Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Superannuation: Are you feeling lucky?

By Nicholas Gruen - posted Thursday, 16 June 2005


In October 1987 my father’s retirement superannuation pay-out was sitting in the trustee’s bank account pending payment to him. He wanted to invest it in the stock market. Those with a keen eye for dates might already have guessed that while he waited to extract his money - like teeth - from the red tape encrusted super system, global share prices fell by almost a quarter!

This final stroke of luck was symbolic of how financially lucky his generation was to enjoy the long boom of the 50s and 60s. Dad’s own father’s generation cobbled together their retirement savings between two world wars and the great depression!

Will your generation be lucky or unlucky? Who knows? Shouldn't we be thinking about that as we move further towards the goal of putting you in charge of your superannuation with “super choice”?

Advertisement

Super schemes have typically operated to guarantee contributors a “defined benefit” (in the way that the old age pension is a “defined benefit” and independent of the tax you’ve paid when younger). We’ve been unpicking this system - in a way deregulating it - and instead moving towards “accumulation” funding of superannuation (where your ultimate benefits are a simple function of how much you’ve accumulated).

This produces some of the classic benefits of deregulation. Defined benefit schemes create arbitrary unfairness like unexpected benefit changes and or unexpected increases or reductions in contributions. Accumulation funding is transparent, and “choice of fund” puts you in control.

But there are two problems - big problems. Both arise from applying a deregulatory formula rather than optimising the complementary roles of government and markets in a mixed economy.

First, as I argued in my last article (On Line Opinion), “investment advice” is riddled with poor skills, poor information about investment performance, and conflicts of interest. We should regulate to improve performance rather than just encrust it in yet more red tape.

Second, full funding exacerbates intergenerational risk. Someone in a “lucky” generation earning a 6 per cent real rate of return on super would retire with nearly twice as much as someone in an “unlucky generation” earning a 3 per cent return.

Many people would buy insurance against that kind of bad luck - like they do against having their house damaged. But no-one’s selling it. Even with burgeoning derivatives markets assisting firms manage risk, markets won’t ever do much more than scratch the surface of insuring against “intergenerational risk”.

Advertisement

Now pooling risks that markets can’t pool is one of the core functions of government. Could governments help us manage intergenerational risk?

One possibility among several would be to create what I’ll call “retirement bonds” and offer them to superannuation funds. The bonds would pay a yield that was higher than the yield from a diversified share portfolio for an unlucky generation, but lower than the yield for the same portfolio for a normally lucky generation.

A variation on this would be for these bonds to “smooth” returns over long periods of time with excess returns being “banked” and returned to people in poorer years - as occurs within the Commonwealth super scheme, and in a way that is loosely analogous with some of the instruments the government has made available to farmers to average and otherwise smooth their after tax incomes.

Your super portfolio could then purchase some of this “insurance” against your being in an unlucky generation. It’s a trade between two parties each with very different capacity to bear risk. On one side of the trade are individuals like you and me many of whom will prefer greater security of a good return rather than higher returns with much greater risk of bad returns. On the other side is the state, which can pool risks, and so bear them much more effectively.

And because it can be done within the existing “super choice” structure, it’s not “one size fits all” as government action often is - and as “defined benefit” funds often are. Each person’s preferences are taken into account - by themselves as they make choices - and they only take up the offer of “retirement bonds” to the extent they wish.

And, as is the way with trades, both parties win. Not only do you and I get a very important choice we’d otherwise miss out on, but the government could expect to make a profit over time. That’s because retirement bonds pay a yield that’s lower than the return the government would expect from investing the money in a diversified portfolio of high yielding assets - like the “Future Fund”. The expected government profit would be the premium for insurance that only it could provide.

If retirement bonds came to comprise - say - 15 per cent of super assets, they’d make a nice little earner. If, for instance, there was a 2 percentage point margin between payment on the bonds and the expected return on the government’s fund, this would generate over $1 billion per annum which would approximately double with rising super assets by 2015.

The catch?

Government as an entity would bear more risk. However that’s only because its citizens were bearing less - or rather lightening its burden by spreading it around.

Its another variation on economic reform, but rather than simple deregulation it would use both arms of the mixed economy - government and the market - to help us grow richer not by working harder, but by working smarter.

  1. Pages:
  2. 1
  3. 2
  4. All

First published in The Courier-Mail on June 1, 2005 as ‘Super bonds would help spread risks’.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

Other articles by this Author

All articles by Nicholas Gruen

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Nicholas Gruen
Article Tools
Comment Comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy