Super, does it have an Achilles heel?

[Mr Z]

This is something I have no empirical measure of, it is just a suspicion, an idea that I am keeping an eye on...

Basically it revolves around the demographics of the baby boomers. They are as a group such a significant population bulge that they have been a force unto themselves in many ways. Through out their lives by and large it has been positive but as they hit their twilight years we are seeing more of the downside of having such a distorted population profile.

The boomers are a large part of our workforce and as a group hold the highest dollar value invested in most all investment areas, one of them being super. As they collectively get to the point that they are no longer putting into super and start drawing down on super we will experience significant selling pressure in the areas that most of their super in invested. The only way this can be held static is if the funds flowing into the market more than meet the redemptions. Given the demographics of the following generations I can't see that this is likely. So I am kinda seeing the boomers as a bear market in themselves or at best a significant market headwind. My approach with my fund is to be invested where I think the boomers are not concentrated.

Consider these things...

1. It's selling at the margin that turns a market so it does not take a huge imbalance to driven a market lower.

2. It is a vicious cycle, as this money is needed for income the lower the market moves the more needs to be sold to maintain income. Assuming that dividends don't meet current needs... most will not.

3. Markets look forward, once this dynamic becomes apparent it will be discounted in the present, it will not be a slow drift lower if it is an identifiable dynamic.... it will be a 'phase transition' with a relativity rapid move to the new discounted level.

4. Not only are the generations following the boomers less in number they are lesser in wealth and in many many cases they are simply poor money mangers that don't save at all and have debt that would have scared the average boomer when young. They have been born and raised in a benign environment and behave as if there is no risk.... ever.

When you look at the market this way our super system is simply a pay as you go system with the market as an intermediately that can revalue things in the bat of an eye. Ultimately its zero sum, money must go into it for it to come out of it and if this where a traditional gov pension plan officials would be looking forward and worrying about the money in vs the money out over the next couple of decades. (started 2008)

Some circumstances could mitigate this, things like working longer but I can't think of a reason the problem will go away. Assuming of course the supposition is correct!

So my question is... Is the number you look at in your super account merely a paper gain that will not be there when you really need it. Remember we can't all get out of the market with the number that is printed on our various statements!

The second part of this thought is that should the super system start to fail will we see some sort of government grab for the money with a pension promise as compensation. After all its a big pot of money, government will likely have a big need if we keep spending at this rate! Rudd has even talked about the super industry buying special gov bonds.... what if that is the thin end of the wedge? One mitigation here is that gov will have the same trouble liquidating to get the funds but as they are a single entity if the assets where taken over they could control selling possibly avoiding the worst.

I am bias, I run my own fund and I keep as little money in it as possible. I invest outside of it and take the tax hit, at least I know what I have.... I just can't bring myself to completely trust them. Years ago I had one relative that was completely screwed by a retroactive rule change when he went to cash his super in. At the time he did what he did it was the best thing to do, after the event he got a "by the way you now owe us $x extra" from the ATO, he was gob smacked, fought it but lost. For the life of me I don't understand how in a democracy rules and laws for that matter can be retrospective, frankly it scares me. Ever since then I have been wary about super.

I realize that it would be a huge thing to restructure super in such away but I see it as a response to a crisis which is always when the ugliest things get done.

Now even if there is no such crisis I think you can argue that the probability on some market impact is high so you may want to factor that into your thinking.

Now please tell me my this is just loony tunes thinking? Am I over looking something big? Have I just got it wrong? Please try not to attack me, it is just a theory, a talking point if you will! I am not married to the idea, more searching for evidence/ideas around the theme.

One last thing... if this is a real problem it applies to all assets that boomers hold to some degree, RE comes to mind!

 

[prawn_86]

Re: Super, does it have an Archilles heal?

Just a quick reply, cause im at work, but i would think that what you are getting at is similar to what Japan has experienced over the last 20 yrs.

Stagnant/no growth with very little prospects into the future. Their reasonings are slightly different, but they do have one of the worlds oldest population per capita as far as i am aware.

 

[nioka]

Re: Super, does it have an Archilles heal?

The second part of this thought is that should the super system start to fail will we see some sort of government grab for the money with a pension promise as compensation. After all its a big pot of money, government will likely have a big need if we keep spending at this rate! Rudd has even talked about the super industry buying special gov bonds.... what if that is the thin end of the wedge? One mitigation here is that gov will have the same trouble liquidating to get the funds but as they are a single entity if the assets where taken over they could control selling possibly avoiding the worst.

This HAS HAPPENED IN THE PAST and should not be overlooked.

Shortly after I started full time work,1947 there was a new deduction from our wages. It was separate from the taxation deduction and was for a new government fund that would guarantee everyone a pension on retirement. 3pence was deducted out of my wage of 27shillings and 6 pence.
A few years down the track the government in power transferred all the funds into consolidated revenue with the understanding that we would still get a pension on retirement and it would be paid from consolidated revenue. The extra deduction was included in the income tax.

A few more years down the track and they means tested the pension.

Remember too in those days there were death duties that swallowed up a lot of an estate. One case I recall was a neighbour died and a third of the farm was sold to pay the duties. The son that inherited the farm died two years later and a third of the remaining farm was sold before the grandson inherited the balance. The farm then became uneconomic and the owner went out shearing to cover costs. ( To rub salt into the wounds his wife took off for the big smoke with a truck driver while he was away shearing, took him to the family court and got half his assets so he had to sell the farm. Ran into him recently, retired on the pension.)

So the moral of the story is "don't count your chickens before they hatch".

 

[Julia]

Re: Super, does it have an Archilles heal?

Nioka, the exact same thing happened in NZ, I think it was when Muldoon was PM. We contributed to a specific Super fund, and then it was all rolled into consolidated revenue. However, the difference now between NZ and Australia is that they do still provide a non-means-tested pension for everyone from age 65.
Have no idea how they manage to fund this, except that it is included in the individual's tax assessment, so I suppose it's effectively means tested by that measure.

Mr Z, remember that the baby boomers cover the birth years 1946 - 1962, so any moves made regarding their super won't be happening in a sudden or compressed period of time.

The other assumption in your hypothesis is that as soon as a baby boomer hits retirement age he/she will be withdrawing all their super from the market. Perhaps some of them will, but I'd suspect many will be like me (a baby boomer) and will not change anything on reaching retirement age, other than moving the SMSF from accumulation phase into pension phase. I'll move my funds from shares to cash and vice versa in line with market trends in the same way in 'retirement' as I've done in the years prior.

I don't live in fear that the government will somehow take my super off me.
Probably wouldn't have the same confidence if I were invested in some public SF. But I think the political backlash if they were to interfere drastically would be more than any political party would be able to cope with.

 

[tech/a]

Re: Super, does it have an Archilles heal?

So the moral of the story is "don't count your chickens before they hatch".

Ive said this many times before.
Those who do retire and have a healthy super to retire on are far from guarenteed a financially secured retirement until death.

You really need to consider the possibility of lasting 30+ years after retirement.
In 20 or so years time inflation and your own needs will require the need for passive income.
So think about how you can best have your super return you passive income which will keep you ahead of immediate needs.

( I use rental)

 

[brty]

Re: Super, does it have an Archilles heal?

Governments tinker with super all the time, though last years raising of the age pension age was probably the start of real change. You wont hear a politician even mention changes this week, but there would have to be a raising of the age you can obtain super on the cards. There will also be other changes over the years, things like the tax free status of super for over '60's will disappear with-in 5-10 years.

Mr Z, the only part of your post I don't agree with is the effect of demographics in Australia. Because of immigration and the baby bonus, our cohort of babyboomers does not look as bad as most of the western world, therefore the effects of the BB's retiring wont be as bad, especially if the govt keeps raising the super guarantee payments percentage of the workers.

brty

 

[Mr Z]

Re: Super, does it have an Archilles heal?

Mr Z, remember that the baby boomers cover the birth years 1946 - 1962, so any moves made regarding their super won't be happening in a sudden or compressed period of time.

This is true, I would like to see some distribution numbers to see if there is a bulge in the boom. I would guess it is front loaded?!

Found this...

The concern is that if at any time the retiring numbers tip the balance on the working numbers the thing starts to head off in the wrong direction possibly compounding. That would impact people like you and me, I will react if it appears to be damaging my fund significantly.

My back of the envelope calcs put boomers at 4x% of the workforce, from memory. Really must go look that up again! I think they where like 25% of the population and by the time you backed out the retired, to young to work & students (assuming unemployed and those not seeking work are evenly distributed across the spectrum) ... anyway it put them toward half the work force. It sounds wrong now...!!! anyone got a good source? I will go look when I have some more time.

 

[Mr Z]

Re: Super, does it have an Archilles heal?

Mr Z, the only part of your post I don't agree with is the effect of demographics in Australia. Because of immigration and the baby bonus, our cohort of babyboomers does not look as bad as most of the western world, therefore the effects of the BB's retiring wont be as bad, especially if the govt keeps raising the super guarantee payments percentage of the workers.

Immigration is a logical fix but I have read claims that our immigration laws mean that we basically get a big age spread because other family members are often brought out after the immigrant. The claim was it actually didn't impact the demographic spread as you would expect.

I dunno about that one, left me head scratching!

 

[explod]

Re: Super, does it have an Archilles heal?

Ive said this many times before.
Those who do retire and have a healthy super to retire on are far from guarenteed a financially secured retirement until death.

You really need to consider the possibility of lasting 30+ years after retirement.
In 20 or so years time inflation and your own needs will require the need for passive income.
So think about how you can best have your super return you passive income which will keep you ahead of immediate needs.

( I use rental)

Not the whole story Tech. My DIYouself funded super fund will outlast my wife and I as we make the investments and trades within in it. On the performance of the last six years it should continue to grow exponentially providing we keep picking the right investment plays.

And in old age a great interest as well. What we should be doing is giving people a proper financial education.

 

[Mr Z]

Re: Super, does it have an Archilles heal?

But how does a market grow without a constant supply of new money? It can't, not all can win, especially not to the degree you have. The maths stops working unless ever expanding amounts of money arrive on the scene. That may happen if it is simply printed (QE) but the value of it will be ??????

I note that Walmart saw a 6% month on month price rise recently. The largest in its history... 72% annualized rate. This massive stimulus will flow to prices sooner or later which will lead to higher rates which will compound any structural issue the market has. Big inflation has happened, we are a little bit pregnant in that regard but not showing that much here in Oz just yet.

Explod, play your cards close... this will become dog eat dog IMO. Zero sum game remember!

 

[Pager]

Re: Super, does it have an Archilles heal?



Learning to trade/invest using a low risk strategy is going to be the best way forward IMO, handing over your super egg at retirement as many do to fee based or commission based advisors will see many get stung no matter how much regulation there is.

During your working years learn to invest/trade so hopefully by retirement you can take control and run your own super/investments if you haven’t beforehand without paying fees and commissions to others, plus you have control over what happens, its also a good way to keep the mind active and although im a long way off retirement its also very rewarding and satisfying to do IMO

 

[Mr Z]

Re: Super, does it have an Archilles heal?

+1

At least with a SMSF you can run a counter strategy if required and be extra vigilant about loss control.

Suits me but then I am a control freak....! Kidding... kinda... a little

 

[awg]

Re: Super, does it have an Archilles heal?

Hi Mr Z,

The questions you raise could effect almost any investment class, especially if you regard super as merely a tax efficient vehicle for investment that can include any asset?

I fully expect that regulatory changes affecting super will be made that reflect govt budgetary requirements though.

Thats the way govts work, as Niokas example clearly illustrates.

People often used to ask me why a certain policy of government policy had changed that effected them, and when I was honest, it was always about either getting a vote or saving a $.

Not to mention sustainability of many unknown variables into the future

May I enquire what is yr approx age demographic?

 

[basilio]

Re: Super, does it have an Archilles heal?

That was a long story you ran on super Mr Z. I thought your logic and the inevitable consequences far too realistic to be seriously acknowledged.

One of the points you didn't mention but which is also (in my eyes) a significant issue is the role of charges on the super funds. In my view the ticket clipping of firstly individual fund managers and then the super funds themselves saps much of the investment value allegedly accrued in our super. It usually runs at around 2% of the whole fund each year. To put that in perspective if the fund is gaining 8% a year then a quarter of that gain is being lost in fees and administration. And of course if you have a couple of bad years it looks far worse.

I don't have a solution. I'm just very cautious about believing that there will be a continuing exponential growth in share market and property values that will support the super schemes in place. Let's remember that this is the very first time a society has attempted such a wide ranging process. We're the guinea pigs.

 

[Mr Z]

Re: Super, does it have an Archilles heal?

I'm a boomer as well !

We are the crowd when it comes to investing which is why I pay close attention to what my friends own... always listening, never talking when it comes to money chat. What they think gives me a general heads up, that is why I need forums, its therapy I know I 'm a turn coat, but nobody else will pay my bills!

Besides if they found out I starting buying gold in 2001 they'd have poked fun at me ever since. I got a thick skin but that'd be too much.

Yup I just can't bring myself to trust the gov over $ given what is transpiring. Maybe it will be to my detriment in the end but that is a risk I will take.

I notice that Abbott is talking infrastructure bonds & super... it is a rising theme. Trust us we are from the government and we are here to help : hmmmm "yeah right" LOL the only two positives I know that make a negative!

Hopefully its a baseless concern in the end but I think it bears keeping in mind.

Cheers
Z

 

[So_Cynical]

Re: Super, does it have an Archilles heal?

2. It is a vicious cycle, as this money is needed for income the lower the market moves the more needs to be sold to maintain income. Assuming that dividends don't meet current needs... most will not.

I think this (above) is a bit of an Achilles heel in your theory...the cooper review into super was a very comprehensive study revealing some amazing stats.

• 30% of the total funds in Aussie super are held in SMSF's (over 332 billion)
• The average member balance inside SMSFs is $456,000
• SMSFs beat larger APRA-regulated funds in earnings by usually 1 or 2% PA

So i would conclude that 30 to 35% of the boomers will be self managed and thus doing ok and have no need to eat into there capital..well certainly wont be forced sellers anyway...that leave us with the APRA-regulated funds and
Mysuper, they have and will tend to have a greater proportion of funds allocated to off shore/non stock market assets.

I don't see a big problem unless.

Perhaps the very peak of the boomer age class bubble combined with a GFC of some kind and super low interest rates could come together into a perfect storm.

 

[Mr Z]

Re: Super, does it have an Archilles heal?

I don't have a solution. I'm just very cautious about believing that there will be a continuing exponential growth in share market and property values that will support the super schemes in place. Let's remember that this is the very first time a society has attempted such a wide ranging process. We're the guinea pigs.

Yes I suppose we are!

In the end the fin industry holds the power in this equation so its inevitable that it will skew the playing field its way.

This thing would work better if we had a constantly growing base as it was when pensions first came about. However as we are learning growth has its own problems! I was really struck when I realized that no matter what you do this is actually a "pay as you go" system. Sure its more complex and distributed differently but at the end of the day with the markets being zero sum every dollar that comes out must go in. This is not a big saving account! From that stance its not so different from pension schemes of old, the currently productive pay for the currently retiring. The only big difference is that the currently productive have a mechanism by which they can re-rate the value of the currently retired assets and funding. Like Mr Ponzis efforts it needs constant new blood at an ever growing rate to fly properly... like Mr Ponzis efforts it has to take a dive at some point, it is built in! IMO staying away form the crowd is the only way to go.

 

[Mr Z]

Re: Super, does it have an Archilles heal?

I think this (above) is a bit of an Achilles heel in your theory...the cooper review into super was a very comprehensive study revealing some amazing stats.

• 30% of the total funds in Aussie super are held in SMSF's (over 332 billion)
• The average member balance inside SMSFs is $456,000
• SMSFs beat larger APRA-regulated funds in earnings by usually 1 or 2% PA

So i would conclude that 30 to 35% of the boomers will be self managed and thus doing ok and have no need to eat into there capital..well certainly wont be forced sellers anyway...that leave us with the APRA-regulated funds and
Mysuper, they have and will tend to have a greater proportion of funds allocated to off shore/non stock market assets.

I don't see a big problem unless.

Perhaps the very peak of the boomer age class bubble combined with a GFC of some kind and super low interest rates could come together into a perfect storm.

The problem is that most boomers think a like and tend to invest in the same places and $456,000 is not enough to retire in comfort by a long shot. You will need to eat principle with that amount with todays returns and rising costs... especially as lifes little surprises hit. Nothing there actually gives me a lot of comfort. I wish it did

 

[Julia]

Re: Super, does it have an Archilles heal?

What we should be doing is giving people a proper financial education.

Absolutely agree. The problem is that the school curriculum is already very crowded, plus teachers mostly have zero idea about financial matters.

Learning to trade/invest using a low risk strategy is going to be the best way forward IMO, handing over your super egg at retirement as many do to fee based or commission based advisors will see many get stung no matter how much regulation there is.

During your working years learn to invest/trade so hopefully by retirement you can take control and run your own super/investments if you haven’t beforehand without paying fees and commissions to others, plus you have control over what happens, its also a good way to keep the mind active and although im a long way off retirement its also very rewarding and satisfying to do IMO

Again, I agree, Pager. However, many people perceive managing their own super as way more difficult than it is, something probably perpetuated by the financial planning industry.

One of the points you didn't mention but which is also (in my eyes) a significant issue is the role of charges on the super funds. In my view the ticket clipping of firstly individual fund managers and then the super funds themselves saps much of the investment value allegedly accrued in our super. It usually runs at around 2% of the whole fund each year. To put that in perspective if the fund is gaining 8% a year then a quarter of that gain is being lost in fees and administration. And of course if you have a couple of bad years it looks far worse.

Yep, really important to think about the fees. Many people don't even read their statements enough to appreciate how much they're losing in fees.

I think this (above) is a bit of an Achilles heel in your theory...the cooper review into super was a very comprehensive study revealing some amazing stats.

• 30% of the total funds in Aussie super are held in SMSF's (over 332 billion)
• The average member balance inside SMSFs is $456,000

• 
  You've expressed this correctly, but it's important to remember that this is average member balance, not average Fund balance, the latter being more than $900,000.

 

[tech/a]

Re: Super, does it have an Archilles heal?

Not the whole story Tech. My DIYouself funded super fund will outlast my wife and I as we make the investments and trades within in it. On the performance of the last six years it should continue to grow exponentially providing we keep picking the right investment plays.

And in old age a great interest as well. What we should be doing is giving people a proper financial education.

Yeh

Agree
There comes a point where return (if funds enough) outweigh expenditure.
This equals growth and security as inflation grows around us.
And it will!

plus teachers mostly have zero idea about financial matters.

But Julia every teacher I've met knows everything about everything!

Finally a SMSF I control and I'm not relying on someone else who could go broke-embezzle or skim me.