Where do I start to write about how to salvage the Great Australian Dream for most of my friends and the next generation?
Do I start with a much younger me, too arrogant to know my own financial ignorance, but very very very lucky?
Or is it about interest rates, and how we all were slaves to The Man for a whole lot less time at high interest rates compared to now?
Or is it my favourite asset class (aside from the roof over my head), that is, superannuation?
And how about the big question – Housing Affordability for most of my fellow Australians?
Perhaps we might discuss Austrian Economics – or at least my twisted take on it.
Let’s start with the younger me. As Dexy’s Midnight Runners put it in their signature song: We are far too young and clever.
I was a very financially ignorant 21 year old. My idea of financial sophistication was to keep money in term deposits (well, in 1990-91, term deposits DID pay over 10% in interest…). I used to pass over the stock market pages and the turf guide in the Herald-Sun in equal indifference on my way to reading the comic strip page.
OK – full disclosure – none of my friends doing commerce or economics degrees ever talked about the share market or investing, and most of them turned when life came calling a few years later to be even more financially illiterate than me despite ‘Sandstone League’ degrees in finance or economics.
To borrow from Robert Heinlein – anyone can be a military genius til the bullets start flying. That does apply to smart Alecs who think they know anything about money, especially those without skin in the game.
So anyway, back to Ernest at 21. I was indignant that money was being mandatorily set aside for me in superannuation. In my financial ignorance but great personal arrogance (well, I had recently read a toxic dose of Ayn Rand) I believed that the money was better off in my pocket because I would find a better use for it.
Let’s park my clever 21 year old ideas. We will come back to that. Maybe we can smack 21 year old Ernest on the back of the head on the way through.
I sure would.
Perhaps let’s just pause and discuss Austrian Economics. This is one of the free market schools of economics, the one which is most Laissez Faire (which is French for ‘leave us alone’ – I know this because the equivalent Italian phrase is ‘Lascia Fare’).
Many economic theories try to predict and manipulate human behaviour. They have very limited understanding of humanity and how individuals behave, which is that humans are harder to herd than cats, which is unsurprising because we are smarter and more unique.
Austrian economics, particularly through Ludwig Von Mises in his book Human Action, does explain this. He also debunks Marxist economics in this, although I personally prefer a moral discreditation of Marxism (ie Stop thinking of Humans as Hive Insects).
I think that Austrians try to simply predict that we will act in our own self interests, and that those interests are a lot harder to define and quantify than what other economic theorists argue.
I hope I get that right. I am about as good at defining Austrian Economics as I am at defining Existentialist Philosophy, even though I like both of those very much.
Let’s now turn to Superannuation.
I am a big believer in Superannuation. I am, if my superannuation fund was the movie Tigerland, Colin Farrell…. I know exactly how to game it and why. When new colleagues are introduced to me, they are warned not to get me started on superannuation.
Which makes it very hard for me at the moment to say that perhaps, for most people (except for me dammit), mandatory superannuation is not a good thing in the long term.
It is very complicated, and whilst I am wily, I am not an economist or an accountant or an (God forbid because they are so boring) actuary.
But let’s start at why we have universal superannuation.
When the (post 1996) permanently embittered Paul Keating was Treasurer and then Prime Minister, he decreed that all Australians were to have mandatory superannuation accounts.
In the long term, this would save the taxpayer a great deal of money because most people would have self-funded retirements, and therefore they would not need to rely on the old age pension.
That, however, has come over the past 30 years at a cost in two ways.
The first is that workers have had to defer immediate gratification in order to save for their futures. That has involved part of their wages being set aside for a rainy day (ie when they are 60 instead of 21).
The other is that people have been given many tax incentives to put some of their income and wealth aside for that ‘rainy day’, such that the more well off who might not otherwise need to provide for their future can use superannuation to minimise their taxes and plan for intergenerational wealth transfer.
The later involves a lot of cost to the taxpayer. I personally am starting to think that if we were to stop tax subsidies to superannuation, and just let most people have access to the old age pension, it would be cheaper to the tax payer.
Which means that the original purpose for universal superannuation has been defeated – it probably does not save money for the taxpayer.
This is particular the case where most people can find ways of gaming the system and maximising their ability to obtain pensions whilst either enjoying their superannuation early, or planning their retirements in other ways.
Letting all first home buyers access $50,000 of their superannuation funds to buy homes is not a great idea for the nation. If everyone doing that is in a couple, and the banks then add a multiple of five to what that deposit represents, it will artificially inflate house prices by $500,000. This is not good for the community, except for those who already own several homes, and for those who are very sophisticated property investors (or such companies).
So let’s go back to a few other of the original ideas I had parked at the start of this post.
Let’s go to inflation and interest rates now.
Where interest rates go up, it tends, unless there are other factors involved (eg $50G super releases into house deposits) to force house prices down.
Interest rates tend to be forced up when inflation goes up. Interest rates are there to rise to slow the rise of inflation.
One of the things which causes inflation to go up is when people have more money to spend. They spend more and that causes the velocity of money to increase, and the demand forces up prices.
So, let’s go back to superannuation. If all tax incentives to put extra money into superannuation disappear, and all the mandatory requirements for employers to put part of your salary away for your retirement disappear, we are talking about an immediate gross increase in pay packets for about ten percent for all Australians.
Even where some people will be like the 21 year old version of me, who smugly believed without any ideas to back it, that I would be able to be more responsible with that money than anyone else (and who might have tried to do so), most people are just going to squander it. The rest they will spend on wine, women and song.
All of that spending of that extra money is going to increase demand and the velocity of money, and in turn is going to drive up inflation.
Which in turn will force interest rates to rise.
Which will then push housing prices down, at which time, some of those silly 21 year olds will be ready to settle down and will have the high cash incomes to afford a lower sized mortgage at a higher interest rate. [I will qualify that by saying that any money currently in a superannuation fund needs to stay there, to avoid distorting the housing market and in order to serve its original purpose – ie to fund your retirement.]
I think that this is the nuclear option to housing affordability – your home or your retirement – but it might well be time that we look at the paradigm of superannuation (and all the vested interests parasitically clipping the ticket there in terms of fees) through another lens, an Austrian lens.