Tie up the pensioners and then nationalise their savings

Tie up the pensioners and then nationalise their savings
  • Politicians created the problem
  • Don’t even invest in the government emotionally
  • Nationalise house prices next

The Australian government is preparing the country for its superannuation reforms: ‘Elderly restraints to be regulated’, reports The Australian.

And just in time, too. Because government restraints on the elderly will be called for when the government publishes stage two of its plans:

The Morrison government appears to be inching inexorably closer to a full nationalisation of the country’s $2.7 trillion superannuation system’, writes Karen Maley in The Australian Financial Review.

Yikes. Can you believe you’re reading that from a mainstream newspaper?

Then again, it’s how all government policies unfold…

Politicians created the problem

Politicians create policies to deal with a problem. In this case, the size of the financial burden on the government to care for the retired via the state pension.

But all government policies find a way to fail. They either create a different problem, which is bigger than the original one, or they worsen the original one.

In this case, super has done both.

Step three is to nationalise the failure. At least the government is trying to clean up its own mess, I suppose.

Let’s take a look at how this is playing out, and similar policies elsewhere in the world.

There’s no doubt super is failing miserably. It comes up so short that even the government couldn’t ignore it any longer and asked for a review by the Productivity Commission.

The findings are pretty bad, despite the fact that the worst failings were excluded from the review. It didn’t even look into whether super was providing adequate income in retirement — the whole point of super. 

Don’t even invest in the government emotionally

The disappointment there wouldn’t have been a surprise given poor stock market returns and low interest rates.

But the Productivity Commission’s diagnosis is bad enough anyway. So bad that the government is planning to delay the initial solution to super’s other failings — more money through higher contributions. After all, if something doesn’t work, throw more taxpayer money at it.

If you want to quibble about me using the phrase ‘taxpayer money’, you might want to reread that ‘nationalise’ comment from above.

But there’s a deeper issue here. Super’s influence, and the influence of similar policies around the world, has turned financial markets into retirement schemes. Retirement schemes that are subject to the same imbalances that put government budgets under pressure in the first place.

If there aren’t enough taxpayers to finance the state pension, then there aren’t enough investors to finance the super system either. It’s an input-output problem. So in the end, the result is the same.

And for the same underlying reason — apathy.

People think the problem of paying for their retirement is handled by someone else, so they don’t have to worry about it. All that’s changed by super is a shift of this responsibility from politicians to finance industry professionals.

I don’t care whether you think that’s an improvement or not. The point is, it isn’t going to work (unless you’re one of the finance professionals).

The funniest part is, having figured all this out, the solution being proposed by the government is to go back to a political influence over retirement savings. The question is how much of a political influence.

Nationalisation? A government super fund? You can read about the government’s proposals in the news.

We’re here to tell you what they really mean. A bit like Karen Maley’s claim that it all leads to nationalisation.

Regardless, the government’s policy will only make the problem worse by returning us to the original problem.

That is, the government’s obligation to care for us in retirement, without the financial means to do so.

Pensions bankrupt international businesses

Here in Europe, there’s an additional version of the problem.

Companies owe so much in pension liabilities to current and future retirees that their entire business is at risk. We’re talking blue-chip stocks and household names going broke.

In a report about this, our research team in London laid out what it called the ‘Condemned 10’: The UK’s 10 companies at risk of failure due to their pension liabilities.

Over in the US, local governments have gone bust under the same burden. Police and fire services suffered while former mayors got paid extraordinary sums they’d legislated into being.

And in Greece, the entire government went broke before pensions were cut…

Not only that, but political control over pension assets is part of what financed the sovereign debt boom in the first place.

Without all those politically mandated savings, government deficits would’ve been harder to finance.

Is Australia better off than all these places? Perhaps. But the underlying economics are similar. A debt is owed to current and future retirees. That hasn’t been provided for.

My point being, these things can and do go badly wrong eventually.

So back to super. What’s the cause behind the miserable performance in the first place? Without figuring that out, it’ll be hard to fix the problem.

Everyone has a different answer to the question.

That doesn’t mean some of us are wrong and some are right. Perhaps we’re all right. Perhaps it’s unions, greedy bankers, fees and everything else hurled at the super industry — including the Productivity Commission’s criticisms.

But that’s not a reason to make the problem worse with more political action.

The real question is why people don’t demand better from their super. They do have a choice, after all.

Sort of, anyway. Actually, they don’t. You can’t opt out. So, as long as all the super funds are about equally bad, they can get away with it.

That’s where the government’s fix comes in. It claims to be able to counter the problem of the bad super system it created by changing it somehow.

Good luck with that.

Nationalise house prices next?

Being able to leave is the only reform needed to sort out the super industry. If people only participate in what they think benefits them, the super industry will have to benefit them.

The government’s policy is the opposite. Higher contributions and more government control.

The closest you can get to opting out of super is to run your own fund.

And what about that other trusty asset which retirees will turn to in their golden years? Their home.

Well, it turns out that treating a house as an investment can turn against you about as much as trusting the government.

Fitch Ratings is expecting Australian house prices to be the worst performing in the world this year…

Is there anywhere to hide from this mess?

Sort of. Last week, I pointed out how the Australian dollar was going to protect you from a financial crisis. It could protect you from lagging investment returns, too. But only if you know how to use it properly.

And that’s where the strategy Shae Russell, Jim Rickards and I are recommending comes in. It’s laid out in our publication Strategic Intelligence. Subscribers already know about it.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia