Here's another knee slapper. John Brogden, the new director of Australia's for-profit superannuation funds management association, wants mandatory super contributions increased from 9% to 12%. Brodgen heads the Investment and Financial Services Association (IFSA).
Talk about getting on the front foot. Actively managed funds have not exactly had a stellar few years. And as we reported last week, there's some doubt as to whether the funds, on average, can ever actually beat the market. Increasing compulsory contributions might be a way to make up for revenue you'll miss out on as those that can choose to move to self-managed funds.
Frankly, though, the whole idea of not having a choice about super reminds us of the ant colony in T.H. White's "The Once and Future King." In the ant colony, there is very little choice. Everyone has a role defined for him and even language itself is limited. The smaller the vocabulary you have, the more difficult it is for you to articulate your dissent.
The rule of the ant colony is that "everything not compulsory is forbidden." How much does that sound like the Nanny state we are living in? The government is not only intent on telling you what you cannot do (smoke, drink, eat like a pig) but what you must do under penalty of law (surrender your income to be managed by someone whose financial interests are not aligned with yours.)
We're not saying that laying up savings for a rainy day isn't a good idea. It's a great idea. In fact, it's so important, we'd suggest it's not the sort of decision you should surrender to anyone else. Preparing for your financial future is ultimately your responsibility because you're the one that's going to live that future, not your fund manager. If you don't have your own wealth game plan, odds are you're going to lose the game.
What that game plan includes depends on your appetite for your risk, and, of course, your view on the markets and your investment time frame. But these are not complex issues beyond the capability of ordinary people to discuss and plan for. They are the sort of things we should all specialise in if we want to make, grow, and keep our money-money that plays a part in whatever kind of life we choose to live.
If we're a bit philosophical today it's because we're recovering from a weird ailment. Our colleagues call it the Darth Vader Diet. Last week we woke up to a constricted esophagus. It made it very hard to swallow. At first we thought it affected our breathing.
But once the panic subsided, we realised it was some sort of spasm in our esophagus, like a cramp making its way down our throat (it's just above our stomach at the moment). It's been dubbed "the Vader diet" because it's like Darth Vader is squishing our throat because he finds our lack of confidence in the stock market disturbing.
In any event, we've been forced to a mostly liquid or mushy food diet so nothing gets lodged in our throat while it's sill crook. It's a good weight loss method, despite the discomfort. And it makes for a clear-if somewhat whimsical head. Hopefully the antibiotics and donuts will kick in and fix things up soon. Until then...
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 16 July 2009:
Re Super: The ants will bail out the grasshoppers :
- whether or not the ants can afford it; and
- whether they like it or not.
Pre crash, the average Aussie retires with about $90K in super. Many retirees are happy to spend any accumulated savings on travel and perhaps a new car THEN be supported by the old age pension and the public health system.
I guess I'm an ant. I certainly feel that small (financially) in comparison to some of the posters around here and on the share blogs. Yet I still have about six times the average final super balance (with about 10 to 15 years to go before retirement). I expect that my balance will be very heavily taxed when I finally draw down on it because someone has to pay for the grasshoppers. At the moment fees and the 15% contribution tax kills a lot of the interest earned on my accounts. The tax and fee framework was established with an assumption that I would be earning 18% + in a growth portfolio rather than 5.5% with the cash box ticked.
For grasshoppers to make ends meet they would need to save at least 15 - 20 % of their raw income over their working lives. They have no intention of doing so and this is why a 9% compulsory contribution was introduced. 9% is woefully inadequate.
I have not problem with the idea of forcing the grasshoppers to save because it's in my interests that they do so. I do have a major problem with the restrictive regulatory structures that force many of us ants to pay idiots to lose our money (for a fee) AND which are now in the process of "clamping down" on self managed super escapees.
Cheers
Comment by Ross on 16 July 2009:
CA, don't let the industry funds off either. If you look at their collective performance on international shares in particular you might regard them as having run a casino and question the veracity of the claim that they don't "pay commissions".
Watch that AUD go these past days! The EUR/YEN v USD hasn't gone anywhere near matching it and the ZAR has only gone half way. I will be watchfull of any retreat and won't miss it. I am now turning extremely bearish on resource commodities and am looking to take profits. I don't include ag for the short medium term but am watching inventories there too as aid shipments from the US have virtually collapsed. I could be wrong but I am going to let the hot money flow be my judge, jury and executioner.
Comment by Coffee Addict on 16 July 2009:
Ross: I'm also very bearish at the moment. I'm only holding because most of my key picks are transitioning into production mode and are being (or will be) repriced on that basis. I'm also averse to realising tax profits at the moment.
I think we could have some fun managing an abolute return and protection (paraodox intended) fund if friends with a few hundred mil would give us the job!
Cheers
Comment by rag on 16 July 2009:
where does inherited wealth come into this equation - what our parents or great aunts leave us = isnt there going to be a wealth distribution from parents to children and why wouldnt we consider this in our retirement equation
and of course each and every one of us has different opportunities givn parents wealth but there will be a distribution [less so now].
Comment by Ned S on 16 July 2009:
One idea that I can see some sense in is that we'll see a lot more wealth destruction rag - Over time - As the aging boombers all try to sell off their real assets like stocks and property to support themselves in retirement.
But even if that is incorrect, I think we'll see a huge amount of wealth dissipation. As opposed to direct wealth distribution from parents to children. Some examples:
Old people are typically retired a long time. And they typically put their money in lower risk and return assets - So inflation eats it. Ken Henry specifically wants that to be the plan for a portion of their super - Force the oldies to buy annuities. But annuities don't give anything back to the heirs as I understand it?
They often buy properties in fun in the sun lifestyle locations – Not much use to heirs who may well want to stay where they are. Except to sell – And if we see too much of that, the bottom falls out of the fun in the sun lifestyle property market. Which isn't great for the heirs.
And they sometimes treat themselves to a nice holiday or two and buy camper vans and eventually fancy motorised wheel chairs and other stuff that there is ultimately not much resale value on. Some of them will maybe even use credit early in retirement? And dissipate some wealth that way while they are learning to change the habits of a lifetime.
And I suspect that many of them will find that they haven't structured their assets very wisely for retirement. So assets will get eaten up by financial advice and legal fees and capital gains tax as they rearrange things.
Then there are the reverse mortgages that the banks make available to ensure that when the oldies croak, the bank owns the house - Rather than the heirs. And the medical profession is on a huge winner in keeping all the old fogies alive for many happy years - Over which time they can progressively remove more of their body parts, and money, from them. As for the possibility that a “wealthy” person (or at least a home owner) might need aged care??? While I really know nothing about it, I did get a large number of results when I googled “aged care accommodation bond sell house”.
I think that on balance the concern is that as the oldies head into retirement, they won't have enough to see them through. So if they really are going to be starting off from behind the eight ball in that regard, it probably isn't too realistic to think that after 20 years or more of happy and fulfilled retirement plus a protracted illness or two minimum, that they'll leave a lot to the heirs? Some truly wealthy ones could - If they choose to do it. But even the comfortably well off stand a very good chance of just seeing their assets dissipate over time.
Comment by Ross on 16 July 2009:
CA, one factor for me is that the market makers led by Goldman are now a smaller tighter group almost unopposed by contrary position holders with the wherewithal leverage in the index trades to challenge their control of asset prices .... and that the US govt know they have control. We know that US inflation is feeding in despite unemployment spiking severely. Goldman shorting commodities and helping to lower inflation might be a win-win too good for them to ignore. So I now see this as a rolling shakedown across all asset classes and am looking for it being brought on one-by-one.
Comment by Greg Atkinson on 16 July 2009:
I wonder if the Ken Henry tax review will raise the issue of an inheritance tax? I would guess the government would love to get their hands on some of the money being handed down from one generation to another.
Comment by Ned S on 17 July 2009:
Greg - I think they'll find more subtle approaches? And it's never a favourite of the truly wealthy - Which probably includes a lot of Oz politicians from both sides of the political fence these days. Never say never of course. But I must admit that it would surprise me?
Comment by Lachlan on 17 July 2009:
Well it looks like inflation is an issue again but for how long I dont know. You get a Goldman bounce, probably a mile of short covering, a new and powerful spike on the market indexes, the USDX trying to break out on the downside (if that gets out of control we're in trouble), commodities surging up (look at copper go). But where to from here. Well Ross if Goldman (and the rest of the deflationist crowd) get short as this move runs out of puff, commodities may be forced down again...along with the markets....maybe the dollar to keep grinding. Then maybe Ned you'll be shown to be right as we get a stagflation...induced by market meddlers. Arrrgh where does it all end. I might just bin all my investments and take the kids fishing.
Comment by rag on 17 July 2009:
good reply on inherited wealth - so, after reading your response I have to rethink my retirement plan...damn
although I hear that in Germany the children can sue their parents if the parents are not 'looking' after their assets properly - that is if the parents start to squander their hard earnt wealth the children can seek legal restraints to stop them - now that is real scarey
oh well - I think I will buy a block of land, set up a huge solar panel and wind turbine - sell the stuff back to the grid and create retirement income - if the canberra model is adopted in NSW then it has legs...get something from the State than what usually happens
Comment by Annie on 17 July 2009:
Yes it may well be that all those waiting for their oldies to croak may well be dissappointed and even end up on the floor in snot and tears.
Comment by Ross on 17 July 2009:
Death duty is the least regressive tax and has the lowest GDP impact. If you look back to the Asprey Tax report in 1975 you can see we only applied it as a light touch and it formed a very small part of the tax base but of coarse it was deeply unpopular (or looking at it upside down an opportunity to gain popularity at a small expense to revenue) and politically the bottom of the harbour tax scheme crowd and the likes of Packer had relatively more clout back then. If you look at the Asprey committee's views on it however you can see they are broadly supportive of it.
I raised this some time ago in respect of a defined programme to offset the costs of contributing toward principal reduction for underwater mortgagees (to keep them off the street and contributing what they can to principal payments). Maybe Obama heard me (and probably not) but he started his programme some months later. The trouble is that the lenders have to contribute by taking a haircut and marking their balance sheets to market so they have been "losing" the applications. And yes it is coming to a CBA branch near you and we have to pay for it without having a govt able to launch programmes generated by issuance in the world's reserve currency. Like Dan said the other day the AOFM can only sell debt to a limited market and its quality and hence ability to generate demand is determined by how the market views them balancing their budget ... that will be a negative view when the Australian mortgage bubble pops.