Retirees must get more sophisticated: Professor

Summary: A former Governor of the US Federal Reserve System believes Australia has a good superannuation system, but he warns that retirees need to become more active and sophisticated.

Key take-out: As global interest rates trend higher, those with large allocations to fixed income will generate more income but the prices of bonds will drop. Diversification of assets is key in retirement.

Retirees need to become more engaged with their investment portfolios, and more sophisticated in order to optimise their income, according to a former Governor of the US Federal Reserve System.

In an exclusive interview with Eureka Report after addressing an investment conference in Melbourne on Wednesday, Dr Randall Kroszner said retirees heavily weighted towards fixed interest products will be taking a bigger risk as global interest rates begin to rise.

“You will certainly be getting a higher rate of interest, but on an existing bond portfolio if interest rates go up, that means the price of the bond will come down,” Kroszner said.

“That means you have to be a little bit careful about hoping for higher interest rates. You need to set your portfolio up right to be able to participate in that.”

Kroszner was a Governor of the Federal Reserve System from 2006 to 2009, and was chairman of its Committee on Supervision and Regulation of Banking Institutions during the global financial crisis. He was also previously a member of the Bush Administration's Council of Economic Advisers, and is now Norman R. Bobins Professor of Economics at the University of Chicago Booth School of Business.

“It used to be that when you were retiring, you'd put everything into very safe, interest earning assets, and then you're fine,” Kroszner said. “And that was never actually a very good idea.

“Having yourself a bit more diversified makes more sense, and I think the global financial crisis and very low interest rates have been helpful in getting people to see that that very simple approach, although a super safe one, is perhaps not the optimal one to have.

“So it's having a bit more balanced approach to thinking about retirement, and also it helps to underscore for younger people ‘we'd better start early'.”

Australia's superannuation system a positive

Kroszner described Australia's compulsory superannuation system, including the Superannuation Guarantee levy, as a positive framework for retirement.

“You have this superannuation structure here in Australia which is excellent, and basically requires people to think about that [retirement] from early on, because they are required to make contributions into these funds,” he said.

“I also think that it's a big positive this is something run by the private sector rather than by the Government.

“I can't say the US has done particularly well by people who have made contributions into social security. Over a long time horizon it would have been better to people to have more flexibility to at least put part of their retirement contributions into things like superannuation funds.

“It would have been more beneficial to have at least some of the elements of superannuation you have here in the US.”

Kroszner said that when he was working in the US Government, he had looked at the establishment of a super system similar to Australia's.

“When I was working in the White House we proposed exactly that, to allow people on a voluntary basis to allocate some but not all of their social security contributions to funds that had many of the characteristics of the superannuation funds.

“We were not able to get Congress to agree to that, but I think that would have been good. I spent a long time studying your system here and have great respect for it.”