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Alias (5735)

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Journal of Alias (5735)

Thursday February 14, 2008
03:30 AM

Unintended (multi-decade) consequences of private accounts

[ #35651 ]

Since World War 2, Australian politics has been driven by an almost classic left/right two party system (with a few minor subtleties), largely echoing the British parliament.

On the left is the "Labor Party", primarily a product of the Trade Union movement and still dominated by them both in control (estimates say around 50% of pure political backroom power) and representatives (between 50%-75% of Labour Members of Parliment and Senators are ex-Union leaders of varying stripes.

On the right are the conservatives, in typical political fashion called the "Liberal Party", in a permanent pairing with the "National Party" who are basically the country/farming/outback party (the don't even contest seats in city areas).

In classic left/right fashion, the left is good at political reform and grand gestures (like the Aboriginal apology, but also several very positive government entities were created by them) but terrible with money (including most famously when one federal Labor government got within 6 weeks of going bankrupt).

MPs for the right are dominated by Accountants, Lawyers, Businessmen and Farmers. The right are exemplary financial managers and legal folks, and largely free of the issues that might be caused by a "religious right" as we don't have such a thing. But they sometimes struggle with ethics, and can be overly risk-averse and well, conservative.

We've oscillated between the two, left and right, mummy and daddy, for 60 years.

After a 12 year run on the right, we just switched left again.

But there's reason to think that THIS time things could be different for the left.

In 1992 the Labor government introduced forced private pension accounts.

This forced companies to pay 3% of your salary (technically speaking calculated on top of your headline pay rate) into a pension fund. The key point of difference with most other systems of company-driven pensions is that companies almost never operate the pension funds, and all money paid in remains the legal property of the employee. The contribution rate has slowly increased over the last 15 years, and is now 9%.

And employees cannot "cash out" the funds. Money you pay in as an 18 year old trolley boy is legally trapped there until you are 50-60 year old corporate manager and retire.

The system is called "Superannuation", named after the general savings principle, and shorted by most people to just "Super".

From a systems design point of view, this is a beautifully elegant creation specifically because it takes the idea of long term savings and then explicitly factors out all the Things That Could Possibly Go Wrong.

At the scale of entire countries, companies can be trusted to comply with the letter of the law of the country they operate in, but can't be trusted to otherwise act responsibly in the interests of anyone other than their shareholders. And they can vanish at any time.

Likewise governments can be trusted to continue to exist indefinitely, and act in the interests of the population as a whole, but since they make up the rules as they go, they can't be trusted to keep their promises over long periods of time. This is compounded of course by governments being run by habitual lairs.

As an individual, giving property outright to EITHER a company OR a government on a promise they will give you back more in the future is a fundamentally bad (inefficient) bet. I don't count taxes as they are really just your slice of operating expenses and not property. And bonds can liquidate at any time, making them a relatively low risk promise, and more like a form of currency.

Further, it's been long known that at large scales, individuals do not reliably act in their long term interests, and habitually suffer from being an "Unsophisticated Investor". This makes people, for the most part, terrible at saving money when we could instead buy an iPod, or take a pretty girl to dinner, or go skiing.

So Super starts with the idea "save money for your retirement" and then removes the employer/employee conflict of interest, removes the inherent uncertainty of future government actions, and removes the myriad of human biases that combine to make us terrible investors, the most obvious being Hyperbolic Discounting, the Overconfidence Effect, Optimism Bias, Herd Instinct, for the financially-weak the scary Dunning-Kruger Effect.

These are all examples of removing what I call "Trust Problems", which is that any form of compulsory trust in a system is inherently a weakness of that system (although the degree of that weakness will vary).

In general, if an alternative solution exists which does require compulsory trust, that solution should be more reliable and less risky. Trust makes for an excellent OPTIONAL optimization in a system, but should not be FORCED.

While the financial companies and funds managers responsible for looking after these special "Super Accounts" also suffer from the same problems of incompetence (people) and profiteering (companies) the problem is greatly reduced since they are at least legally qualified (people) and regulated (companies) specifically to do the job of looking after your money for you properly.

And if you don't like them, you can take your money and give it to someone else to someone else to manage as you see fit, because it is still YOUR money. You just can't turn it into cash.

As an added protection, any accounts tagged as Super Accounts also impose limits on the people who manage them, with the usual limits on making high-risk investments. When the government can afford it (as it can now) they also add additional bonuses via matched contributions and tax benefits to encourage people to add additional "voluntary" deposits on top of the mandatory contributions.

By keeping it as "Your Money" and not merely "Your Entitlement" people are also FAR more possessive and protective of Their Money, not to mention that the only laws Super Accounts rely on are utterly fundamental ones such as basic Property Rights, that no government can simply legislate away.

So having designed a system that avoids the major Things That Can Go Wrong, the government of the day executed the program and backgrounded it.

After running happily in the background for 15 years, the results have been astounding. The national "Super Pool" savings (the collection of all money held in accounts tagged as Super Accounts) currently stands at around 1-1.5 TRILLION Australian dollars (around 1 trillion US dollars)

To put that into perspective, if the same program had been executed in the United States at the same time, the US Super Pool would currently be in the vicinity of 15 trillion US dollars.

As I said, Super is a beautiful elegant design. And because the avoidance of Thing That Could Possibly Go Wrong was built in from the start, the program has run smoothly for 15 years.

Australia now has the highest per-capita and second-highest outright national savings pool in the world, second only to Japan, despite the fact Australians are just as heavily in personal debt as the rest of the western world.

By this point, if you haven't stopped reading already, you've probably been wondering where the Unintended Consequences are.

So here's where things get interesting.

Because many people have very large amounts of money in somewhere that is VISIBLE to them as being "theirs", they pay a lot more attention to things like the stock market than they used to, which imposes on the government a greater impetus to be pro-business than they used to. And while we may bemoan the record profits of major corporations like the major local banks and telcos, it seems to lack the bite is used to have, because a comparatively huge percentages of those big public blue-chip companies are owned by the pension funds.

I'm sure many people complain about high bank fees at times of record corporate profits, but secretly know that it means their annual Super Report is going to be excellent that year. It does seem to somewhat temper criticism when even the lowest paid workers are significant stockholders in the big companies.

The annual price of iron ore is almost as big a news story as the price of oil, because a high iron ore price for the annual contracts means huge profits for the mining companies, which means healthier Super returns.

However, there's an even more interesting consequence.

Because it is a competitive market, the market increases in complexity to the point where it inhibits the consumer's ability to choose the optimal fund to put their super money with and encourages conflicts of interest between the investor in a fund and the company's bias to its shareholders.

As a result many people end up being screwed on fees and charges, and generally making a lower return than they might, while fund managers surf the "river of gold", as the Super Pool has been categorized.

There is one group however, that are already in a high position of trust with the workers, that already put their interests first. And that group are the trade unions.

So in recent years we've seen the very rapid ascent of what's known as the "Industry Super Fund", which is code for an investment fund owned, operated, or heavily influenced by Trade Union groups, or owned soley by their members.

And there is a plethora of these funds, but many consistently outperform the average. According to superratings.com.au, the highest performing funds, across the entire Super Pool were funds like the Health Industry Super Fund, the Motor Industry Super Fund, and the Retail Employee Super Fund.

They outperform the major banks and investment houses on a consistent basis, because for the investor they are largely free of any conflict of interest and represent the option with the least number of places for money to be siphoned away.

Their links with the trade unions also means they are the default choice for many industries, and so they have lower advertising and customer acquisition overheads that purely commercial funds.

This has led to led to the strangest consequence of all, which is that we're now seeing the rise of union bosses and union employees with financial, investment and merchant banking backgrounds that have large stock holdings of the very companies that are employing their union members.

This is not only putting a whole new dynamic on the union movement, but is feeding a new generation of financially savvy unionists into the political machinery of the left.

Over the long term (I think we need another decade to really see the full effects of these changes) this could make for a much more well rounded and oddly pro-business "left".

And to really draw a very weak analogy, the ownership of these public companies by super funds does seem to take us to a situation where the "workers own the means of production", but with a much more diverse and market-optimized concept of "ownership"...

It's sort of going from being left, to being far left without knowing it, via the right... or something.

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  • It's communism! It's anarchy! No! It's Marxism in the Free Market!

    Informative, thought-provoking, and amusing. +2 :)

    --
    perl -e 'print "Just another Perl ${\(trickster and hacker)},";'
    The Sidhekin proves that Sidhe did it!
  • Your description of the Australian private retirement accounts is interesting. It makes the intermittent US proposals to privatize social security look even more like a scam.

    Achieving socialism by other means is amusing.
    • Please note that:

      1. The government is still the welfare provider of last resort. If your super money runs out during your retirement, you move onto the standard Old Age Pension, fully funded by government. But the standard Old Age Pension is NOT a lot of money. It really is a last resort.

      2. Australia has never really had corporate pension funds like the US, or government "social security" entities. Pensions are funded out of general revenue. That is, out of normal taxes.

      3. This has all been introduced over
      • Maybe if Obama has solid control of both the Congress and Senate...

        The US system doesn't quite work like that. Even when one party effectively controls two branches of government, there are enough checks and balances in place that competing interests still get in the way of perfectly smooth unity of governance and legislation. It's kind of a feature.

        • I understand you don't have party voting and there are subtleties, but I guess I meant that the Dems would have a large enough majority that they would exceed the threshholds despite the normal randomness of the voting.

          So less "Obama" having control perhaps, but rather the Dems in general.
        • Maybe if Obama has solid control of both the Congress and Senate...

          The US system doesn't quite work like that. Even when one party effectively controls two branches of government, there are enough checks and balances in place that competing interests still get in the way of perfectly smooth unity of governance and legislation. It's kind of a feature.

          Indeed. Especially if someone as far to the left on so many policies like Obama gets in the big chair (not that I am going to sit here defending his [potential] predecessor, either, let alone the current or recent Congress).

      • Obama's prospects look good, though it is hard to say how much that mean at this early date. Unfortunately I don't think he will be able to do anything radical, even if he wins an overwhelming victory. The separation of powers that is the basis of the American government prevents that, as it was designed to. I fear we will not solve our financial problems with any radical new ideas; I assume we will just debase our currency in the traditional way.
        • Obama's prospects look good, though it is hard to say how much that mean at this early date. Unfortunately I don't think he will be able to do anything radical, even if he wins an overwhelming victory. The separation of powers that is the basis of the American government prevents that, as it was designed to. I fear we will not solve our financial problems with any radical new ideas; I assume we will just debase our currency in the traditional way.

          Better that, than what Obama would do, which is violate our Constitution and destory our liberty.

          Not that I feel strongly about it or anything.

          • Well debasing the currency is survivable, we have been through that before. Pudge why do you say Obama would violate the Constitution and destroy our liberty?
            • Pudge why do you say Obama would violate the Constitution and destroy our liberty?

              Oh, where to start. We could talk about his attempts to get rid of most guns, violating the Second Amendment. Or his desire to take away the right to hire and fire employees at will, violating the First Amendment right to association, the Fifth Amendment right to due process, and the Tenth Amendment right to keep unenumerated powers at the state/local level.

              (For those who don't know what it means, the Tenth Amendment means that if something is not a power delegated to the federal government -- and "gener

          • Regardless of what Obama may or may not do, we are already living under a president who is violating the Constitution and destroying our liberty.
            • Sadly, the 16th amendment has been around for 95 years, FDR went crazy some 80 years ago, and LBJ kept things up over 40 years ago. That's a lot of inertia to overcome.

              • Sadly, the 16th amendment has been around for 95 years, FDR went crazy some 80 years ago, and LBJ kept things up over 40 years ago. That's a lot of inertia to overcome.
                When I first heard Jefferson say we should re-create the government from scratch every generation, I thought it was a dumb idea. As I got older, it has seemed far less dumb.

            • Regardless of what Obama may or may not do, we are already living under a president who is violating the Constitution and destroying our liberty.

              Yes, in some ways. What really bothers me is that when Bush violates the Fourth or Fifth Amendment, people run around like it's the end of the world. But when a Democrat violates the Second or Tenth, they shrug their shoulders and say, "well, the Constitution is over 200 years old and it's a living document." I would ask if a little honesty and consistency is too much to ask for, but I already know the answer (not speaking of you here, since you've said nothing along these lines; just speaking generally)

              • I'll preface my comments by saying that I enjoy guns. I'm not a hunter, but a nice afternoon of target shooting is very relaxing...

                Now, just because a law is passed that limits gun ownership does not mean that the 2nd Amendment has been violated. "Well regulated" means there will be regulations. Congress can restrict the types of weapons that people can own. If you don't believe that then you believe that people should be allowed to own nuclear weapons. So at this point it's simply a matter of where to draw
                • just because a law is passed that limits gun ownership does not mean that the 2nd Amendment has been violated

                  Sure. I didn't mean to imply otherwise. But when the policies have the effect of preventing people from being armed, then that IS a violation of the Second Amendment, in my self-esteemed opinion ;-).

                  I view it similarly to speech time/manner/place restrictions on speech. Any speech restrictions on time, manner, and place must (apart from being content-neutral) a. serve an important government interest, and b. that interest must be served by the regulation (apart from the speech's message); c. the regulat

                  • That clause though seems filled with contradiction.

                    It says give people arms, because you need a militia... that should be regulated.

                    So should the right to own a guns be tied to participation in a militia? Or an implicit right for them to call you up for $stuff when they need volunteers?

                    There also seems to be the problem of scale.

                    There's a natural desire to limit the guns to personal weapons, which in my view puts applies limitations like we have in Australia (with regards to types of weapons you can own, if
                    • That clause though seems filled with contradiction.

                      OK. It's not. :-)

                      It says give people arms, because you need a militia... that should be regulated.

                      So should the right to own a guns be tied to participation in a militia?

                      No. It is clear that this was just one of the many reasons the people who wrote, voted on, passed, and ratified the Amendment thought that the right to bear arms should be preserved. (Indeed, many people thought that the Second Amendment was not even necessary, because OF COURSE we have a right to bear arms!)

                      Or an implicit right for them to call you up for $stuff when they need volunteers?

                      If you mean can military service be coerced: no.

                      From a legal standpoint, it seems an ugly and inelegant law to be stuck with.

                      Eh. It doesn't matter: what matters is the final