December 01, 2014

Horse 1795 - MLC Saves Someone's Retirement - Their Own

Firstly, I'm not sure if this story is supposed to make us laugh or not. The message that MLC is trying to portray is that as it stands, people haven't saved enough for their retirement and should consider putting in a little bit more. Whilst there might be some merit in their sentiment, if you work through the mechanics of the law and the actual circumstances of history, this advert ends up being a giant slap in the face to a great deal many people.

Think about the older man. He says that retirement is something that people did when he was a boy. Even if you allow for the most generous of conditions, the earliest that he could have been born was the year 1983. The caption on the display case says "Early 21st century" and even his boyhood extended even one day into the twenty-first century, it means that the absolute earliest that he could have been born was 2nd January 1983, for if he had been born the day earlier, on the first day of the century, he would have been no longer a minor. I suspect though that he is supposed to be as old as the boy in the advert and if you assume that he is that old right now, his year of birth probably lies around the year 2004.
If this man was born in the year 2004, then his eventual retirement age is likely to be 75 because the statutory age will have been pushed back by the time he gets there. If this is true, then he will be retiring in the year 2079 and already we run into a massive problem.

What sensible person honestly thinks that the rules surrounding superannuation will even be remotely the same in 65 years' time? Even the Income Tax Assessment Act of 1936 only lasted 61 as an intact piece of legislation before the Income Tax Assessment Act of 1997 came along. To suggest that by the time this person reaches retirement age, the superannuation legislation will be the same is a nonsense. If we assume that the current Superannuation Industry (Supervision) Act 1993 has the same life expectancy as the ITAA 1936, then it will have been replaced by 2054.
Even in my lifetime (I was born in 1978) by the time I retire, I suspect that retirement age will already be 75; that would mean that my retirement will begin in the year 2053. Personally, I already think that retirement will have already been extinguished by the time I get there for reasons I will now expound upon.

Let's assume for a second that inflation is zero. The long term capital growth trend for the twenty-first century is likely to be about 1.9% (the 30 year postwar period was extraordinary). Immediately this poses a problem. As of today, the government takes 15% of contributions and most fund managers take 1%-2% per year of the total assets. Even if you allow for compound interest it still means that of a working productive life of 55 years, you can really only expect to have squirrled away about 4.5 years of you current salary. That's fine but 75 + 4.5 is only 79.5 which is still short of people's life expectancy of 84. Already, people are in trouble.
The even bigger problem is that the people who need to save the hardest for their retirement can least afford to do so. If you are a lower income earner, then your marginal propensity to consume will already be quite high because you're probably already pared back when it comes to your expenses anyway. If you are a woman and you decide to have children, then due to the compound effect, even one year out of the workforce will have major effects in 50 years' time.
Due to the concept of wealthy condensation, people who begin with a larger pile of money, will end up with an even bigger pile at the end of their lives. If you choose to be poorer or a woman (as if either of those are even choices that you even can make) then the superannuation system itself is one giant con.

The other big problem with the superannuation system is the fact that it exists.
Superannuation has the same problem as an insurance scheme in that it has to pay out money to people. Already as the Baby Boomers have begun to retire, there has been an increase in the number of people that the system is paying out to. The problem is that a point will be reached sometime in the next 30 years where the number of people that the system is paying out to will exceed the number of people paying into the system; this is further compounded by the fact that at the same time real wages are also falling.
Pension systems are already something of a Ponzi scheme and the only difference between a public system and a private one, such that the superannuation system is in Australia, is who controls the funds.
On that note, another problem that a private superannuation system has is that it pits various funds against each other and when you're dealing with both inflation and the 1%-2% that fund managers take, when overall growth is only expected to be in the order of 1.9% for the coming century, the only logical outcome is that most people can expect to lose in real terms.
This even assumes that fund managers actually do anything. The Observer did a study in 2012 which found that an ordinary house-cat could out perform professional fund managers.¹

Getting back to that little boy standing in front of the cabinet, if he is ten years old and his grandpa is 55 (I'm taking a guess) then this scene is at the earliest, in or about the year 2060. If this is true, then sadly this scene might be all too true. The question then is "what are MLC doing to save retirement?" Are they investing in education? Are they investing in university research? Are they investing materials development? Are they investing in sustainable technologies? Or are they investing in real estate and financial institutions as their PDSs would tell us?

Who are the couple behind the glass², in the MG? Are the MLC fund managers? Probably? The question then is one of whose retirement is MLC saving? The only conclusion that I can draw is that when MLC asks is to "Save Retirement" they actually mean for use to save theirs.

MLC will probably send a form reply, like this:
The Observer portfolio challenge pitted professionals Justin Urquhart Stewart of wealth managers Seven Investment Management, Paul Kavanagh of stockbrokers Killick & Co, and Schroders fund manager Andy Brough against students from John Warner School in Hoddesdon, Hertfordshire – and Orlando.
By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat's portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals' £5,176.60.
- The Guardian, 13th Jan 2013

²To be fair, the chap reading the newspaper also won't be a thing in future. I suspect that Fairfax won't make it to 2017 and that daily newspapers won't be a thing by the end of the decade.

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