Superannuation won’t solve the housing crisis

Welcome to Part III of the Hello Humans Superannuation special, in which I put forward a number of solutions that are more effective than letting people raid their retirement fund to pay for a house which many believe is an Australian birthright. If you missed them, you can read Parts One and Two here and here.

Cracking open our Super funds has become a lazy alternative to actual solutions for the housing crisis.

Aside from the fact that raiding Super will only push up prices and deepen the crisis that will inevitably occur, it highlights how deeply flawed Australia’s economy has become, that we must rely on property for income, instead of, you know, a job that supports the present cost of living and that is substantive enough to encourage salary sacrifice for a comfortable retirement.

Australia is one of the least diversified economies in the world, and Super is affected.

“Australia sits below Syria and above Cameroon in terms of its economic diversity,” says Dr Steven Keen, Head of Economics at London’s Kingston University. (Economic diversity meaning the number of companies / businesses / resources in any given national economy which provide employment and revenue streams for the population).

Australia ranks 23rd, between Canada and Qatar in terms of its ability to innovate, according to the World Economic Forum’s Updated Global Competitiveness Index.

“In both business sophistication (28th, down one) and innovation (26th, down three), Australia not only lags far behind the best performers but also loses ground to them,” the report reads.

Dr Keen says Australia is a wealthy society based on a narrow industrial base.

“If Super worked we would be much higher up on that list,” he said. “It hasn’t done what it should have”.

Professor of Economics Steve Keen

For a country which encourages people to invest their Superannuation in diversified portfolios, the government has done a piss poor job following its own advice, despite the fact that economists have spent the last three decades extrapolating individual personal risk profiles to the entire economy.

Australia is far too reliant on commodities and tourism and not much else. As I have written previously, the country has been kept afloat by a silent wave of immigration and a glut of private debt.

For some reason the government is still standing behind the outdated concept of specialisation.

Ask any politician, financial planner, wealth manager, heck even your bog-standard banker: ‘What makes for a good investment portfolio?’, they will tell you the best way to ensure a comfortable retirement is a diversified portfolio, investing in stocks, bonds and property of differing risk profiles to maximise your return.

The economy works the same way: You need investment in different sectors, to create jobs that provide differing returns, allowing both workers and employers diverse choices as to how they hire, spend and invest.

But a truly diversified portfolio is limited by the amount of things you have to invest in. The lack of diversity in the economy has overvalued stocks and bonds, as well as property.

Unfortunately this advice has been ignored for the better part of 30 years, so here we stand, in an economy that relies on mineral exports to Asia – which is slowing – and tourism in cities whose culture and nightlife are being destroyed by wealthy tenants with noise complaints and property developers.

Professor Keen says Australia’s impending retirement crisis is a reflection of the lack of commitment and concern for the diversity of the economy’s productive resources.

“The trouble is the pension itself has to reflect how much your productive resources can afford to provide for people who aren’t working,” he said.  “If you let your productive capacity decline over time, it doesn’t matter how much you pay people in pensions, the capacity of the economy to provide a living for its participants is diminished.

“If we had invested the time and resources that have gone into super into building robot technology for Australian manufacturing, for example, or converting our minerals locally or developing the parts that go into solar power, we’d have productive industries to build on. But we didn’t and now what we have now is one of the least diversified industrial structures in the wealthy world.”

Dr Steven Hail, economics lecturer at The University of Adelaide concurs with this view.

“Had Super been used as a tax to create room for non-inflationary investment in green infrastructure, it would perhaps have been different,” said Dr Hail. “But it wasn’t.

Dr Steven Hail, economics lecturer at The University of Adelaide

“It is the result of both sides of politics in Australia completely misunderstanding macroeconomics and the limitations on fiscal policy, and then not being honest about the policy, even within that context. ”

There are plenty of things the government could do to level off the cost of housing, and allow ease of access for first home buyers: Banning negative gearing, for one thing, along with interest only loans.

Six things to do before raiding super

How people like Bronwyn Bishop can cry socialism for government intervention in the housing crisis while simultaneously drawing a lifetime pension while also being legally allowed to make deliberate losses on property assets in order to gain a tax deduction, is beyond me. It is totally anti-capitalism to encourage a deliberate loss.

Other solutions involve reinstating the capital gains tax and including the value of private residences in the pension assessment.

But that would require government action and vision. You know the thing we elected it to do: Make important decisions about the economy.

Allowing Australian workers to raid their Super funds is shifting responsibility for a national policy-driven issue to individuals. It forces Australian workers to shoulder all of the risk with only the aged pension to rely on should everything go tits up between now and retirement.

But still this issue refuses to die. Just last night Peter Martin, Economics Editor for The Age advocated on Twitter for a Super raid to address housing access and prices. He argued that 80% of retirees will still be on the pension in 30 years time, according to the Intergovernmental Report. The same report that ignored the automation and changing workforce composition.

More than 40% of the Australian workforce is set to be automated within the next 15 years. And of the jobs that continue to exist, a greater proportion will be casual or part time, doing nothing at all to address the problem of Super supporting the ageing population in retirement, let alone providing enough income to pay for the current cost of living.

Never mind that raiding Super for property investment would only serve to raise prices, meaning more people would need to sacrifice a greater proportion of their retirement fund for a property that is very likely already overvalued. This according to leading economists including Deloitte Access economist, Chris Richardson. Also Emeritus Professor of Economics Geoffrey Harcourt, Dr Steve Keen, head of economics at London’s Kingston University,  Dr Bill Mitchell, Chair in Economics and Director of the Centre of Full Employment and Equity and Dr Steven Hail, economics lecturer at the University of Adelaide.

It is deeply irresponsible to advocate raiding Super before even attempting a proper solution. And the advocacy for the idea displayed by people like Martin demonstrates how quickly and easily the government has been let off the hook for its complete and utter inaction on this over the last 30 years, let alone failing to see the crisis coming in the first place.

Last year home-loans topped $1 trillion. This weekend a one bedroom apartment up five flights of stairs with no parking and a shared balcony sold for $1 million in Sydney.

Scrap Super, pensions for everyone

Professor Keen & Hail say Super should be scrapped, in favour of compulsory pensions for all. Or at least keep Super as non-compulsory retirement investment and have companies and workers trade-in pay-rises for increases in Super. (Not that most of us have had a pay rise over the last decade or more).

The threat to the deficit by replacing Superannuation with a mandatory pensions is overstated, according to Professor Emeritus of Economics, Geoffrey Harcourt, (though he is not, like Keen & Hail, an advocate of scrapping Super).

The economist says Australia has “huge, intractable problems to deal with in the present political environment.”

“For example, the fallacies of debt to income ratio and this obsession with balancing a budget.”

“It is illogical. It implicitly assumes you are dealing with a stationary economy when in fact they grow.”

Professor Emeritus of Economics at Adelaide University and Emeritus Reader in the history of economic theory at Cambridge, Geoffrey Harcourt.

Research by  who taught at Johns Hopkins and MIT economist Evsey Domar in the 1940s showed that if you have a growing economy, the debt to income ratio doesn’t explode. It moves towards a limit. And within orders of magnitude you’re likely to meet in the real world.

“Especially in Australia,” says Harcourt. “That limit is quite liveable without being a burden.

The economist says the “fetish” over the deficit size and debt to income ratio is completely misplaced.

“When discussing the burden of national debt you must distinguish between internal debt and external debt,” he said. “Internal debt is just transfer to those who hold bonds from those who pay taxes. (Who of course, may be overlapping sets). You may not like the distributional effects of how that occurs, and that can be tackled, but is not a burden on the economy on whole. Externally there is  a burden because exports have to be that much higher in real terms than they otherwise would have been in order to service interest and principal payments on overseas capital coming in and imports.”

“If you use overseas borrowing productively, which is by and large what Australia has done historically, you can spare resources to make extra exports and still be better off than you otherwise would have been.”

“When we use borrowing to create infrastructure, that may make us much more productive even when you allow for repaying of loans and interest, better off than if you hadn’t borrowed in the first place.

“And with low interest rates we are missing a golden opportunity to be borrowing.”

Chief Economist at IFM Investors Alex Joiner says the primary place of Australian residences has been sacrosanct and therefore falls out of pension calculations, “an unproductive use of the asset”.

Joiner says taking the value of properties into asset testing would help to encourage retirees to downsize and improve housing affordability more broadly.

When confronted with these claims, Professor Keen replied “respectfully, that is total bullshit.”

“People like Joiner don’t understand that the role of the government is to create money,” he said.  “This is the thing I get so sick of trying to get through to people. There are two ways the government can create money domestically:

  • You can borrow money from banks, (debt).
  • Or spend more than you t gets back in taxation creating FIAT money.

When governments try to run a balanced budget, or worse – a surplus – it is destroying money and then saying to the economy ‘please grow’.

“It is suicidal,” Professor Keen says.

Professor Harcourt says the best way to create money is to have mercantile trade surplus like Germany or Japan, a claim which Professor Keen concurs.

Don’t scrap stamp duty

Contrary to popular opinion, abolishing stamp duty is not a good idea.

Dr Keen says stamp duty has grown faster than the rate of inflation due to the massive increase in house prices over the last 5-10 years. “Abolishing stamp duty would just hand more money over to the finance sector to lever into house prices,” he said.

The economist says stamp duty should be replaced by a land value tax levied not on transactions but on change in valuation over time

“Frankly tax reform alone won’t fix it, but I’d go for a switch along with making it unattractive to banks to lend for housing bubbles,” he said.

Banning foreign investment would also help to reduce speculation.

“I’d limit foreign purchases to no more than 10% of capital city, and then only for non-residents who are frequent visitors,” says Keen. “With corporate purchases below 2%. Plus restoring capital gains tax to the same marginal rate as income tax.”

Allowing people to raid their Superannuation fund simply delays the inevitable crisis that will result when the bubble does eventually burst. And burst it will.

And as Fairfax’ Money Editor Caitlin Fitzsimmons pointed out this morning, a massive housing crash is likely to cause a recession.

Raiding Super kicks the problem down the road.

It may be tomorrow, it may be 25 years from now but there will be a financial crisis. If we’re lucky there will only be one.

There will be a crash and lives will be impacted. The only thing to be done now is control the fall-out. We need strong decisive leadership today, to soften the inevitable blow.

Protecting people from themselves is the least we can do. Reforming the system would be better.

In the meantime, leave Super alone.

Claire Connelly is working on her first book, How The World Really Works, a guide to recognising rhetorical red flags and immunising yourself against bullshit. You should definitely buy it when it comes out. A podcast of the same name will also be launching in the coming months. Stay tuned. In the meantime, support independent journalism. Subscribe to the Hello Humans Newsletter for $4.50 a month via Patreon.