Here at Goldsmith Money, we like to question government policies which force the average person to part with his or her money – even if the politicians tell us it is in our ‘best interest’.
In a recent article by Money Management, they reported that the 5 year average annual returnfor Australian superannuation funds was now sitting at 3.7%. This was according to the latest data released by the Australian Prudential Regulation Authority (APRA). A link to the article is here.
I make the assumption now that these returns would be indicative of diversified pension accounts world-wide, which general focus on equity and fixed income asset classes only.
This annual rate of return, 3.7%, is barely keeping pace with the headline inflation numbers (don’t get me us started on actual inflation). It is also likely that these workers were paying highly interest rates on their home loans. So again I ask the question –
Why are the workers of the world being forced to direct circa 10% of their salary to these superannuation and pension accounts?
Isn’t the most prudent retirement strategy one that ensures home ownership in retirement?
Wouldn’t that final circa 10% of salary and wages be better off directed to paying down home loan debt quicker? There is no investment risk paying down debt.
Who is really benefiting from the superannuation and pension systems?
We would love to get your thoughts, ideas, answers and comments below.
For the vast majority of us – superannuation and other retirement products have failed us dismally. It is time to scrap these systems and products… and start over.
A short time ago I introduced a new page to Goldsmith Money, titled ‘Lost Retirement’. In light of Coronavirus, I thought it timely to expand upon this topic.
We previously discussed the depleted balances of superannuation and pension accounts attributable to stock market crashes. It is certain now that the market crashes of 2008 and 2020, accompanied by negative interest rates and excessive money printing, will see these products fall well short of the promises they made.
The compulsory superannuation and pension systems of the world have completely failed the working class of the past 20-30 years. Meanwhile the ultra-wealthy were able to use these systems to minimise their income tax obligations for 3 decades and potentially enrich themselves selling these failing products.
And the products will not only fail to deliver the retirement income stream that the vast majority of workers will need – they have left workers highly vulnerable to economic downturns and the Black Swan events such as Coronavirus.
Nations of the world have been forcing their citizens to contribute a percentage of their wages and salary to retirement products. In doing so they have significantly reduced their ability to:
Save money for times of financial hardship.
Repay their debts more quickly.
Build a alternative passive income streams to replace lost wages and salary.
At present, millions of workers have been left unemployed due to a worldwide economic coronavirus shutdown. Readily acessible personal savings and alternative income streams would have saved a great deal of hardship, for a great many. It would have also saved governments a great deal in support payments.
Regardless of major catastrophes however, workers should have personal savings set aside for all manner of contingency. Sickness; redundancy; repairs and maintenance. Workers should also have funds available to take advantage of investment opportunities which might arise.
The points I have made here might be considered personal liberty arguments for the scrapping of compulsory superannuation. Giving an individual the freedom to invest and save for their own retirement, as they choose. In addition to personal liberties however, there is also data to show that current systems are not simply failing the workers, but the economy as a whole.
Cameron Murray of the University of Sydney, in his article titled ‘Superannuation isn’t a retirement income system – we should scrap it‘ argues that these compulsory superannuation systems are inefficient, costly and ultimately depresses the economy. He eloquently states:
It is better thought of as a growth-sapping, resource-wasting, tax-advantaged asset purchase scheme aimed at the already wealthy, which is unlikely to do much to reduce reliance on the age pension.
There are many reasons to scrap this system which has failed so many and I have touched on just a few here. It is up all of us now to capture all the reasons and then petition our governments to do so.
Witnessing the wild mechanisations of The Great 2020 Coronavirus Stockmarket Crash presents the perfect opportunity to open up a new discussion on the matter of retirement savings. More specifically – superannuation, retirement and pension products and the government regulations which compel us to use them.
For the past 30 years Governments around the world have been ‘encouraging’ their citizens to save for their retirement. Well ‘encouraging’ may not be a strong enough word. Governments have generally ‘forced’ their citizens to contribute 9-15% of their wages and salaries towards retirement savings products. And over the past 3 weeks, we have seen trillions of dollars wiped off the value of these products. So let’s examine.
Let’s assume the average worker is likely to spend their wages and salary in the following proportions:
Income Tax – 30%
Housing – rent or loan repayments – 25%
Generally living expenses – 25%
Surplus funds available for other investment or luxury spending – 20%
Then the Government came along and said ‘no, we want you workers to put your final 9-15% into special financial products which you cannot touch until you retire’. The diligent workers are now left with disposable income of a mere 5-11% of their gross pay.
So the workers did as they were told. They allowed for their employers to deduct part of their wages and salaries and send it off to these retirement product providers. Putting their faith in the promises which the politicians, the bankers and their union representatives had made.
Every payday they effective transferred money into these products. Many of which were paying large fees to the product trustees and the investment managers. This didn’t matter though – for in the end they would have a sizable nest-egg to see them through retirement.
Meanwhile the workers were forced to forego the early repayment of their home loans; the purchase of investment properties; the investment in hard assets; or, simply the enjoyment of life through the purchase of luxury goods and services.
Then along came the GFC. These retirement products lost half their value in 12 months… but this was okay, as there would be time to build it back up.
Now the Coronavirus Crash is upon us, markets are down 35% and so too are the retirement savings products. Only this time – we are 11 years on from the end of the GFC. Is there still time to make it back up?
Interest rates at Nil%, even negative. Corporate profitability is down and is likely to stay this way for a number of years. An entire generation has now seen their retirement plans lost.
So here is a question – why couldn’t the workers simply be trusted to use their additional disposable income to repay their home loans quicker?
Surely the best way to provide for yourself in retirement is to own your own home outright – yes?
As explained in this previous post https://goldsmith.money/2020/02/23/risk-free-return/ – the early repayment of a home loan generally provides you with a risk-free and tax-free return, equivalent to the going home loan interest rate.
So another question – if those in power genuinely wanted to assist citizens to prepare for retirement – why didn’t they incentivise them to simply purchase a home and repay the debt as fast as they could?
Not enough questions were asked of politicians and bankers post the GFC – will they be allowed to get away with this for a third time?
The importance of the topic cannot be understated. This post will now become a new feature page of the Goldsmith Money website.
I would love to get your thoughts on this topic – please be sure to comment below.
