AndersB

Are superannuation investments bad for the economy?

52 posts in this topic

Here is an idea based on another crazy crackpot statement from wulfgar:

 

The problem is money is an illusion.....even gold money is an illusion......and fiat money more so. Money is an accounting device, it can tell us a lot about the current state of affairs (and they don't like what it does tell, so they print more so it gives a rosier picture). But it can't guarantee a future outcome.

The real question is the amount of goods and services the future retirees can call upon from the GDP. And it doesn't matter whether the money is public or private. It doesn't matter if the planned retirees put aside fantastic sums now, because like compound interest, it cannot work on the mass scale.

 

…<snip>...
 

And an excessively large superannuation scheme is destined to go bust because it is a ponzi scheme that the government will be forced to bail out.

What's the point of forcing the workforce to hand over greater and greater sums of superannuation to financial sharks, who will send it bust and then scream at the government to bail it out (too big to fail).

 

…<snip>...

 
Let's consider the Quantity theory of money that says:
  M x V = P x T
 
where
  M is money supply
  V is velocity of money
  P is the general price level in the economy (this is linked to inflation)
  T is the volume of transactions in the economy (this seems linked to real GDP)
     (Nominal GDP = P x T = P x real GDP)
 
Therefore:
  T = (M x V) / P
 
Sure, this theory is being debated, but basically, real GDP slows down when the velocity of money slows down. This kind of makes intuitive sense.
 
So what happens when superannuation funds become a significantly large (stock) factor of the economy? Especially when super funds have a large proportion of money invested in:
 1) Banks
 2) Commercial real estate (using bank loans)
 3) Residential real estate (mainly SMSF using bank loans)
 
Then, perhaps, the velocity of money in the broader economy goes down, because lots of super funds assets are stuck in banks and real estate? Basically, this crowds out investments into the productive economy.
 
In other words, given the investment portfolio structure of super funds today, GDP growth will slow down the bigger the funds grow.
 
Could the crazy old coot be onto something (again)?

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Why wouldn't the super funds become de facto venture capitalists for emerging new industry? 

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Why wouldn't the super funds become de facto venture capitalists for emerging new industry? 

 

Risk averse performance by fund managers.

 

Everyone basically tries to follow the stock index now.

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Risk averse performance by fund managers.

 

Everyone basically tries to follow the stock index now.

 

If that's the case I'm not paying them the commission. I can buy the index myself. 

 

Seriously though, super funds managers will need to adapt. The days of solely buying the index are over. My own fund has returned 7% on average including the GFC years. The ABC show the check out showed that a cat stepping on random stock picks beat most fund managers for stock market picks in 2013. Crazy business idea #431 - Start a company that actually tries to pick stocks that might rise. 

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If that's the case I'm not paying them the commission. I can buy the index myself. 

 

Seriously though, super funds managers will need to adapt. The days of solely buying the index are over. My own fund has returned 7% on average including the GFC years. The ABC show the check out showed that a cat stepping on random stock picks beat most fund managers for stock market picks in 2013. Crazy business idea #431 - Start a company that actually tries to pick stocks that might rise. 

 

Picking winners is easier said than done. 80% of fund managers perform below the index rate of growth. This looks even worse after fees are taken into account.

 

What are you doing at 2.30AM :huh:

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I'm thinking Anders. And coding a bit of wicked C++.

Good man!

C++ passes my compiler test for a proper programming language. :)

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Here is an idea based on another crazy crackpot statement from wulfgar:

 

 
Let's consider the Quantity theory of money that says:
  M x V = P x T
 
where
  M is money supply
  V is velocity of money
  P is the general price level in the economy (this is linked to inflation)
  T is the volume of transactions in the economy (this seems linked to real GDP)
     (Nominal GDP = P x T = P x real GDP)
 
Therefore:
  T = (M x V) / P
 
Sure, this theory is being debated, but basically, real GDP slows down when the velocity of money slows down. This kind of makes intuitive sense.
 
So what happens when superannuation funds become a significantly large (stock) factor of the economy? Especially when super funds have a large proportion of money invested in:
 1) Banks
 2) Commercial real estate (using bank loans)
 3) Residential real estate (mainly SMSF using bank loans)
 
Then, perhaps, the velocity of money in the broader economy goes down, because lots of super funds assets are stuck in banks and real estate? Basically, this crowds out investments into the productive economy.
 
In other words, given the investment portfolio structure of super funds today, GDP growth will slow down the bigger the funds grow.
 
Could the crazy old coot be onto something (again)?

 

 

There is a problem when there is a lot of money chasing limited(quality)  investment opportunities. In any case, there is no need to limit investment money to Australia. In today's electronic world, capital flies very quickly to where perceived opportunities are to be found. As Armstrong says 'follow the money' to see where capital is concentrating to create the next boom. Question is how to get that information at the early stage?

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Good man!

C++ passes my compiler test for a proper programming language. :)

 

Bah, if it needs a compiler it's for script kiddies. Assembly language FTW!

 

Back in my day we made punch cards from used tissues at the tip, if we were lucky...

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Bah, if it needs a compiler it's for script kiddies. Assembly language FTW!

 

Back in my day we made punch cards from used tissues at the tip, if we were lucky...

 

My first paid job was to develop assembly code for an operating system to boot from disk instead of paper tape...

 

And yeah… you wuh looky! We used to mill our own silicon for the transistors that made up the logic. Software is for sissies!

 

Cue someone to bring up tubes...

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My first paid job was to develop assembly code for an operating system to boot from disk instead of paper tape...

 

And yeah… you wuh looky! We used to mill our own silicon for the transistors that made up the logic. Software is for sissies!

 

Cue someone to bring up tubes...

 

I held babbage's coat...

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I held babbage's coat...

I made the first beads for the abacus!!.

 

Seriously, I have grave concerns about the trillions of dollars currently being held on our behalf by Superannuation funds around the world.

At the moment many of these funds are investing in fairly solid investments - usually associated with the bricks and mortar industry.

But.... If that market were to decline so significantly that they couldn't produce a return sufficient to meet outflows, there could be a wild ride in store.

Given that Superannuation has been on the increase in the past 2 decades as baby boomers have been stocking up for their retirement, my concern is what happens when that trend reverses, and the Super funds suddenly have to reverse their entire operations.

 

I just don't know, why I don't have faith in human designed systems.

They always seem to forget to factor in the unlikely, and are slow to adapt.

 

I have a concern that governments will be forced to socialise the superannuation payouts, and control it all with legislation.

It could be that by  the time I reach the trough, there may not be enough in there to feed me.

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I also meant to add, that I think Wulf's logic is solid on this one.

I give him/her credence for thinking a little bit laterally about this subject that is going to be crucial in the very near future.

Without these funds, most civilised western countries will be unable to feed their aging populations.

Compared to the many who simply swallow all the guff that passes for economic enlightenment today, Wulf at least realises some of the chinks in the battle plan.

Well done Wulf.

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Good comments, Solomon.

 

From a fundamental perspective, the return on an investment is a residual claim on a future productive gain. Therefore, retirement funds (whether private or public) ultimately rely on the future productive capacity of society, which is wulfgar's point.

 

There is a risk involved when the investment funds become disproportionally large in the economy, and if the funds do not efficiently allocate capital to long term productive means. Basically, todays highest profits do not equal what is most productive in the long term.

 

Today, the objectives of different investor groups may be different:

1) Individual investors: provide funds to what the investors think will be productive assets.

2) Large funds: greater emphasis of overall portfolio performance and low risk. (Are banks and commercial real estate really that productive?)

3) Governments: future productive capacity of the economy through investments in e.g. infrastructure and education

 

The question is: who will best stimulate future long term productivity?

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There is a problem when there is a lot of money chasing limited(quality)  investment opportunities. In any case, there is no need to limit investment money to Australia. In today's electronic world, capital flies very quickly to where perceived opportunities are to be found. As Armstrong says 'follow the money' to see where capital is concentrating to create the next boom. Question is how to get that information at the early stage?

 

Yes, international markets are very easily available to any investor these days. Yet, the 'domestic bias' is quite high as mentioned here:

http://www.moneymanagement.com.au/analysis/investment/2013/experts-warn-home-bias-risk-australian-investors

 

The latest report by Towers Watson is available here:

http://www.towerswatson.com/en/Insights/IC-Types/Survey-Research-Results/2014/02/Global-Pensions-Asset-Study-2014

 

The chart on page 31 shows that Australian superannuation funds are a bit over 50% invested in Australian equities out of their total equity portfolio. Considering how small the Australian stock market is, it seems strange that not more is invested in the global market in a fully diversified portfolio. This is especially puzzling now that the currency risk is against the AUD.

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I also meant to add, that I think Wulf's logic is solid on this one.

I give him/her credence  <snip>

Wulfie is a 'him'. Haven't seen him is a few years though.

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My old man used to work in corporate superannuation back in the 80s/90s. He said that typically funds that had performed well would be outperformed in the future by underperforming funds. It was basically a cyclical thing - you were better off being contrarian and changing with the cycles when your fund was a high performer.

 

The info he shared wasn't in the context of productivity though.

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My old man used to work in corporate superannuation back in the 80s/90s. He said that typically funds that had performed well would be outperformed in the future by underperforming funds. It was basically a cyclical thing - you were better off being contrarian and changing with the cycles when your fund was a high performer.

 

The info he shared wasn't in the context of productivity though.

 

Makes a lot of sense. Shares go up and down. So a fund manager that buys at the ground floor will look good in a few years, until their holdings rollover again. History shows that active fund managers on average do no better (or worse) than following the index.

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When the current super system was introduced in Australia,  superannuation was only (as far as I know) provided to public servants, politicians, military and academics as defined benefits schemes.  This meant that the 'pension' was a proportion of a specific salary level when you retired.  In some cases it was the average of your last three years in other cases it was the salary of that particular level of position/rank.  So that a retired backbencher or Department Secretary, on those schemes would be getting a percentage (say 60%) of the current salary for those positions.  This was a good system for some as it maintained relative purchasing power and public servants and others generally got significantly lower salary than equivalent private sector jobs but security about their pension and jobs.

 

I remember there were articles calculating how much would end up in the super system over various time frames and a general warm feeling about how good that would be for Australia and everyone who contributed.  At that time there was no details but my understanding of the marketing spiels was that the contributions would be used like venture capital to fund important infrastructure and develop new Australian businesses, inventions and discoveries where being in on the ground floor got good returns.  My feeling was that the predicted huge pile of cash would attract the most unsavory charlatans in the future (after 10 or 20 years) when there was astronomical amounts of capital.  Obviously  I was naive, the contributions were channeled into commission generating bank/financial products or used to bid up share prices, and the bad actors were actually involved from day one.

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When the current super system was introduced in Australia,  superannuation was only (as far as I know) provided to public servants, politicians, military and academics as defined benefits schemes.  This meant that the 'pension' was a proportion of a specific salary level when you retired.  In some cases it was the average of your last three years in other cases it was the salary of that particular level of position/rank.  So that a retired backbencher or Department Secretary, on those schemes would be getting a percentage (say 60%) of the current salary for those positions.  This was a good system for some as it maintained relative purchasing power and public servants and others generally got significantly lower salary than equivalent private sector jobs but security about their pension and jobs.

 

I remember there were articles calculating how much would end up in the super system over various time frames and a general warm feeling about how good that would be for Australia and everyone who contributed.  At that time there was no details but my understanding of the marketing spiels was that the contributions would be used like venture capital to fund important infrastructure and develop new Australian businesses, inventions and discoveries where being in on the ground floor got good returns.  My feeling was that the predicted huge pile of cash would attract the most unsavory charlatans in the future (after 10 or 20 years) when there was astronomical amounts of capital.  Obviously  I was naive, the contributions were channeled into commission generating bank/financial products or used to bid up share prices, and the bad actors were actually involved from day one.

 

The defined benefit schemes needed to go as they're nothing more than a growing pyramid of liabilities that eventually crashes every government or private organisation that supports them. You only have to look at the US and Europe to see what happens. On top of that, using the old NSW Labor government under Wran, governments cannot keep their hands out of the funds and sent the State Super scheme close to going bust. I would be much happier if MPs were paid a bit more but forced to go on a DC scheme rather than the DB scheme they are currently afforded to them.

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The defined benefit schemes needed to go as they're nothing more than a growing pyramid of liabilities that eventually crashes every government or private organisation that supports them.

 

I thought the problem with the defined benefit scheme is that it wasn't funded at all. That is any tax or contributions were just put in consolidated revenue then spent and no attempt made to get a working or sustainable system.  The same thing applies to safety net old age pensions, the problems and issues were identified decades ago and ignored. 

 

 

I would be much happier if MPs were paid a bit more but forced to go on a DC scheme rather than the DB scheme they are currently afforded to them.

I would be much happier if MP's salary was linked to the median of the general population, eg. a backbencher gets 1.25 or 1.5 the median salary.  Their pensions could also be linked to the median pension in a similar manner.  

 

While I'm at it, their subsequent entitlements and allowances could be means tested against their post parliament incomes and the entitlements reduced much like is done with unemployed and other welfare and entitlements where onerous or punishing criteria are used. 

I wonder if there is a current politician who would support this?

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I would be much happier if MPs were paid a bit more but forced to go on a DC scheme rather than the DB scheme they are currently afforded to them.

 

Any fed polly elected since 2004 get's the same scheme as us plebs, although at a higher rate of contributions - 15%. I think most/all of the states have followed.

 

In trying to confirm my belief was true I stumbled across this pearler of MPs entitlements. http://www.smh.com.au/national/full-list-of-federal-mps-entitlements-20090521-bh0v.html It's a bit dated but gives you an idea of what they get. It seems so complex you'd need to hire someone just to record and make the claims. 

 

I liked this one...

 

Constituent requests: MPs can give away an unlimited number of large Australian flags to eligible bodies such as schools and up to 50 large flags to private individuals. They can give away up to $900 a year worth of desktop or hand-waver flags. They must keep a list of who receives flags.

MPs also can give constituents photographs of the Queen and Prince Phillip, a CD or DVD of the national anthem, a print of the Coat of Arms and information about national symbols and awards.

MPs can have two photographic sessions a year with the official government photographer to have their portrait taken.

Read more: http://www.smh.com.au/national/full-list-of-federal-mps-entitlements-20090521-bh0v.html#ixzz2viUjOefv

 

 

Local school - can we get $500 for a program to stop kids getting beaten at home

MP- No. but we can erect a 50m x 50m flag on the top of your school.

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I thought the problem with the defined benefit scheme is that it wasn't funded at all. That is any tax or contributions were just put in consolidated revenue then spent and no attempt made to get a working or sustainable system.  

 

Some private organisations funded their DB schemes. Most didn't get their actuaries to keep up with the increased life expectancy. Apart from QLD all govts failed to fund their schemes. The QLD govt always funded it - that's why govt debt in QLD can't be compared to other states. The QIC is sitting on a pile of money to pay out legacy pensions while other states have to fund it out of today's revenue. 

 

I would be much happier if MP's salary was linked to the median of the general population, eg. a backbencher gets 1.25 or 1.5 the median salary. 

That's not a bad idea, but the multiple you propose is very low. 

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Any fed polly elected since 2004 get's the same scheme as us plebs, although at a higher rate of contributions - 15%. I think most/all of the states have followed.

 

If that is true, how come the media can quote how much a PM will be paid when they leave politics?

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If that is true, how come the media can quote how much a PM will be paid when they leave politics?

Because they have a random number generator?

 

All past, and present PMs were elected before 2004!

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