Super - another ponzi scheme?

Interesting article in SMH Money recently.

It does make some interesting points about the sustainability of any form of pension scheme/scam.

If the issues that the author raises come to fruition, will it be a case of first out best dressed (with the dilemma of what to do with your $Millions) or if you wait, will you be able to access it when you need it or will compulsory annuities end up as the only option in pension phase?

 

I think there are a number of flaws in the article:

"Third, the financial assets held in the system (shares, real estate, etc.) have to be converted into cash at current values when they're redeemed, not at today's inflated values. Those values are quite likely to decline, especially as a large cohort of Australians retires around the same time, driving up supply."

Doesn't account for demand from new entrants.

"Fourth, the substantial size of these savings and the large annual inflow (more than $100 billion per year) into asset managers has artificially inflated values of domestic financial assets, given the modest size of Australia's capital markets."

Really? What is the All Ords now compared to 10 years ago? Where is the inflation?

 

His first point is entirely irrelevant to the title of the article and the rest of his argument.

His second point takes a questionably true statement (in actual fact, most of the increasing cost of healthcare has been swallowed by the government, not by the individuals), then makes an unrelated claim - "returns can no longer cover expenses" without actually demonstrating this.

His third point is designed to take it as read that present values are inflated. He does not justify this apart from his later claims that values are inflated because of super. Without that assumption, the point doesn't actually say anything.

His fourth point, around inflation of values by super implies that all super inflows go into domestic markets. It then uses deliberately imprecise language to make the comparison between the inflows and the current sizes greater than actuality and emphasize his claims.

His fifth point is irrelevant in the rest of the thrust of the article and makes an entirely different claim.

His final point is based on flawed data from people who've had super only part of their working life. Shortfalls are a well recognised issue in the system. However, he entirely fails to deal with part pensions and assets funding care needs later in life.

 

As you point out @Perthguy - new entrants, this is a major factor. Our population is set to double by 2050ish, consequently demand will double, economy will also grow proportionally as well.

The guy also ignores the benefit of having some form of offset prior to getting the full pension as well as the multiplier effect or cushioning the contraction of spending in the economy if retirees simply went from earning the median wage to drawing the pension.

 

Our share market doesn't seem to be inflated. Ie it's on a lower P/E ratio than other major markets. And our super money is spread around a number of asset classes and markets. It's a bit far fetched that people retiring would create enough of an overhang to drive down prices..

 

Whats the drawdown rate anyway? 3, 4%?

 

Or anything up to 100% lump sum at any time once retired.

 

They can also just put it all on black. That doesnt mean people will do it. Whats the most likely scenario? People will retire and draw down a few % a year.

 

@Trainee - new car, boat, caravan, round the world trip, refurbish the house, new hip etc - easy to blow $100-200k or more.

 

Are there any stats on how many taking a pension and how many taking a lump sum?

Also, as above, super funds hold a range of asset classes both local and international.

It is a stretch to claim that Australian Super has inflated US stock prices.

 

"Third, the financial assets held in the system (shares, real estate, etc.) have to be converted into cash at current values when they're redeemed, not at today's inflated values. Those values are quite likely to decline, especially as a large cohort of Australians retires around the same time, driving up supply."

Yes, when any asset is sold it can only be sold what the buyers in the market at that time are prepared to pay for it. However (depending on the super fund in question) it is not necessarily the case that all of the assets have to be sold at the one time. This could potentially be done incrementally as funds are required... thereby exposing a person's superannuation balance to purchasing markets spanning quite a number of years. In other words, if there was a stint of time where markets were down a bit, the person is not necessarily obligated to liquidate all the superannuation assets at that time.

 

That's true @JacM. So, say I was expecting my super to be worth $500k but was an economic downturn or whatever and it was only with $400k to take as a lump sum, I would be crazy to take it as a lump sum. I would just draw fown the minimum permissible until the value recovered.

My parents lost 1/3 of the value of their super during the GFC but the valuehas increased since then.

 

I think chicken little wrote this article. It is based on the premise that the world will end and prices all collapse. Doomsdayer stuff. And everyone will race for the exit when super laws dont allow this. For every seller there is a buyer.

There are many who have super in low risk investments and who may choose to buy when markets fall and ride them back up.

Former banker is not a qualification.

 

Well said sir!

 

If a flood of people sell their share Investments to retire the underlying profits of the businesses they own does not change.

So the capital value of the asset will fall but the yield will increase by the same amount.

The increased yield will attract, if nothing else, international investors seeking yield. This will then replenish the capital value to the current value.

The argument that the withdrawal of pension monies from the system will cause asset price deflation is factored on the basis that their is a limited number of persons, with a limited amount of money, who are able to invest and that superannuation is a material part of that system.

On a global scale that is not so.

 

I agree. If you look at super overall, the argument that super funds panic selling shares will drive down the price of shares doesn't stack up. In total, Super is worth over $2.3 trillion in Australia. Some of that is invested in the ASX and some overseas. But Super isn't the only investor in the ASX. Even if all of the people who could sell their Australian shares sold them all at once, it probably would not make much difference. It would be scarier if institutional investors started a huge sell off outside the super system.