Debating alternatives though, can only lead to better outcomes.

Rule 17: Superannuation

Rule 17: Superannuation does not create new Money; it only allocates existing Money for future distribution. Superannuation is inequitable, favours the rich and is biased against various cohorts of citizens. While there may be benefits to the existing superannuation system, there are better ways of structuring to make it much more equitable across all citizens and generations.

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