Will boomers bust super?

PORTFOLIO POINT: As baby boomers head into retirement, super could be facing a liquidity crisis.

They talk about peak oil theory, where the production of oil hits its highest, before declining rapidly. Is it possible that there is also a “peak super” theory?

Have super funds, including self-managed super funds, hit an inflexion point? Has the phenomenal growth in funds of the recent decade peaked? Are we about to see a great levelling out, before an eventual drop-off – in inflation-adjusted terms, if not in real terms – in the sums being run by the superannuation system?

A couple of reports out in January suggest that this might actually be something to be concerned about.

In some ways, it would appear to be a ridiculous suggestion. After all, super in Australia is, to one extent or another, mandated. Currently, 9% of employees’ wages must be paid into super (although those rules don’t apply to the self-employed to the same extent) and the Gillard government is intent on lifting that rate to 12%.

Last month, the super system topped $1.23 trillion for the first time. And considering that investment markets are still well behind their 2007 peaks, a considerable amount of that growth is due to contributions.

The first report suggesting this was actually contained in a recently launched book by Macroplan Australia economist Brian Haratsis, called Australia 2050 – Big Australia?, which suggests the Australian super system will start to go backwards in the coming years because of the number of baby boomers retiring.

The second is in the latest figures from Multiport, an update of the statistics that generated considerable discussion among Eureka Report readers last year after it showed a 20% drop in the total contributions being made to SMSFs by members. To read those articles, click here and here. We’ll come back to this in a moment.

Brian Haratsis is the managing director and chief economist of Macroplan Australia. His Australian 2050 – Big Australia? book is about the problems and issues Australia faces as its population grows, not just super and retirement incomes.

However, he states that pension payments, or redemptions, are going to ramp up incredibly in the next few years as baby boomers retire en masse. This will create a significant liquidity issue in many funds.

The basis of his theory is that the sheer volume of baby boomers who are going to start retiring over the next few years is going will drain so much cash from super funds that it will cause the nation’s fund balances to not only go backwards, but potentially to freeze up – particularly if they have illiquid assets such as large property or infrastructure holdings.

It would be comparable to but worse than the recent liquidity crisis Australians suffered in recent years in regards to the mortgage/property funds that froze in late 2008, many of which are still only offering limited redemptions.

The problem that will be caused by people accessing their super over the next 10–15 years, Haratsis says, is that they are often the ones with relatively low balances, because compulsory super didn’t arrive until 1992 and they have not managed to grow their super much since then.

The average lump-sum payout during 2009-10 was $70,000, he says. And in many instances, it made sense for people to take out their small amounts of super, spend it on a Land Rover and a campervan and head off around Australia. They will quickly be eligible for a government age pension.

“If you don’t have enough super, you might as well blow it and go on the pension,” Haratsis says. “[Older] Australians who were getting super from 1992 to 2020 are going to be substantially undersuperannuated.

“From 2011 to 2025, we are going to be in a situation where more and more people are going to be using the age pension, not less, and it’s going to put an incredible strain on the federal budgets. There are going to be more and more problems from a budgetary sense, partly because so many baby boomers are drawing on relatively small lump sums.”

Haratsis believes that Jeremy Cooper’s review of super really missed an important opportunity to look into this. And he believes the federal government has also made a big mistake by cutting contribution limits and doing anything else that stops people from saving through this period. Increasing the Superannuation Guarantee levy from 9% to 12% is OK, he says, but it probably really needs to be 15% to solve the liquidity crisis we will suffer over the next 10–20 years in super and the government age pension.

“There should be no more contribution caps,” he says. “This should not be a tax-driven issue. This should be about maximising the amount of money in super.”

While Haratsis is looking at the big picture, statistics from SMSF administrator Multiport gives some credence on a micro level.

Multiport does the administration for about 1350 SMSFs, managing $1.2 billion, which puts its average super fund at a very similar size to the official average (see SMSFs close in on the magic million) at a little under $1 million, according to the tax office.

Multiport was the first to show last year the quantum of the drop in contributions to SMSFs (about 20%) in 2009-10 following the halving of contributions limits by the then Rudd Government that had started that financial year. Their figures for the two September and December quarters since then show a continuing decline in contributions.

For instance, contributions for the December 2009 quarter were $8300 per fund. This fell 23% to $6400 per fund for the December 2010 quarter. The June quarter is traditionally the big one for contributions, as you would expect, but the trend is severely negative.

More interestingly, one of Multiport’s statistics shows that pension payments from SMSFs outweighed contributions in the December quarter.

While there was just $6400 going into the average SMSF for the December quarter, the outflows was nearly double that, at an average of $12,000 per fund.

Now, one swallow doesn’t make a summer, so it would be folly to read too much from a single quarter’s figures. And it does not entirely follow that if pension and benefit payments outweigh contributions, that super funds are going backwards, as earnings from the fund/s could well mean that the super fund is still continuing to grow. But it certainly makes it harder.

But it does give weight to what Haratsis is saying. Boomers have only just started to retire. The volume will increase over the next decade.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.