A Look at Debt and Super

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[Ed note: the following is an excerpt from an upcoming report on superannuation and retirement from Australian Wealth Gameplan editor Kris Sayce]

Australian baby boomers have never experienced a “rainy day” – so they’ve never planned for one.

But then why would you?

Over the last 20 years, virtually everything has gone up… and up…

A generational bull market has lifted the stock market, property values and commodity prices to dizzying heights. Most of us have felt the benefit of this in some way or other.

It’s certainly made us feel a lot wealthier than we are. And when you feel wealthy, you tend to act wealthy.

And that’s just what we’ve been doing – in some style… We’ve bought bigger houses, newer cars, nicer TV sets – and in the process, we’ve racked up more personal debt than the Americans were in just before the U.S. sub-prime crisis hit.

How deep in debt are we?

According to the Bank of International Settlements (BIS), during the 1980s, the ratio of household debt to disposable income for Australian households was around 45%. For every dollar an Aussie earned he owed 45 cents. Not ideal – but manageable.

Since 1990, the BIS reports that this ratio has risen rapidly, reaching an incredible 157% in December 2007. That means for every dollar the average Aussie earns, he owes $1.57.

In an October 2008 article, The Australian reported:

“By 2008, Australian households carried 35 per cent more debt relative to their income than Americans. The great Australian middle class has become more addicted to credit and more spendthrift than the US, the home of consumer capitalism.”

We all know what happened in America after their debt bubble exploded

But despite that warning, and despite debt far in excess of their incomes, Aussies are STILL spending money like it’s going out of fashion.

In June 2009 the government handed out $900-a-piece to low and middle-income earners as part of a $23 billion stimulus package. By August, Australian National University economist Professor Andrew Leigh found that 40 per cent of those who’d received that cash had spent the lot. That’s some stimulus for the economy!

“This is approximately twice as high as the share of United States residents who reported that they spent the tax rebates handed out in 2001 and 2008,” noted Professor Leigh.

We all love spending free cash – who doesn’t? – But every dollar you fritter away now is a dollar your future self will have to find when there’s no regular money coming in.

The fact is, despite the overwhelming warnings, many of us spend more than we earn without any thought to the consequences… we believe that house prices will always rise… that high asset values equate to “true” wealth… and that we don’t have to save any of our income because our super will provide us with a comfortable retirement.

But hang on a second – How often do you audit your super?

How regularly do you check to see whether your nest egg is still growing… or, at the very least, well protected against the economic downturn? Every month? Once a year? Never?

Have you checked it recently? Maybe you should…

Many Aussies opt for their company approved super fund and then forget about it, expecting to be handed a huge cheque at the end of their working life.

Granted, it’s convenient: no research, no hassle, no worries. There’s usually a big name behind the fund, and the glossy brochure your HR Manager hands you makes you feel cosseted and reassured.

It’s the easy choice so you take it. And you stick with it – because you never physically see the money… it’s just another deduction on your pay slip. It’s not as if you’re actually handing over piles of notes to someone to safeguard and nurture for you.

According to a recent report by superannuation research firm Chant West, the majority of retail super funds (i.e. yours) are classed as “growth” funds; defined as containing between 61 and 80 per cent of their allocation in assets such as shares. Even if you’re invested primarily in a “balanced” fund, 40-61 per cent of your retirement cash will still be held in “growth” assets, says Chant West.

Growth assets are great when the market is going UP… but you want to limit your exposure to these assets when the market goes DOWN. And that’s the problem: in the same report Chant West states that the average ‘growth’ super fund fell by 13% in 2008/09.

This is the worst return since the introduction of compulsory superannuation in 1992.

The worst return in the history of super.

That’s a real kick in the teeth.

And the thing is, unless you’ve been paying attention, you may not have even noticed it. Rest assured, it’ll smart pretty badly when you’re still doing that early morning commute five… or even ten years after you’d planned to retire.

Please understand: sticking with the ‘default option’ of your company super allows someone you don’t know to make all the crucial decisions that affect your financial future.

In terms of committing crimes against your future self, this is just about the worst thing you can do. Believe me – you may as well jump forward in time to the day you retire and punch yourself square in the face.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
Kris Sayce

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Comments

  1. The Australia government “bought” itself some time with the money spent on its stimulus package. A lot of people in Australia think the worst is behind them… it is not. I was in Canada when the GFC happened in the span of less than three weeks everything went from “good as gold” to shit because of what happened in the United States, the preachers of pure capatalism.

    The Rudd government would have committed political suicide if they had done nothing at all, instead they gave money to the base of the econonmy…the consumer. In doing so, it created a “trickle up” effect that reminds me of the exact opposite of the policy that Ronald Regan enacted in the U.S in the recession of the 1980’s. By giving the consumer the “stimulus” the consumer will be encouraged to spend, not hard really judging by the financial lifestyles of most of todays society.

    The $900 given to every citizen, the drastic increase in the first time homebuyers grant, etc, has helped the economy since the GFC. Since I have been in Australia since March I have seen actually benefits instead of the “emergency stimulus” results that have occured in the U.S which is akin to killing a hangover with 150 proof alcohol.

    In Australia, the stimulus (in my opinon) has created bubbles. Mainly a massive housing bubble created by the FTHB and the people buying up, and not to mention the wonderful illusion presented by the real estate market. Secondly the $900 given to the citizens gives them a buying luxury, and when all is spent it will artifically inflate the earnings of many companies.

    People who read my comment might think I am “full of shit”, ” gloom and doom”, or a “bear perspective”. Well, I say, consider some of these facts.

    The Commonwealth Bank in Australia has said it may, probably, most likely set their Home Loan interest rate above the RBA’s. What will that do for all the FTHB’s that bought a home (and everyone else) in the last year or so on the charity of the government interest.

    The U.S is out of recession, so the world is not far behind?

    If you believe that statement, well I want some of the hard core drugs that you are taking because all that we have been led to believe is smoke and mirrors, nothing more. This is not dream time, or a Hallmark moment, or even a Disney movie. We have all over the last few generations spent money that was never our own to begin with and this is the consequence or as this website puts it ” a reckoning”.

    I dare you after reading this comment to do a search on the web for “Las Vegas real estate” and find that you can buy a house in Las Vegas (Sin City) for a mere $30,000 or less. Think I am kidding? Check it out for yourself.

    What if it is you in one years time selling that house/condo/cottage in Sydney, Darwin, Perth etc for one tenth of it purchased value? I ask you to think hard about this… a truly bought home is one that can not be taken from you. When people asked me if I owned my house in Canada I would reply ” No, my bank owns it, I just live there”.

    In closing I feel what is happening around the world right now is a correction or re-adjustment of our financial lifestyles…personal, corporate, government. What would future generations have if we didn’t change this.

    If some readers like my opinion, then I thank for enjoying it. If some of you think its bullshit, than I am sorry I offended you.

    However it viewed, have a nice day!

    M. Klein

    Reply
  2. So does anyone have a suggestion? I switched my super to the cash option in February 2008, but I was kicking myself because I could see the crash coming as far back as August 2007. In June 2008, I switched to defined benefit, which I am very comfortable with! I was lucky enough to get in before the fund closed that option off. Anyway, what is someone in an ordinary job with no choice of fund best off to do?

    Warren Porter
    November 11, 2009
    Reply
  3. Warren

    Your DBF fund is probably OK but check the small print to confirm that contributors are not liable for shortfalls. The strength of your employer is key may also be important with regards to DBFs.

    Coffee Addict
    November 13, 2009
    Reply
  4. What about the option of SMSF? Looking after your own super. I have done it since 1995 as I was self-employed but don’t all employees have this choice now? I helped some friends to do just that and they did not suffer the corrections.
    Only when you yourself become responsible for your wealth will you be able to have total control. So go and do it now, set up your own Superfunds.

    Reply

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