I have received several E-mails over the last few weeks that suggest that the economics…
Time to nationalise superannuation in Australia – even conservatives think so!
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.
Conclusion
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.
“In that context, I would create a national public superannuation fund that offered full vesting to all current fund members and zero management fees.”
Is that for the same reason there is a ‘social security fund’ in the USA? To make the polity feel like they own something, when if fact they can’t do that because of the fallacy of composition?
Whenever I look at a pension fund’s accounts (particularly a public sector pension fund) I’m always struck by how the worker’s contributions, plus the other worker’s contributions in the form of ‘investment income’ covers the ‘benefits paid’.
Almost like if the state paid out ‘benefits’ in the form of a state pension and then recovered ‘contributions’ from everybody in society in a fair way. We could even simplify the term ‘compulsory pension contributions’ and use a shorter word – ‘tax’.
We could create the same fictional feeling of saving, by providing a capitalisation number for a state pension in a fictional state pension ‘fund’. You can generate that with a computer and a formula.
One of the new justifications for large companies to overcharge, be exempt from competition, and generally allowed to acts as oligopolies is the “Think of the pension funds” line. Is the wealth effect so great that it offsets the price gouging it encourages?
Hello,
Superannuation is the FICA scheme and the same as a tax. It reduces aggregate demand. A currency sovereign does not need to collect the superannuation to fund the scheme so why collect it? Simply offer a garanteed state pension and stop pretending their is no money for that.
Interesting development. Key issue is really credit allocation, as nationalization would massively reduce private sectors access to funds. I have just completed paper on central bank digital currency where this is also an issue, i.e. what will the CB do on its asset side when/if the public shifts deposits. Agree also with other comments that fiction of pre-funding could be abandoned, but may be politically premature
I have pointed the fallacy of the compulsory super out more than 10 years ago, but who reads my website ‘hawilspoint’, and the media, politicians and Union bosses will do anything, that views like mine do not see the light of day.
As Alan above comments, simply offer a guaranteed state pension, and that is what the Australian government is doing now, because the majority of the Australian retirees are either on a part- or full government pension now, therefore abolish the means-test of the age pension and abolish any tax concessions for super, and if anyone wants a higher standard of living in retirement, he/she should save towards it with after tax income.
Probably all the politicians are aware of the “Great Australian Super Fraud” and are not interested to change it, because they benefit greatly from it.
What can be really frustrating, is, to listen to the ABC presenters on a $300.000.00 plus income beating around the bush about the super, yet they are going to benefit greatly from it.
I tried for years to get the FOUR CORNERS program to bring the super fraud to the attention to as many people as possible, but without any success.
Why did you choose to re-regulate banking instead of nationalizing it?
“what will the CB do on its asset side”
The CB asset side floats if it is the issuer of the denomination its balance sheet is denominated in. It is the residual in the system – effectively recording in a floating fashion the net outstanding debits held elsewhere in the currency area.
Dear Bill
We don’t need government pension funds. What we need is a universal old-age security program financed by general revenues. That would be the equivalent of a universal health care insurance. Such a program would be a strict pay-as-you-go scheme, which is the best scheme. A funded pension scheme is an illusion because ultimately nobody is supported by funds. People who don’t work are always supported by people who do work. Suppose that every Australian under 65 were to die tomorrow, would those over 65 still be able to enjoy their pension incomes as before? Certainly not.
We cannot transfer resources to the future by financial means. That is the same fallacy as the belief that we can borrow from grandchildren and impose debt burdens on them. Of course, in an open economy it is possible for a country to run current-account surpluses for many years and then run current-account deficits afterwards, but that would only mean that the retirees of that country are supported by foreign workers. If every country with an aging population tried to generate pension fund surpluses and invest them abroad, then we would have the fallacy of composition again.
My view is that every country should deal with the aging problem on its own and not try to use foreigners to solve it either by running current-account surpluses or by importing immigrants. In any case, in nearly every country with a large immigrant population, the immigrants pay less into the treasury than they receive from the treasury. Immigration isn’t really a solution to the aging problem, if only because immigrants grow older too.
Regards. James
I am assuming that the project of digital bank currency refers to a decentralised system. What is the point of a central bank digital currency? Isn’t it a solution looking for a problem, just because we have tulip mania anyone wants to find an application for tulips? The decentralised blockchain-based ledger offers redundancy but at a what cost? This is actually true whenever we introduce redundancy in any systems that’s why this has to be designed consciously. The cost of blockchain-based systems is in using broadcasts instead of unicasts or multicasts and having to continuously recalculate checksums of blocks of newly added transactions in a computationally-intensive way – otherwise there will be no confidence in the transactional integrity of the distributed database. The payout for this excessive effort might be newly minted units of the digital pseudo-currency or transaction fees. Even now when the volume of transactions is not that high, a lot of electricity is wasted on performing these useless computations. What is the current carbon footprint of the bitcoin? Anyway since the system is decentralised and token-based it is impossible to introduce a proper central bank, capable of creating liquidity out of the thin air (by amassing on its asset side things like mortgage-based securities and effectively monetising dodgy assets). That’s why we are back to 19th century – the era of gold rush and Irish Famine. The idea of ultimate stripping of fiscal sovereignty from the state so that private property will be the only property (obviously in the hands of the 1%). Loanable funds theory not describing the real world? Make the real monetary system conform to loanable funds theory by removing money-as-a-debt-assets and leaving money-as-a-token-gold-crypto-nugget.
It could be possible to redefine a decentralised digital currency not as tokens but as debt-relations to resemble old good bills of exchange but then there is an issue of preventing fraud unless anonymity of the agents is curtailed.
Wouldn’t it be better to redesign a hierarchical digital monetary system where the central bank is the central node and modern open protocols (not something as primitive and hackable as Swift) are used for transactions between financial institutions and non-financial corporations and individuals? A certain level of redundancy would increase the level of confidence. The relationship between the central bank and the treasury will also be defined in a clear way so that both institutions will work towards the common good of the 99% of the citizens (the 1% will look after themselves anyway, as usual).
Regarding the issue of the assets of the state-owned superannuation institution, the problem is not in the access to funding. What is wrong if commercial banks borrow money from the central bank instead on selling debt securities to so-called super funds? It was Otto von Bismarck who invented the modern pension system. The government institution merely acts as a bookkeeper. They record how much workers will be due when they retire based on their current contribution. At the current period of time pensions are paid to retirees and contributions are levied on workers. There is no reason why pensions must be equal to contributions so it is not strictly “pay-as-you-go”. How much to be paid and how much to be distributed is the issue of fiscal policy and it contributes to the overall deficit or surplus. The underlying issue is the redistribution of real resources of the economy from these who work to these who can’t or have already worked enough. We don’t need to make them pseudo-capitalists. It is true that capitalists do capture surplus value because of ownership of means of production but there are other equally efficient means of taking away things from the worker and giving them to someone else.
The real reason why we are subjected to the forced-saving experiment in the form of private super is purely political. Bismarck wanted people to stay in Germany not to migrate to America. But the super industry makes all of us minor capitalists. I should start my day by checking the stock market how much I have earned. But every night I cannot go to bed because inflation may eat away my savings… Why Peter Costello wants to remove this smoke-and-mirror I still do not fully understand. Maybe because post-baby-boomers retirees who didn’t fatten up on the housing boom will have to live in poverty and may be disloyal to the current regime at a some not-so-distant point of time.
Hello Professor Mitchell,
What is your opinion on the recent election of New Zealand’s new prime minister Jacinda Ardern and her plan to add full employment(along with inflation targeting) to the central bank’s mandate?
To James: Agree but fact is many countries use aging as argument for large CA surpluses; even IMF has adjusted its external imbalance model to accommodate this
Re central bank digital currency, no one is currently contemplating blockchain; q is if CB should open regular accounts to the public in competition with private banks as first step; but q remain what to do with funds and shift in reserves
Who would have thought a character like Costello would be in Ideological disarray over a system paradigm he championed when in office.
Its one of his core attributes as then treasurer he was always setting up rent-seeking ponzi-schemes.
Privatization featuring self-regulating entities like the electricity grid example: abolish the independent regulators then make a feedback loop where privatized corporates advised the only regulator (former insiders) on what was appropriate regulation for them. Of course a pig administering his own trough is an adequate description. Pass the costs onto the public for this one.
In Costello speak he says the benefits are as follows:
“The AER will reduce regulatory complexity and streamline energy regulation. This will, in turn, increase competitiveness and efficiency in Australia’s energy markets, enhancing the climate for investment and benefiting related markets and consumers.”
https://www.themonthly.com.au/issue/2014/july/1404136800/jess-hill/power-corrupts
😉
You see its almost like some formalism in a science subject. The Costello rule: magical formula that when finished points back to where it started as the preferred solution.
Oh right.
Turns out people who seem to push numbers and produce nothing to benefit society push numbers and produce nothing for society.
Of course, the free lunch insult applies to someone like me–not the financial elites.
Just a regular day in neoliberal world where working hard to produce new product/knowledge doesn’t get you fair compensation.
Dear Thorvald,
I was under false impression that blockchain was considered, there is some information on Bank of England website
Home > Research > Digital Currencies
I will be very interested in reading your paper.
There might be a trend of separating electronic payment systems (at a retail level) from lending. Examples are WeChat Pay and Alipay or Paypal while older-generation credit card payment systems integrated payment and bank lending. The idea of providing financial services as a public service by a state institution (CB) is very interesting.
Compulsory super should be abolished. However there is a case for converting industry super funds (which are essentially cooperatives, like credit unions) into retirement savings vehicles – which could supplement government issued (and universally available) retirement pensions. There is no reason why industry funds could work in competition with a national super scheme, which would help to keep the former working efficiently and free from rorts.
The fact that industry funds are still working imperfectly does not imply that their operation is incapable of improvement or reform. On the other hand, the privately operated (mostly by big banks) retail funds are riddled with rorts, and are quite incapable of reform, and should be closed down.
Why to just offer guaranteed state pensions at 60?
Make super contributions voluntary and provide all Australians with a pension up to the median income. The lower limit being the JG wage.
Any contributions to your super can be tax free and tax paid on it when you withdraw it.
You can have a government fund paying the rate of economic growth and industry funds (invested in the stock market) Interest earned in the industry funds above the growth rate are subject to a tax.
For this scheme to work you’d need a generous tax free threshold on wages up to the median income.
If the median income is $60,000 a year then your pension is between the JG wage and up to the $60k. (depending on your salary when you were working) The tax free threshold would be $60k. Those that chose to supplement their retirement with super contributions can withdraw that amount and pay the nominal rate of tax on it.
Simple. For those that want to stop and retire they can. For those that enjoy work and see financial benefit in continuing to do so, they can. Every Australian would have access to provide themselves with additional income during retirement. Politicians, CEOs, the working class are all under the same scheme.
The super industry has wrought so much harm, it is hard to get your head around it. The destruction of any semblance of private shareholder discipline of the management class being only the tip of the iceberg.
Superannuation is all about getting one up on your neighbours, primarily your younger neighbours. Why this is any sort of government function, I can’t fathom.
A government run and backed super fund is just a highly inequitable government pension scheme. Giving tax concessions for retirement savings is equally dubious, unless it serves to discipline the market in some fashion such as requiring investment to be in new productive assets.
Even a transparent aged pension scheme seems inferior to a proper Job Guarantee, provided that the infirm (aged or not) have access to appropriate disability schemes and/or reduced working hours.
Unfortunately, rather than investing in a healthy, educated and experienced domestic work force, Canada’s public pension plans are leveraging up and purchasing luxury retailers, lottery operators, and private equity firms in foreign countries.
Details at:
Inside the risky strategy that made Canada’s biggest pension plans the new ‘masters of the universe’,
Theresa Tedesco and Barbara Shecter | October 14, 2016
http://business.financialpost.com/news/fp-street/inside-the-risky-strategy-that-made-canadas-biggest-pension-plans-the-new-masters-of-the-universe
This issue is back in the media right now!