It's not good enough just creaming off billions in management fees.
IT USED to be understood that financial institutions existed to service the real economy, not vice versa. Financial deregulation reversed the relationship, which led directly to the global financial crisis.
The failure to re-regulate the financial system five years after the GFC - thanks to the power of Wall Street and the City of London in particular - is a major factor in the probability of another crisis or ''double-dip'' global recession.
Australia avoided the worst of the GFC, thanks to the government's $45 billion fiscal stimulus, which offset the collapse in private spending.
The government's political opponents had a field day attacking ''wasteful'' public spending financed by debt. But it was a brilliant result from a macro-economic perspective. Australia had only one-quarter of negative economic growth, and unemployment peaked at 5.8 per cent, compared with 7 per cent in the much milder global recession in 2001.
But debt was successfully demonised in Australia as the Coalition hailed the reduction of public debt under the Howard government as evidence of a golden era of responsible financial management - even though it was largely achieved by under-investment in social infrastructure and the sale of economic infrastructure (public buildings, airports, Telstra), which simply swapped low-cost public debt for high-cost private debt.
But the Hawke/Keating government gave the biggest boost to the finance industry in 1987 with the introduction of compulsory superannuation. This has set Australia on a trajectory towards privatised age pensions - a reform that both the Clinton and Bush II administrations in the US considered and rapidly backed off due to hostile public opinion across the political spectrum.
Superannuation funds under management in Australia now total $1.4 trillion (equal to annual gross domestic product) and an additional $60 billion a year is pumped into the pot due to the levy. The industry creams off 1 to 1.5 per cent of the total value of the funds (about $14 billion to $20 billion a year in management fees) for largely speculative activity.
A survey published last week shows that between 1996 and 2011 the financial return on retail (for profit) funds was less than the return on annual term deposits, and the return on industry (union) funds was about the same as the return on long-term bonds.
An even more damning comparison is contained in the OECD Pensions Outlook 2012, which showed that over the period 2001 to 2010 the real annual return on Australian funds was minus 5 per cent - the worst of the 22 countries surveyed, apart from Iceland, whose banks literally bankrupted the small country.
The Australian superannuation industry enjoys a tax subsidy that is expected to rise from $32 billion now to $45 billion in 2015 as the compulsory levy is increased from 9 per cent to 12 per cent. The subsidy, which is heavily skewed to high-income earners, will then be equal to the cost of the age pension.
Unabashed, the private superannuation industry has been agitating for the government to create more opportunities for low-risk, high-yielding investments in Australia, threatening to otherwise invest even more of its funds under management overseas.
Infrastructure Minister Anthony Albanese set up a joint working group comprising lobbyists who have the most to gain from the expansion of the superannuation rort, plus bureaucrats from Treasury and his own and the Prime Minister's departments.
Their report is a disgrace.
The key recommendation is an ambit claim that suggests that state and territory government should ''monetise'' their remaining high-yielding, low-risk economic assets by selling them to cashed-up investment banks and superannuation funds. This would free up money for the governments to invest in low-yielding infrastructure that private investors won't touch because of the risks associated with the investment.
Specifically, the superannuation industry has its eye on existing water, road, rail and port assets, which are largely monopolies with assured income streams. To reveal what is at stake, assume that, as state monopolies, these assets earn 5 per cent on capital for the government and would be expected to earn 10 per cent on capital for private investors.
This means that the assets worth $100 billion on the government's books, would only be worth $50 billion to the private operators if the prices for the services remained the same. The government might get $100 billion for the assets if it allowed the new owners to double prices for the services.
There is an alternative. It has never been cheaper or easier for governments with triple-A credit ratings to raise capital on their own behalf, because of the fear of a double-dip recession. The Australian government could raise all the money it needs for infrastructure in the form of 10-year bonds at 3 per cent. Investors in German and Swiss bonds now pay for the privilege.
If the superannuation funds are reluctant to invest in the government bonds, they should be told that their $32 billion subsidies will be revoked. Better still, the government should abandon the policy to lift the compulsory levy to 12 per cent.
Kenneth Davidson is a senior columnist. Email: firstname.lastname@example.org