How Your Super is Not Quite Your Super

I did warn you we’re like a dog with a bone.

We’re giving superannuation another crack across the head today.

But don’t worry, we’re not ‘picking on’ tertiary students today. Incidentally, just on that before I move on. Your editor has taken a pasting on the Money Morning and Daily Reckoning message boards – and in emails to the Money Morning mailbag – for ‘picking on’ a tertiary student.

The basic premise being that, well, we shouldn’t have criticized the submission, and at least she’s trying to make a constructive contribution.

That’s fine. As always, we accept criticism. But we will make a simple point. If the same submission was made by a 47-year old, would your editor still have criticized it?

The answer of course is, yes.

Therefore not to criticize the submission on the grounds that it’s from a tertiary student would mean completely disregarding it for that reason alone. In your editor’s mind that seems rather patronizing.

And to lay it to rest, we agree that it’s good for people to make a constructive contribution to anything. However, when that contribution is to lobby in favour of an additional 15% of your salary being compulsorily taken by the government then we think it should be argued against.

But before I move on, there is one subject we won’t tackle today, and that is the idea of “forced savings.” We’ve seen it mentioned a few times in various emails and blog entries, as though “forced savings” is a noble and desirable policy initiative by governments.

In our opinion it isn’t, and we’re struggling to see how it could ever be considered so. But we’ll have more on that another day.

Because today, we’ve got something else to bang away at. We received the following email to the Money Morning mailbag this week:

“Could you explain the difference between our superannuation payments and a Ponzi scheme? As I see it the super payments are exactly what a Ponzi scheme is.”
Ian.

The short answer is, strictly speaking superannuation isn’t a Ponzi scheme.

But, you know, we don’t like giving short answers, so strap yourself in for a longer answer…

If we take Charles Ponzi’s original scheme, then a Ponzi scheme is paying old investors with money from new investors without actually growing the invested money through actual investments.

When you pay your money into a superannuation fund, the funds are invested in something – shares, bonds, cash, property, etc.

Returns from those investments are then reflected in your account balance. It rises and falls depending on the market value, or the estimated market value in the case of property.

When your superannuation investment is drawn down, the fund manager will sell those assets in order to give you cash. Of course, the fund manager doesn’t sell your assets individually. They’ll net off inflows and outflows from the entire fund at the end of the day, or at some point the following day and then credit your account with cash.

However, the public service superannuation scheme is something closer to a Ponzi scheme. That’s the one that’s underfunded by the government and which the Future Fund is supposed to top-up.

Although it may not technically be in a Ponzi status, it’s underfunding does mean that the balance of the fund is less than the claims against it. In effect, new contributions are going towards the balance of other members not just their own.

But just because superannuation isn’t an actual Ponzi scheme doesn’t mean all is well in the world of super.

In fact the more we hear from the super ‘cheerleaders’ the more fearful we become about its existence.

Paul Keating’s appearance on the ’7.30 Report’ the other evening is a perfect example. But I’ll get to that in a moment.

First, we need to bash down a few of the myths and half-truths surrounding super. The first is the idea that super is “yours” or “yours, but not just yet.”

Look, it is “yours”, but only partially. It’s yours in that it’s in your name. It’s yours in that your money goes into it. And it’s yours in that you’re the beneficiary of the super fund.

But it isn’t yours in the same way that other things are yours. Remember, when you’re paying super contributions it’s all fully paid. You don’t owe anything against it (although you can now borrow in a super fund, but let’s keep this simple).

It’s not like a house which you call yours but which is really owned by the bank until you’ve paid off the mortgage.

The furniture in your house is yours and you can do with it as you please. The money in your wallet is most likely yours and you can spend or not spend it also as you please.

As far as we can see, compared to other investment assets or investment vehicles, superannuation is unique. It’s yours but it isn’t yours at the same time.

You see, while you are the beneficiary of your super fund and while it is in your name it isn’t yours to do as you please.

Just for a moment think about the structure of a superannuation fund. The wording to it is very clear. Whether you are invested in a retail super fund, an industry super fund, or even a self managed super fund, your status of that fund is the same.

You are a “member” of the superannuation fund.

What does that mean? Well, let’s refer to the Superannuation Industry (Supervision) Act 1993, with amendments:

“15B Modified meaning of member
(1) The regulations may provide that a person is to be treated, or is not to be treated, as being a member of a superannuation fund for the purposes of this Act or specified provisions of this Act.
(2) This Act applies with such modifications (if any) as are prescribed in relation to a person who is a member of a superannuation fund because of regulations made for the purposes of this section.
(3) In this section:
modifications includes additions, omissions and substitutions.”

That’s it. That’s the definition of a member according to the 511 pages of the Act.

We’re no legal eagle (obviously), but a member means, well, it means whatever the current or future Act of parliament wants it to mean. It’s not much different to being a member of the RACV or the Frankston Lawn Bowls Club.

You pay your membership fee (superannuation contribution) and then you get back whatever the trustees say you’ll get back.

Let me put it this way. As a member of a superannuation fund, you are the beneficial owner of the assets in the fund. However, your right to those assets and what those assets are is very tightly controlled.

You see, although as a member you get to have some choice over where those assets are invested, the legal responsibility for ensuring the fund is compliant with the law rests with the trustee of the fund.

In the case of a retail or industry super fund the trustees are appointed by the fund. Even in the case of a self managed super fund there are trustees. In that case the trustees are also members.

But whoever the trustees are the responsibilities are the same. In the case of a self managed super fund, with your ‘member’ hat on, you decide where you want to invest the fund’s money. And then with your ‘trustee’ hat on you determine whether the investment is compliant with the law.

That means the trustee of the fund can only approve investments that are in line with the law of the day.

Plus they must ensure all other laws associated with superannuation are adhered to. Again, that is dependent on whatever the law of the day is.

In other words, there is nothing in the current laws which say the assets held in your superannuation account are actually yours as an individual. Rather you are a beneficiary of whatever assets are held in the account.

So, as an example, if a current or future government decided that all assets in superannuation funds were to be exchanged for a government “managed fund” then the trustees would have to comply.

Or even if they made it the law for all super funds to have a 20% allocation to infrastructure funds. The trustee would need to ensure the fund was complying to that law.

Even so, your status as an individual wouldn’t change. You would still be the beneficiary of the assets in the fund, only the assets are now different.

Don’t forget, this process has already been tested by the government and the tax office with the expropriation of temporary worker superannuation accounts earlier this year.

The tax office seized all super assets of former temporary workers, with the proceeds being paid to the government’s consolidated revenue. In other words, the government will spend it.

The former temporary workers are still beneficiaries of the funds, however the assets in the fund are no longer the same. In fact, they are no longer there!

Which brings us to Mr. Keating and his interview on the 7.30 Report the other evening.

The quote from the former PM that floored us was this:

“I mean, here we have in superannuation the third largest pool of savings in the world. $1100 billion, growing at $100 billion a year. These funds could hold Australian AA-housing mortgage bonds. No trouble at all. In fact we saw all these dreadful numbers for super, people losing money, but if they had your or my mortgage they would be getting 6 per cent solid, or 5.5 or 6 per cent. So therefore, we have to work out how we can have the super funds take the mortgages up. And I think one of the ways that can happen is for the central bank, the Reserve Bank, to trade in housing bonds like it trades in treasury bonds. So it makes a liquid system, a liquid market.”

Man the lifeboats! If Mr. Keating is thinking this, you can bet your last dollar that every public servant in the land is thinking the same thing. And that includes the king poo-bah of public servants, Emperor Henry.

How to get hold of $1.1 trillion dollars of private investor’s cash in order to prop up the housing market is one way of looking at it.

How to get hold of $1.1 trillion dollars of private investor’s cash in order to create a replica of the Fannie Mae, Freddie Mac, Lehman Brothers, AIG debacle is another way to look at it.

We’re running out of space today, so we’ll hold over the rest of our analysis of Mr. Keating’s grand plan to another day.

Back to super, it should be very clear to you that your superannuation fund is not quite as much yours as you think it is.

I know I’ve used the expression about super being “yours” before. Although it’s technically true, it’s only a half-truth. In reality it’s only yours for as long as government and the tax man will allow it to be yours.

And although it may be yours it may not be in quite the form you’d like it to be.

If they decide you can’t be trusted, or there’s a chance you could “squander” some of the $1.1 trillion held in those accounts, then it won’t take much effort for them to blend your superannuation fund into a much bigger pool of government controlled funds.

Funds that can be used to “invest” in infrastructure assets, residential mortgages, or anything else that could help them get re-elected in the short term. Or even just plain spent.

All of it using your hard earned money.

And that is when superannuation would unquestionably become a Ponzi scheme.

Other Stuff on the Markets

The S&P/ASX200 dropped 0.69% yesterday, while overnight on Wall Street the Dow Jones Industrial Average slipped 41 points. In Europe the FTSE100 fell 1.17% and the CAC40 slumped 1.66%.

The price of gold in Australian dollars is trading at $1,149.60, while in US Dollars it is trading at $993.95. And the price of silver in Aussie dollars is $18.73 and in US Dollars it is $16.19.

The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8655, and JPY78.98.

Crude oil closed overnight at USD$65.98.

For the biggest movers on the market yesterday click here…

Cheers.
Kris.

How Your Super is Not Quite Your Super, 7.4 out of 10 based on 7 ratings

Tagged as: Ponzi scheme, superannuation