Super, does it have an Achilles heel?

[So_Cynical]

Re: Super, does it have an Archilles heal?

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

The 456K was a 2009 figure so probably 500k now...and in 4 > 6 years double that, and keep in mind thats a per member figure...most SMSFs (67.9%) had 2 members (husband & Wife) so near a million combined...and im gona make a crazy assumption that any couple with 1 million in self managed super will own at least 1 house.

So im conservatively guessing the average net worth of the average couple in a SMSF would be over 1.8 million....not exactly roughing it. and that's a minimum 30% of the boomers.

 

[nioka]

Re: Super, does it have an Archilles heal?

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

I agree with that. Worse still I find that financial advisers and bank managers do not seem to know much than school teachers, that makes it hard to find a starting point.

 

[gooner]

Re: Super, does it have an Archilles heal?

:topic

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.

Wiki states the following

The United States Census Bureau considers a baby boomer to be someone born during the demographic birth boom between 1946 and 1964.[9] The Census Bureau is not involved in defining cultural generations.
Landon Jones, who coined the term "baby boomer" in his book Great Expectations: America and the Baby Boom Generation, defined the span of the baby-boom generation as extending from 1946 to 1964, when annual births declined below 4,000,000. They have since returned to higher levels in the "echo boom."
William Strauss and Neil Howe label American Baby Boomers 1943 to 1960.

So I am little confused - am I a baby boomer or Gen X? I was born in 1963 so I don't feel like a baby boomer. Julia does not consider me one, but the US census bureau does.........

 

[basilio]

Okay it's waaay to late and I should be getting some beauty sleep. ( Certainly need it..) So let's get radical about what an effective affordable super scheme could look like.

Firstly I have a real query about how on earth more than a very few people can save, invest and grow the $700k plus that seems to be minimum for a viable super pension plan. In fact I'm sure many forum members here will say that is seriously underestimating it.

Okay some fast talking financial consultant from AMP or AXA or whatever can pull out a spread sheet and show that saving 9% a year for 40 years at so much return will result in "lots of money" .

.....As long, as long, as long as you don't become unemployed, have too many children, get divorced, fall seriously ill, go bankrupt for any number of reasons and so on. The fact is that reality gets in the way of spreadsheets and my view is that the returns on retail super funds is very, very modest after all the providers get their cut.

So for Plan B. I would see an effective retirement package including the following

1) A comfortable, paid for home .
2) A spare bungalow out the back for a tenant who pays a couple of hundred dollars a week and is good company
3) An excellent set of PV cells on the roof which destroy my energy bill, pay me a few extra bucks and power my
4) You bewt electric car (which doesn't cost any petrol to run because by now petrol is costing $4 a litre - if you can get it)
5) A neat little community vegie garden I share with a few friends which feeds me, them and has a bit left over to take to a community market
6) A house full of long life white goods ( Washing machine, fridge, water heater, stove which are not going to die for at least 20 years because they were actually made to last. Truly radical stuff there..)
7) Enough friends and good company to enjoy a simple but fun life.
8) Some modest investments that do earn some extra money
9) Or even a small government pension..
10) ............................
11) ............................ (add your ideas )

Now I realise this isn't the retirement package being proposed by your average financial consultant.

But then the retirement package your financial consultant is proposing for you ...

is in fact his retirement package​

 

[basilio]

So I am little confused - am I a baby boomer or Gen X? I was born in 1963 so I don't feel like a baby boomer. Julia does not consider me one, but the US census bureau does........

I was actually a bit surprised at Julia's definition of Baby Boomer.

My understanding was that it referred to people born from around 1948 to about 1952-3 at the latest. This was the huge bulge of children born to the returned soldiers and everyone making up for lost time during the war and the immediate aftermath.

Baby Boomer cohort #1 (born from circa 1946 to 1955), the young cohort who epitomized the cultural change of the sixties

From Wikpedia

It does go on to mention a cohort 2 from 1955 - 1964 - but i don't trust em. !!

 

[basilio]

Sixty Percent Of Baby Boomers Don't Have Enough For Retirement

Huffington Post | Nathaniel Cahners Hindman

Nearly three in five baby boomers face a financial bust in retirement if the current economic climate persists, according to a study cited in a recent article by the Wall Street Journal.

http://www.huffingtonpost.com/2010/08/16/60-percent-of-baby-boomer_n_683191.html

So this issue is very real. The article is a good read because it highlights just how fickle the economy is and how this will affect our capacity to live to a ripe old age.

 

[Mr Z]

Whatever the average balance is not as relevant as you may think. They are by and large paper gains, until realized they mean nothing. The income stream that the fund is generating is the number that we should be focusing on. If it is not sufficient then we will see redemption regardless of fund size. Also the average more than likely consists of 20% jumbo funds and 80% sub par funds, the sub par funds will number higher and will be where the pressure starts.... we only need change at the margin.

The other thing to think about is the possibility of a decent recession in the long period that these funds will need to preform over. That may tip the balance.

Attracting overseas investment I see as a major possible support. This would work if we become flavor of the month globally due to commodities rolling on and choices in places like the US drying up. This could more than support any amount of Australian redemption, providing of course you are invested accordingly. Really our numbers are so small we could be swamp in OS cash. This still means we are very much tied to Chinas fortunes, and hopefully and increasingly India's (underrated I think!) Lets hope they don't stumble to badly during their assent. Many US analyst seem to want to bury them, often very critical of their financial sector.... green eyed monster or chinks in the armor? I can never quite decide who I think is right, they have amazing momentum regardless!

So my point is that whatever the numbers currently its the dynamics of the cash flows that will decide the outcome. We simply need enough cash in to balance any cash out and make up for any lack of income with capital gain.

The other thing is it takes a bucket load more to retire comfortably than you may think! I know a couple that retired early 90's with a good Syd property and in excess of 1 mil in funds. The have maintained a good middle class lifestyle but have shifted down the property gradient twice and now live country. That was a big number then! Over estimate your needs people! and you might come close. Many of their friends of similar or lesser means have lived a little more lavishly and are now struggling with maybe 10 to 15 years to go.

 

[Judd]

I recall seeing a few years ago some data on retirement funds. It was well before the GFC so the estimated results on which the data was based have probably been thrown out the window.

It indicated that a couple aged 65, who owned their home and had $1M in superannuation would comprise less than 5% of that demographic group.

Probably still true to some extent but how do you tell 95% of the population that that grey-haired couple walking hand in hand on a lovely beach at sunset is not going to be you and your holiday will consist of a weekend in a caravan at Dromana. Or that fine dining, eating $75 per head diners and drinking Grange will actually be the Tuesday night special at the local pub if your lucky.

 

[pilots]

Super, WHAT A JOKE, 18 months ago our super was going down hill fast, we moved it to cash, last week we moved it to our own fund. For the 18 months it was in cash we got less than 1.4%return.

 

[Mr Z]

It indicated that a couple aged 65, who owned their home and had $1M in superannuation would comprise less than 5% of that demographic group.

Thats closer to my expectation, basically markets reward a few and take from the majority. At the completion of every cycle there are less winners than losers, it is just the way markets work. We can't all be right, the maths simply will not allow it to occur.

IF all the baby boomers exit on a market upswing using say an influx of overseas money then it is conceivable that they as a group get out in good shape but real life does not work that way... people tend to stay on the ride until it stops. Anyway net net more will lose in the end than win, the losers simply give their money to the winners.

You could argue the %'s some say the losing component is very high 80-90% and the winning very low. I don't know how you tell, very hard to measure but conceptually the dynamic is easy to understand.

The other component here is that the boomers will become a single or narrow issue voting group if things go sour. IMO you will not win an election in this country without buying their vote. Not such an issue when things are good but if super runs into trouble they will naturally gravitate toward any political party offering answers, however bad they are. They will happily vote other peoples money into their pocket and feel justified in doing so. If things go this way its a setup for intergenerational tension, we have seen some evidence of it all ready in the housing boom. Blame has been laid at the feet of the boomers, rightly or wrongly by some. I have already seen one book on the topic of intergenerational tension without looking. If we get to plugging gaps in super with government assistance and increased taxation I expect that to be passionately discussed social theme. In fact you can start a good fight with that one already! (ducks and steps back, just in case!)

Cheers
Z

 

[Julia]

I was actually a bit surprised at Julia's definition of Baby Boomer.

It's not my definition. I'm no demographer. I've always known it was around what I quoted, but googled it and there are multiple references from different sources all giving that year span.

My understanding was that it referred to people born from around 1948 to about 1952-3 at the latest. This was the huge bulge of children born to the returned soldiers and everyone making up for lost time during the war and the immediate aftermath.

No. Definitely much broader than that.

Super, WHAT A JOKE, 18 months ago our super was going down hill fast, we moved it to cash, last week we moved it to our own fund. For the 18 months it was in cash we got less than 1.4%return.

That's just ridiculous. Presume you mean this was the Cash option within a public superfund? There have been some excellent cash rates around especially in online accounts. That's yet another reason to run your own fund.

 

[Mr Z]

The end of the boomer generation is variously defined as early as 1960 and as late as 1964. I don't think there is a definitive official year, I guess people choose what suits their argument best. I think that the 'first cohort' would be the concern if this idea on an Achilles heel is on track. If we get past their peak needs then things will be looking good IMO. I don't think changing the finishing year will actually have any impact, its that first wave that will provide the stress test for many of our systems. If you want real gloom look into the state of our medical system and its capacity to deal with this. Most of our best medical people are boomers and they are among the best placed to retire successfully. The number of Oz GP's coming due to retire is something like 40% and we cannot plug that gap easily! Lets hope they all want to work longer! Similar for nurses and other people in the system! On the bright side if you are medical the competition for your talent should be intense and rewarding... JMO.

 

[YELNATS]

Re: Super, does it have an Archilles heal?

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.

As a BB born in the late 1940's, I was a little concerned the other day when I read that Ms Gillard doesn't particularly value the retiree/near-retiree vote, as her preception is that most of those voters vote conservative/non-ALP anyway.

With the ALP leading in the polls with only 3 days to the election, I'm just a little concerned for our SMSF super nesteggs, both near-term and longer term.

 

[Julia]

Whatever the average balance is not as relevant as you may think. They are by and large paper gains, until realized they mean nothing. The income stream that the fund is generating is the number that we should be focusing on.

I'm going to disagree with you here. Imo too many people focus on income, ignoring what their capital is doing. You need to keep the capital growing.
And in a market downturn there should be more attention paid to capital protection. i.e. get out with profits largely intact when the market turns down, shop around for the best cash return, and buy back in when the market turns back up.

I know there's no unanimity on this strategy, but there seems to me to be way too much passive approach to Super, instead of actively managing it.
Over the last three-ish years, so many people have bemoaned how much money they have lost. Well, if you just sit back, watch the market falling, and do nothing, then yes, you'll lose money.

The above is directed toward people nearing or at retirement. Much younger people can more realistically take a longer term view.

If it is not sufficient then we will see redemption regardless of fund size.

Why are you so sure there are going to be wholesale redemptions? The new retirees are still going to need an income stream. I don't see why you wouldn't just continue the same strategy you've used during the accumulation phase, leaving the capital invested and simply pulling out whatever amount you need to live on. There's presently a dispensation of 50% from the government regarding the percentage of fund capital that must be drawn each year as income, but presumably this will end when we are deemed to be officially out of the GFC.

The other thing to think about is the possibility of a decent recession in the long period that these funds will need to preform over. That may tip the balance.

Perhaps, but again active management will cope with much of this.

The other thing is it takes a bucket load more to retire comfortably than you may think! I know a couple that retired early 90's with a good Syd property and in excess of 1 mil in funds. The have maintained a good middle class lifestyle but have shifted down the property gradient twice and now live country. That was a big number then! Over estimate your needs people! and you might come close. Many of their friends of similar or lesser means have lived a little more lavishly and are now struggling with maybe 10 to 15 years to go.

Well, isn't this a case of needing to have a 'long term budget'? i.e. simply working out on the basis of life expectancy how much you can afford to spend each year? If you have, say, 1 mil, and expect to live 20 years, decide how much that capital needs to generate each year in order to provide a reasonable income, preferably with enough left over to add to the base in order to allow for inflation, and manage it accordingly.

Lifestyles will vary and people will have different priorities for their money in retirement. Some will want to travel round the world every year, replace their car each year, and others won't.

IF all the baby boomers exit on a market upswing using say an influx of overseas money then it is conceivable that they as a group get out in good shape but real life does not work that way... people tend to stay on the ride until it stops. Anyway net net more will lose in the end than win, the losers simply give their money to the winners.

Sure. And what better reason could you have to educate yourself financially so as to be one of the winners, rather than a passive observer?
(not using 'you' in the personal sense here, Mr Z.)

When you are assuming that the baby boomers are en masse going to exit the market, what do you have in mind that they will do? Just take the lump sum and spend it?

Blame has been laid at the feet of the boomers, rightly or wrongly by some. I have already seen one book on the topic of intergenerational tension without looking. If we get to plugging gaps in super with government assistance and increased taxation I expect that to be passionately discussed social theme. In fact you can start a good fight with that one already! (ducks and steps back, just in case!)

Agree indeed that such a scenario would be a justifiable cause for social unhappiness, but I'm just not convinced it's going to happen like that.

As a BB born in the late 1940's, I was a little concerned the other day when I read that Ms Gillard doesn't particularly value the retiree/near-retiree vote, as her preception is that most of those voters vote conservative/non-ALP anyway.

With the ALP leading in the polls with only 3 days to the election, I'm just a little concerned for our SMSF super nesteggs, both near-term and longer term.

So, another reason for doing it yourself, rather than expose your funds to the so called professional fund managers.
In today's paper, there's a small item about a suggestion from the Libs that they would issue infrastructure bonds, not government guaranteed, however, but with a 10% tax break attached, in anticipation that plenty of Super money would flow into these. Obviously at this stage, this is going to absolutely be a choice, but I'd be getting pretty wary of more to come.

Thanks for starting the thread, Mr Z. Interesting discussion.

 

[Mr Z]

I'm going to disagree with you here. Imo too many people focus on income, ignoring what their capital is doing. You need to keep the capital growing.

It does not matter, if the investment is not providing income sufficient for the need you will have to sell it down to get funds to live on. There for the level of income coming in from super is a big determinant of the need to sell. If all super produced enough income their would be no need to sell, at all, ever. This would be a positive thing... but I doubt that most fund are providing enough to live on, which after all is the ultimate aim.

And in a market downturn there should be more attention paid to capital protection. i.e. get out with profits largely intact when the market turns down, shop around for the best cash return, and buy back in when the market turns back up.

Sure that works for you... but not for everyone. We can't all exit at todays close if we 'collective' are the market. I am talking about the net effect on the market, sure there will always be winners and losers.

I know there's no unanimity on this strategy, but there seems to me to be way too much passive approach to Super, instead of actively managing it.

Over the last three-ish years, so many people have bemoaned how much money they have lost. Well, if you just sit back, watch the market falling, and do nothing, then yes, you'll lose money.

The above is directed toward people nearing or at retirement. Much younger people can more realistically take a longer term view.

Well yes.... this is all about the ones retiring soon and their needs, that is the crux of my argument. Namely that they could over power the funds flowing into the market and drive price lower. By the time the young get there it will be a different scene. I am saying that the boomers are most probably looking at not being able cash in what they think they have due to what might be a concentrated rush for the exit.

Why are you so sure there are going to be wholesale redemptions? The new retirees are still going to need an income stream. I don't see why you wouldn't just continue the same strategy you've used during the accumulation phase, leaving the capital invested and simply pulling out whatever amount you need to live on. There's presently a dispensation of 50% from the government regarding the percentage of fund capital that must be drawn each year as income, but presumably this will end when we are deemed to be officially out of the GFC.

Selling will have to happen as you note... the question is will that selling over come the inflows from the smaller following working generations. If so price will turn down, unless as noted before it is compensated for by some other source of funds. You are looking at this as an individual, when we get many thousands taking profit for income we could easily have enough pressure at the margin to move price. I actually think this is the real reason behind the desire to up contribution levels, that will go some way to fixing any imbalance.

Perhaps, but again active management will cope with much of this.

Again for a sharp individual yes, but for the group as a whole and the passive probably not. If not that then opens the door to rule changes as the masses cry foul. You may have your skin intact but that means little systemically. we live in democracies, mob rule basically and if the mob can't get what it needs then we have an issue.

Well, isn't this a case of needing to have a 'long term budget'? i.e. simply working out on the basis of life expectancy how much you can afford to spend each year? If you have, say, 1 mil, and expect to live 20 years, decide how much that capital needs to generate each year in order to provide a reasonable income, preferably with enough left over to add to the base in order to allow for inflation, and manage it accordingly.

Sure but its not the complete doddle many would think it is. Across the time of the example there have been rule changes, risk priced to zero and yield all but eliminated. The GFC etc, dealing with all that while going for security (BIG ISSUE at that time of life for most) has not delivered what you would have thought it should if you retired in 1990 with 1 million. The point is with the various pressures going forward (inflation is going to be big!) you are going to need more than most will forecast.

Lifestyles will vary and people will have different priorities for their money in retirement. Some will want to travel round the world every year, replace their car each year, and others won't.

LOL... many have and are hitting the wall with lotsa life left! I know a few, but hell they had fun! Now the typical reaction seems to be... well we can't live that well on what we have left and we can't get the pension. Screw it, lets buy the home we really want, get some toys, have a party until our capital falls to the level they will give us the full pension. Life is short and getting shorter after all. They end up on the public purse anyway... if you only have a small superfund this is the incentive in our system.

Sure. And what better reason could you have to educate yourself financially so as to be one of the winners, rather than a passive observer?
(not using 'you' in the personal sense here, Mr Z.)

Sure, again smart individuals will and could duck this... if it turns out to be a real market dynamic.

When you are assuming that the baby boomers are en masse going to exit the market, what do you have in mind that they will do? Just take the lump sum and spend it?

Some might but that is not the important thing... once a market recognizes that a certain force is in play it tends to discount the new expected price level now. My concern is that it becomes a widely accepted idea that boomers are going to be a sustained selling force for a number of years. That would beget more selling & discounting which in turn puts more pressure on boomers trying to live of there fund now... it could become a vicious cycle if the imbalance is large enough. We saw a similar effect in the GFC, people selling because they had no choice which in turn lead to more pressure and more selling. If it gets traction people will sell to protect what is left. So they will see a mark down in the funds value.

The idea is that if that balance is tipped it will be first out best dressed for a while. The question is will there be enough funds flowing into the market to balance things out and prevent us 'tipping' into a down cycle. The is a similar idea floating around the US where they actually have mandated redemption and therefore selling at certain ages. Like I have said maybe incoming OS capital flows will prevent this from happening, or even coming close BUT if we are at the mercy of the x's, y's etc I suspect they are just not saving and investing enough to counter the probable out flows. The market is zero sum, for you to take cash out someone has to put it in!

Agree indeed that such a scenario would be a justifiable cause for social unhappiness, but I'm just not convinced it's going to happen like that.

Lets hope not... although I have already witness some intergenerational mud slinging, for now it was funny, I hope it stays at that level. It just seems to be a logical outgrowth of a crisis situation, if the whole thing actually gets of the rails. Its not a forecast!

So, another reason for doing it yourself, rather than expose your funds to the so called professional fund managers.
In today's paper, there's a small item about a suggestion from the Libs that they would issue infrastructure bonds, not government guaranteed, however, but with a 10% tax break attached, in anticipation that plenty of Super money would flow into these. Obviously at this stage, this is going to absolutely be a choice, but I'd be getting pretty wary of more to come.

YES... a savvy SMSF can duck and weave should this become a reality, however unlikely we think it might be. It is a 'what if' exercise, never hurts to have plan B.

Thanks for starting the thread, Mr Z. Interesting discussion.

Its an interesting situation! It is after all a largely unproven system and this will be its first real test. The boomers seem certain to stress our on the limit medical system are they a big enough group to stress the retirement system? Its a question... I

Cheers
Z

 

[GeraldineLea]

Re: Super, does it have an Archilles heal?

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

The cooper review shed new light onto the state of super in Australia but it also made me do my own investigating. I found that I can cut the trailing fees and commissions that I’m paying on my super fund….right now….by becoming apart of a financial cash-back service. What a lot of people don’t realise is that the cooper review will only correspond to new super funds, that is, funds that have been opened post July 2012. So I guess if people are interested in what the Cooper Review offers, perhaps they too should do their own research

 

[Mr Z]

I wonder if the Cooper review actually considered the demographic impact and the resulting dynamics of the market. So much of what passes for analysis is in reality so much linear projection... markets react! I wonder if these guys really know much of much about it.

At least I know I am guessing!

 

[Sir Osisofliver]

I've been hesitant to post into this thread, my views on super are well-established on these boards. I loathe the current superannuation system. It is stupid and value destroying for the vast majority who use it. It's a federally orientated con-job of massive proportions that lets the industry sharks take bites from unsuspecting superannuants. Dealing with clients over the last two years who have been screwed time and time again has given me very little patience and the urge to smack politicians bums and send them to the naughty corner.

But there were a few things I wanted to point out to add some fuel to the fire of this interesting discussion.

1) There are two main forms of risk; Market (systemic) risk and unsystemic risk. You can substantially reduce unsystemic risk through diversification. The only way to eliminate systemic risk is hedging. There is no other mechanism to remove market risk. This is the risk that the Global Financial crisis comes along just before you retire and bends you over a barrel reaching for the KY. Now ask yourself the following questions and feel free to research the answer.....how many superannuation funds (Managed or otherwise) use hedging? Is your Self Managed Super Fund or managed fund even capable of investing into a hedging instrument?

The reason why I mention the above is that Julia says

And in a market downturn there should be more attention paid to capital protection. i.e. get out with profits largely intact when the market turns down, shop around for the best cash return, and buy back in when the market turns back up.

Now I'm not having a go at Julia - Capital Protection is vitally important, protecting the capital will protect the integrity and consistency of the cash flow, but properly hedging eliminates all downside risk and makes this activity of selling and re-buying largely redundant, saving you transaction costs, timing errors and ensuring that you do not lose your cost-based yield. This is of course only relevent for buy and hold portfolio's, not trading portfolio's - which have the ability to short and make money out of the downside risk.

2) Mr Z said this

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.

Mr Z I'd like you to consider the following. When you do courses in Funds Management one of the things that is taught is that you need to examine the demographics behind the investors in your fund for this very reason. If you anticipate through modelling that your fund will require X dollars of withdrawals in a 12 month, 24 month, 36 month etc period you will of course ensure that the funds are available for this drawdown so you don't have to sell anything before you are ready to meet the draw-down. Most funds do not buy assets and hold them indefinately (there are no tax advantages for them to do so), so they will retain funds for redemption purposes if they require them. How will the demographic issue you describe influence this process? Less funds will be used for Re-investment back into the market. Will less funds cause the supply demand demographics to change? Yes. By a lot.... I'd have to say no.

When we invest in the share market (or your superannuation fund does so on your behalf), would it be fair to say that what you are investing in is a small part of the GDP of the country? If our GDP is growing, our economy is growing. The technical definition of a recession is two negative periods of GDP growth. To cause your Achilles heel not only would you need to have the supply and demand dynamics significantly altered in the share market, but you'd also have to ensure that the demographic change resulted in a change into a sustained negative GDP.

Are the forthcoming demographics you describe likely to cause such an event? I dont think so. There are several articles you can yawn your way through over at the treasury department if you want to read more.

Cheers

Sir O

 

[Julia]

Hello Sir O, good point about the hedging, of course. Some of us are probably just a bit lazy about doing this when the uber-simple approach is achieving what we need.

Re your distaste for Super in general what alternatives do you think would work to ensure people can fund their own retirement? Australians seem on the whole to be very poor savers, so isn't some sort of compulsory scheme necessary?

 

[Sir Osisofliver]

Hello Sir O, good point about the hedging, of course. Some of us are probably just a bit lazy about doing this when the uber-simple approach is achieving what we need.

Re your distaste for Super in general what alternatives do you think would work to ensure people can fund their own retirement? Australians seem on the whole to be very poor savers, so isn't some sort of compulsory scheme necessary?

We've sort of chatted about about this previously Julia. All the tax advantages in the world don't make the current superannuation system attractive enough IMO to make up for the disadvantages. The biggest disadvantage is one of control and the second is one of leverage. You can partly address the first issue with the use of a SMSF, but there are still significant control measures placed over the scheme that still makes it unattractive. The second issue (whilst there is some limited scope for the use of leverage) uses derivative structures; one of the most risky investment instruments and one of the most difficult instruments to reduce risk in. To reduce risk within this type of instrument we must look at fairly complex risk management techniques, beyond the capacity of the average investor, rather than a simple loan arrangement with risk management reserves.

As for Australians being poor savers...of course we are poor savers...it's a mugs game with our current taxation system to put money into a bank because our real rate of return barely covers inflation. If you're in the highest tax bracket, you frequently go backwards, so in that circumstance youare much better off using your cash flow to reduce debt. (Ken Henry tried to address this point in his Tax review to bring tax deductibility of fixed Interest in line with other investment classes).

In terms of should there be a compulsory type of scheme.....IMO only one that would allow you to appropriately leverage, and truly control what is your money would be acceptable. Without these two things I will continue to do what I'm doing.

Cheers

Sir O