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Retirement income has for too long been part of class and political warfare in Australia. The responses to the Productivity Commission's damning indictment of the $2.6 trillion (and growing) industry suggest it is still alive and well. Before 1983, professionals, public servants and people in senior positions in the corporate world generally had superannuation. In the private sector there was no compulsion and the employer's contribution was often contingent on the employee not leaving. The unskilled, the semi-skills and the trades tended not to have superannuation and faced usually a short retirement in semi-poverty on the aged pension. The Hawke-Keating Government changed all that. It wanted to replace a class-based, grace-and-favour system with one that would in the long-term provide decent retirement incomes for all. It was one of the best pieces of public policy in Australian history, along with Medicare, the Pharmaceutical Benefits Scheme and the National Disability Insurance Scheme, but it has it faults. Large sums of money are available on a national scale for the provision of services in these schemes. And wherever large sums of money are at stake, the cheats, the unscrupulous and the rent seekers are attracted like iron filings to a magnet, often forming patterns of egregious misbehaviour: over-charging, over-servicing, conflicts of interest, outright fraud and so on. The NDIS is a bit young for the misbehavior to emerge on the service-supply side, but just wait. The ideological divide over superannuation is between Labor, on one hand, which favours compulsion; universality and inclusive fund management and the Coalition, on the other, which abhors compulsion and universality, preferring the free market, individuality and free choice. However, the general success of the superannuation scheme (like Medicare) has made it too popular to abolish outright, so all the Coalition can do is undermine it. We should be careful that the misconduct exposed by the Productivity Commission is not used as a battering ram against the whole scheme, which is fundamentally of great value. It is now the fourth-largest retirement scheme in the world. In the long term it will radically reduce the need for governments to pay aged pensions. Calls for an end to compulsion and delay or abandonment of the plan for contributions to go to 12 per cent are misguided. The idea that freed of compulsion, individuals could and would invest their money as they choose, such as in housing, is fanciful. Without compulsion, Australians have had a hopeless record on saving. Let's face it, without the compulsory scheme, that $2.6 trillion would have been squandered on flat-screen televisions and other ephemeral items, merely adding to Australia's balance of payments worries. Or worse, what if those diligent youngsters had been handed the 9.5 per cent and they had invested it in housing? The result would have been an even more heated housing market, or more likely people buying unnecessarily bigger houses stuffed with more consumer junk. It is unfortunate that the weaknesses in the scheme could not have been ironed out earlier. That is mainly because each side of politics was blinded by ideology and looking after their own rather than attending to the fundamental aim of superannuation – to insure for retirement incomes for everyone. Once you recognise that it is an insurance scheme (like Medicare, the PBS and the NDIS) things fall into place. These are insurance schemes. The more people in them the better the spread of risk and the lower the overheads, so the higher the pay-outs. But the trick is to set the right premium to produce the right pay-out without the fund going broke. One of the first, if not the first, attempt to do this was in the mid-18 th century when the Scottish reformed church, after allowing its clergymen to marry, found itself responsible for the upkeep of their widows. They turned to Robert Wallace and Alexander Webster who looked at (in those days very roungh) life-expectancy figures to determine how much each clergyman should have to pay through their working lives in order for there to be a fund which could pay for widows' upkeep without the fund ever being exhausted. It was a non-profit scheme. It was universal and compulsory. And it worked. Similarly, the Australian Government Future Fund set up with the proceeds of the sale of the last third of Telstra to fund the pension obligations to public servants is compulsory and universal for public servants. Under the leadership of that well-known socialist Peter Costello it is well on its way to its aim of amassing $140 billion to fund the $7 billion a year pension obligation. It also runs five nation-building funds. Guess what? It does not allow public servants to choose which fund they want their superannuation levy to go into. Its goes into the Future Fund. And no fat commissions or excessive profits or fees are taken out. Further, the Future Fund does not suffer from some of the flaws in the general superannuation scheme. The 1983 redress of the former class-based system had a couple of unforeseen problems. Because unions initially gave up a 3 per cent pay rise to kick the system off, they rightly wanted a piece of the action. Because it was the workers' money they rightly wanted a say in its management and to ensure the money was not spirited away. To ensure this they often insisted on clauses in enterprise bargaining agreements as to which fund the employer must put workers' compulsory superannuation contributions. There were two poor consequences. As workers moved from job to job and industry to industry they ended up with multiple accounts, each incurring a minimum base administration fee, however small the account. Few workers made the effort to consolidate them. Secondly, a lot of the trustees of these new funds did not have the skills to ensure the investments were sound. Next governments gave generous tax breaks for superannuation contributions and earnings, enticing financial advisers to attract more self-employed people to invest in superannuation. They "earned" fat commissions from advising clients to put their money into retail funds (mainly run by the banks) which also took a profit cut. But the investors hardly noticed they were being dudded because the tax breaks were so good. So the under-performing funds are usually smaller ones with low skill sets and retail funds which have to take out profits and commissions. The bad performing funds, however, are not a symptom of a bad scheme, rather one that needs a few changes which should have been done long ago. But the defects had been ignored because workers were too ignorant or apathetic and too many people were getting too much power, influence and money from leaving things the way they were. A better way to look at it would be that the good performing funds show what is possible. Given that one of the best performing funds is the Future Fund, maybe all Australians should have the option of putting their superannuation there and the Productivity Commission should have recommended that option as a means of keeping the whole industry on its toes. www.crispinhull.com.au

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