It is one of the ironies of Australian political history that a policy that has profoundly benefited this country’s version of capitalism came, not from the right, but from the Labor party and unions. The mandating of superannuation payments in 1992 under the Keating government has profoundly changed Australia’s financial system. There are few better demonstrations of how mouldy left-right economic distinctions based on ideas formed in the nineteenth century (or eighteenth century in the case of the Adam Smith) have mostly lost relevance in the twenty first century.
When the policy was introduced many Liberal Party politicians at first expressed hostility — until they realised how much money was to be made, that is. It turns out that if you want robust capitalism, then ask the Left. The full financial effect has taken decades to emerge and it is still mostly ignored, or not understood, in political debates. There is much coverage of growing income disparities and how it affects wealth differentials, but there is very little examination of savings, which is also wealth. When that is included, the picture in the Australian economy looks very different.
In 1991, the pool of accumulated superannuation savings was around $146 billion, equivalent to 38 per cent of GDP. In 2019, according to the OECD, assets in all retirement vehicles in Australia equated with 135 per cent of GDP, ranking the country sixth in the world behind Denmark, Iceland, the Netherlands, Canada and the US (the OECD average is 60 per cent). To give some idea of the long term structural implications, in New Zealand pension fund assets only equate with 31 per cent of GDP. Over time that will put much greater pressure on the Kiwi government to fund the aged pension, a problem far less likely to occur in Australia. Even those who do not have sufficient savings to fully fund their own retirement will still be taking some pressure off the government accounts with what they have.
There is now over $3 trillion in Australian super funds which, as Keating has boasted, has completely changed Australia’s external accounts. In 2019, Australia became, for the first time since the Second World War, and perhaps ever, a net foreign investor rather than a net recipient of foreign investment. That was largely because of super funds investing in overseas stock markets (the Australian stock market is just over $2 trillion).
To complete the muddying of left and right wing distinctions, a further irony is that representatives of organised labour, the unions, have turned out to be much better investment managers than the private players. The Liberal Party in the 1990s was outraged at the formation of industry funds because they thought, rightly enough, that it would give great power to the union movement.
Trouble is, the industry funds have tended to do better over the last three decades than the privately run retail funds. One reason is that retail funds tend to charge more for their services. According to the Productivity Commission, there are many ‘excessive and unwarranted fees’, and although they have come down ‘a tail of high-fee products remains entrenched, mostly in retail funds.’
'If there are two well proven rules in investment, they are: the higher the fees, the lower the return; and, the best way to manage risk and reward is to diversify.'
Another reason is that industry funds often have access to different types of investment, such as infrastructure vehicles, which allows them to diversify more. If there are two well proven rules in investment, they are: the higher the fees, the lower the return; and, the best way to manage risk and reward is to diversify.
Another great virtue of Australia’s super system is that individuals own their own savings. In many European pension systems there is no direct ownership and because governments have big unfunded pension liabilities it is likely to mean that superannuants will never get all they were promised. But in Australia the money is invested on your behalf; it is yours.
It is an exemplification of a strain of political thinking, neither strictly left wing nor right wing, that was devised by the great writer GK Chesterton: distributism, the idea that productive assets should be widely owned rather than concentrated. Superannuation has made big steps towards such distributed ownership, unlike the Australian housing market, where there is unfortunately a massive generational divide because of reckless bank lending. The little understood implication is that the ideologies that define our political divisions no longer mean very much.
David James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.
Main image: Paul Keating (Patrick Riviere/Getty Images)