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In a book he has just
co-authored on America’s
burgeoning defined contribution retirement system, DON EZRA finds plenty of
inspiration to be drawn from Australia’s
example. However, the co-chair of global consulting at Russell Investments also
finds three big areas for improvement. Australia has the most advanced defined contribution
(DC) superannuation system in the world. No other country with developed
capital markets has such a high ratio of DC assets to GDP.
You have done many
good things with the superannuation system, in fact, the rest of the world
draws lessons from you. Inevitably, however, superannuation also has room for
improvement. I want to discuss three aspects here: first, the parts of the
system that have no right or wrong approach; second, the things that have been
done well; and third, the opportunities for further improvement, three in
particular. I’ll draw on arguments from a recent book of which I’m a co-author.
Some fundamental decisions about retirement aren’t right or wrong, they’re just
How should responsibility be shared between the state, employers
and individuals? Different countries have different philosophies. How much is
compulsion and how much is voluntary? Should there be a further state safety
net? And so on. Even the normal retirement age is a political decision. When Bismarck instituted the
first state pension in 1889, the starting age was 70 – and the average life
expectancy was 45. So he clearly didn’t expect many to collect the pension, and
even those who collected wouldn’t have been expected to collect it for long.
you want to support an active lifestyle in a retirement that starts earlier and
lasts longer, then it’ll cost a lot more. It’s not right or wrong, it’s a choice.
did very well was to recognise that simply saving isn’t enough. Investing those
savings makes a huge difference: on average, every dollar saved generates
roughly ten dollars to spend in retirement, given the Australian willingness to
take some risk via investing in growth assets. In America, by contrast, until
recently most DC investments were in low-interest deposits, which supports a
much more frugal lifestyle.
That was fine when DC was a side-show and workers
relied much more on defined benefits for super. But now that DC has moved to
the centre of the super stage in America, it’s inadequate. So the
standard American default option now invokes risk too. In fact, that’s an area
should now play catch-up. Your typical participant holds roughly 70 per cent in
growth-oriented investments (like equities) and 30 per cent in relatively safer
fixed interest. That’s fine for the average risk exposure over a lifetime.
it doesn’t spread the risk well. You can take much more risk when you’re young, because you have relatively little at
stake. But when you approach retirement and have much more accumulated, you don’t
want to expose a lifetime of savings to the same risk (as we’ve all learnt over
the past year or so). A better way to spread risk over a lifetime, then, is to
move that 70 per cent growth exposure higher when you’re young and lower when you’re
old. The slope of the exposure to growth assets is called a ’glide path’.
for those who don’t know how to customise a glide path for themselves, the
Americans have designed a default glide path that’s based (as a simple, if not
optimal, approximation) on how far you are from your target retirement age. It’s
called the “target date” approach. That approach would be an improvement in
risk control for most Australians. There’s another aspect Australians have got
mostly right – roughly 70 per cent of super assets follow the default option
offered by their fund of choice.
That’s sensible. In fact, it’s probably too low
a percentage! Why? Because most people don’t know nearly enough to make their
own investment decisions. You may say: ‘Really? Don’t we all read about this
stuff every day? And aren’t there statistics coming out of our ears? What more
do we need?’ My answer: ‘A lot.’ Investing is a specialised subject. We don’t
expect to become doctors or lawyers or engineers by reading pamphlets and
newspapers and doing our own research on the internet. Nor can we become
investment experts that way.
It requires a course of study, and experience. In
fact, what every country has done is to confuse investment education with
financial education. Financial education involves concepts like budgeting. It
involves making informed choices when you can’t afford to do everything you’d
like. The best thing that you deny yourself is the opportunity cost of doing
what you do – saving to achieve that next best thing or borrowing to do it
earlier. You need to consider things like the return on saving and the cost of
borrowing, and compound interest.
Everyone needs financial education. It’s like
meat and potatoes. Investment education is like the icing on the cake. When
someone has been starved of meat and potatoes, living on icing isn’t going to
be healthy. In every country I’ve seen, the real need is to educate people that
the default option is likely to do better for them than their own choices. And
with 70 per cent in default options, it’s far too low a number. The third
opportunity for improved super is also a global need, and Australia has
And it’s better late than never. It’s the importance of
continuing a disciplined investment regime after retirement. Around the world, people
prefer to take a lump sum rather than programmed withdrawals from their super.
Remember I said earlier that each dollar saved tends to grow to ten over a
lifetime? We live so long these days (in a large group of couples, half will
have one partner survive beyond age 90) that six of those ten dollars accrue
You’ve only accumulated four out of every potential ten
dollars when you take the lump sum – and so if you spend it rapidly, and don’t
have a disciplined investment and drawdown plan, you’re blowing a big part of
your potential super. That’s why there’s now a tax break if you leave your
super invested after retirement, to encourage you to find those extra six dollars.
So, those are the three areas for improving super: use the target date approach;
don’t imagine you’re an investment expert; and draw down your super gradually. Super
is as important as work, because it provides an income to live on. Do it well.