In our new book, Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017) – Thomas Fazi and I argue that that reversal of many of the neoliberal changes that governments have agreed to over the last three or more decades is not only possible but desirable. While many of our proposals exploit the legislative power that a democratic government clearly possesses (such as reregulating banking etc), other proposals directly rely on the currency-issuing capacity of the government. One such proposal is to create national pension funds (or superannuation funds in the Australian terminology), which provide an efficient and secure vehicle for workers to channel savings while working to improve their retirement prospects later in life. This idea runs counter of the neoliberal myth, which claimed that the ‘market’ would be a better vehicle for creating institutions to manage workers’ saving and maximise pension entitlements. In Australia, we are now witnessing the indecent greed and major rip-off of workers that the ‘market’ solution has delivered. Even one of the architects of privatised superannuation schemes, the former conservative Treasurer Peter Costello is seeing the folly of his work. In the UK Guardian article (October 13, 2017) – Peter Costello calls for nationalisation of superannuation – we learn that the former treasurer believes that “Australia’s collective $2.3 trillion pension pot would be better invested by a government agency”. The natives are getting restless!
I have written about the superannuation rip-off before – Eliminating the great superannuation rip off.
The former treasurer told a superannuation conference in Melbourne (October 12, 2017) that in relation to the government running a national superannuation fund instead of the current situation where the big 4 banks (Costello calles them a “quadropoly”) run the industry and earn an “enormous advantage”:
There would be huge economies of scale. It would end the fight between the funds that have been unable to attract the money voluntarily …
Compulsory superannuation has created an industry and delivered benefits for the young and ambitious and talented Australians work in it …
But that’s not really why it exists. It exists for those who are forfeiting their wages month-in, month-out on the expectation that 10 or 20 or 30 or 40 years of saving will get them benefits to enjoy in their retirement. As the system matures we have a very long way to go to make sure we deliver them those benefits.
Peter Costello has called for the nationalisation of superannuation, arguing that the flow of compulsory contributions should be wrested from unions and banks, and instead invested by a new government agency.
What is the issue here?
In the Fairfax article (October 23, 2017) – Big four banks set to rake in $31b in profits, boosted by rate hike ‘tailwind’ – we learn that:
The big four banks’ combined earnings are likely to exceed $31 billion in 2017, supported by their moves earlier this year to target property investors with higher interest rates.
I wrote about the way the big four banks in Australia screw consumers in this blog – Banksters misbehaving again but Portugal offers hope.
This is an industry that is dominated by four banks that have continually waged a war against any prudential regulation that would reduce costs to the consumer or require the banks to hold more capital.
Despite all their rhetoric that they are “the strongest banks in the World” etc, they are, in fact, a highly protected, oligopolistic sector that can gouge huge returns on equity that are not enjoyed elsewhere in industry or across banking in the world.
They regularly fail to mention that they were within days of insolvency in late 2008 when their massive exposure to the frozen global wholesale funding markets meant they were unable to repay their maturing loans.
At that point, like all those institutions that survive on ‘corporate welfare’ they went cap in hand to the Federal government and requested that it provide a guarantee on all new foreign currency borrowing.
The government duly agreed and the big four were immediately able to access funds and roll over their debt exposures.
Whichever way you want to look at it, it was the federal government’s currency-issuing capacity that saved the Australian major banks in the dark days of the GFC.
The major banks were not as robust as they make out. They were about to become insolvent and given their dominance in the sector that failure would have had dramatic negative consequences for the Australian economy and would have required a much larger fiscal intervention.
They are classic examples of the ‘privatise huge returns, socialise huge losses’ syndrome that neo-liberalism has created to ensure the state works in the interests of capital and against the interests of the rest of us.
The big four Australian banks are also implicated in Australia’s superannuation industry rip-off. A significant proportion of their shares are owned by the big superannuation funds.
As the former Treasurer said of this share ownership:
There would not be another western country where the stock exchange is so dominated by financials, and in particular by the big banks … This is the ‘quadropoly’ as I have previously described it …
I do not think this is healthy … I have no doubt it is of enormous advantage to the banks. They never have to fear the flight of Australian investors …
You can see why an air of impregnability and complacency has seeped into the management of the banks. Market discipline is negligible, and their returns on equity are hardly matched anywhere in the world.
The highly concentrated nature of Australia’s banking sector – the big-four major banks hold 78 per cent of the total assets held by all Authorised deposit-taking institutions – allows them to earn returns on equity that are sometimes twice the comparable bank elsewhere in the world.
The Commonwealth Bank, for example, earned a return in 2015 of 18.2 per cent. The other 3 big banks in Australia generate similar returns, a sure sign of market power and a lack of competition.
At present, the big four are mired in scandal as a result of a litany of financial frauds and abuses of market power seeping out into the media.
The call for a Royal Commission into their conduct is being vigorously rejected by our conservative government because they know that such an enquiry will expose terrible abuse of the system that the government has allowed to occur because the banksters are their mates (financially and personally).
And this conservative government is just an extension of the Howard government in which Peter Costello was treasurer. At least he is now starting to acknowledge that he was responsible for some of this greed.
In his speech on superannuation he said:
Now I am not pointing the finger at anybody, because you’ve got to remember that I was in government for nearly 12 years, so if you want to point the finger, you can point it at me.
Which brings me to the main issue.
At present, Australia has a compulsory superannuation scheme, where Australian workers have to contribute a proportion of their pay each week to superannuation funds (9.5 per cent). That rate will rise to 12 per cent by 2025 (scaled upwards from 2021).
A large number of workers are forced into a specific fund and cannot choose to transfer to another fund.
The overall sector is split between not-for-profit funds (so-called industry funds) and for-profit funds (so-called retail funds).
When considered the profit-seeking funds, we don’t have to look very far at who is the dominant owner/player – the big four banks again.
The approach of the bank-owned funds is to maximise profits and dividends to capital rather than provide services that are of benefits to the members of the superannuation fund – the workers who contribute.
The data shows that:
1. Management fees for the for-profit funds are much larger.
2. The returns on the for-profit funds are much lower on average.
While the conservatives are always talking up ‘individual choice’, the superannuation sector they moulded, particularly during Costello’s era as treasurer, was the anathema of choice.
What it actually did was ensure these profit-seeking funds would be able to cream off huge amounts of the worker contributions (via their employer) into so-called ‘management fees’ and ‘commissions’.
Currently, Australian workers pay $A31 billion in such fees every year “with half that money going to funds that manage just 30 per cent of all accounts” (Source).
A simple calculation, using the Australian Government calculator, shows that an 18-year old with a starting salary of $A50,000 and only contributing the complusory amount to the super fund would accumulate $A195,557 by the retirement age of 67 in a high-fee fund, whereas in a low-fee, not-for-profit fund, the same worker would accumulate $A308,418 (Source).
The difference is the rip-off that banks and insurance companies get by unnecessarily gouging fees.
The peak-body for the not-for-profit industry funds told the press that the super fees were like:
… a honey pot for Australia’s scandal-prone banks.
The banks have set up the sector to benefit themselves:
… they control a majority of Australia’s platform retail super fund market, a majority of the advice market, and 42 per cent of the group insurance market …
An analysis in 2016 concluded that (Source):
… an enormous number of employees are duped and dudded by Australia’s existing superannuation policy.
Even conservative media outlets like the Economist Magazine are recognising the scandal in the finanacial sector. In the article (May 1, 2015) – What’s wrong with finance – we read that:
Indeed, one problem with financial products is that they are not like toasters, where a consumer can instantly see if something is wrong; it may take years (decades in the case of pensions) for the problems to become apparent. By that time, it may be too late for consumers to repair the damage to their wealth.
Which is apposite in the case of superannuation. Most of us do not really get to grips with what the implications of our super investments are until we are filling out forms at the end of our working life.
And even then we don’t really understand the massive rip-off that has been taking place for the last several decades of our working lives – as the profit-seeking funds gouge our savings to shift money to shareholders.
The article quotes a commentator who concluded that:
… at the current state of knowledge there is no theoretical reason to support the notion that all the growth of the financial sector in the last 40 years has been beneficial to society.
This should also be some solace to all those in Britain who are worrying (unnecessarily) about the Brexit implications of the banks and finance companies leaving.
I wrote about that issue in this blog – Why Britain should not worry about Brexit-motivated bank relocations.
The facts are fairly clear (Source):
… because finance is riddled with “market failure” – in other words, because the incentives of those in profit-seeking financial firms align so poorly with their customers’ interests – don’t presume that private firms are more efficient. Quite the contrary …
Public sector funds achieved the highest average net returns over the 14 years to 2013, exceeding those of the entire Apra-regulated superannuation industry by 1.1 percentage points, industry funds by 0.6 percentage points and retail funds by 2.2 percentage points per year over that period
So the public sector funds that look after the superannuation funds contributed on behalf of public employees are the best peformed.
Which is why Peter Costello, the former conservative treasurer who, in part, created this disastrous situation, is now arguing that the government should take over a large portion of the superannuation industry – and run it like the Canadian Pension Plan.
Which is exactly what we have argued in our new book Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).
We argued that while renationalisation of many sectors would be of benefit to society, it is most urgent and necessary in the banking sector – since all the other sectors of the economy arguably depend on it.
Under our current system, banks have the power to determine, to a large degree, the level and composition of investment, demand and production within the economy and thus its overall direction.
They can also engineer credit-driven booms at will, which in turn leads to soaring prices (especially in the housing market).
When these booms inevitably go bust, triggering a crisis, the banks attempt to repair their overleveraged balance sheets by engaging in excessive deleveraging, cutting off credit when households and businesses need it the most, and further exacerbating the post-crisis recession.
THey also shore up their profits by gouging worker savings through the excessive fees imposed on the retail super funds they own.
In Australia, any proposals to tinker with the current system will be fiercely opposed by the monied interests that bleed the industry dry of reasonable returns to the members.
But the federal government should not allow the retirement incomes of the vast majority of workers to be at the the behest of this lazy underperforming elite.
In that context, I would create a national public superannuation fund that offered full vesting to all current fund members and zero management fees. The operating expenses would be covered from the fund’s investment returns but with the elimination of the gouging from private profits and management fees the returns would be signficantly higher even if the fund only invested in risk free assets.
This would lead to a significant decline in the size of the private industry and the gouging would decline. But people would then have a real choice between guaranteed returns which had low volatility versus the higher returns but a strong chance of getting old at the wrong time. I think there would be a flood into the public fund.
This is not a new idea and has a long tradition in the progressive debate within Australia.
In his famous 1969 federal election policy speech, then Opposition Leader Gough Whitlam said that:
Too few Australians now have the opportunity to join superannuation schemes. It is time this opportunity was extended to all Australians. Only the national government can create this opportunity … Our objective is to give the three-quarters of our people who are not able to enjoy the benefits of superannuation the opportunity to do so.
History tells us that Whitlam’s tenure as Prime Minister was overrun by the interests of capital and he never got to introduce his national scheme.
While some might think the call to nationalise industries – like banking, superannuation, transport, power, water – it is clear that the idea is starting to gain traction, even in conservative circles (to wit, Peter Costello’s call for public ownership of superannuation).
All the fears that a public pension plan could go broke are, of course, just unfounded. A currency-issuing government can always pay pensions and meet associated obligations.
What they cannot guarantee is that there will be sufficient real resources (including expertise) to ensure those on retirement benefits have access to the services they desire.
But by investing in education, training and health care, the government can certainly help to ensure those requirements will be met.
That is clearly a role that a national superannuation fund could serve while increasing returns on workers’ savings.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.