The Guardian 22 June, 2005

Superannuation: Workers take all the risk

Anna Pha

On July 1, the Howard government’s "super choice" regime comes into operation and following that the government intends stripping from awards the superannuation provisions that specify which fund workers belong to.

Ninety-seven percent of workers now belong to a superannuation fund. Twenty years ago the figure was 39 percent (24 percent for women). The huge increase in coverage is a result of the introduction of compulsory superannuation by the Hawke/Keating Labor government in the second half of the 1980s. Previously, superannuation and other private forms of retirement provision were mainly confined to public sector and professional employees. The majority of workers relied on the (public) aged pension as their principle or sole source of income during retirement.

Now there are literally thousands of "retirement savings products" on the market. Estimates of the value of the retirement savings industry (it is big business), including public sector and industry funds, individual savings accounts and other schemes range up to $700 billion.

This new "choice" regime raises issues for workers that are more far-reaching than workers choosing a fund or leaving it to the employer to choose. These issues include:

  • privatisation of retirement income

  • future of the age pension

  • concept of "self-provision"

  • use of workers’ savings as private investment capital

  • shifting the risks onto workers

  • security in retirement

    Privatisation of age pension

    Just as the government is privatising public services, including prisons, water, electricity, and the provision of social welfare to the unemployed, it is handing over its responsibilities for the security of retirees to the private sector and the individuals concerned.

    Thirty years ago, it was widely accepted that the aged pension should be universally available at a certain age — no means or assets tests. During their working life people paid taxes according to their ability to pay and during retirement were entitled to a pension for the rest of their life.

    The concept is a progressive one, very similar to the thinking behind free, secular public education system and universal bulk billing under Medicare, with no fees being charged for these basic services.

    The state plays a central role, taking responsibility for the provision of the service or pension which is funded through a central taxation system. The philosophy of this approach is that society has a collective responsibility to ensure the security of its individual members: a philosophy which is the direct opposite of the individualism and the dog-eat-dog private, for-profit system that is the engine of capitalism.

    With the introduction of compulsory superannuation, the phasing in of universality was dropped and strict means and asset testing were introduced.

    Since then, workers with superannuation coverage have been encouraged to switch from defined benefit schemes where a predetermined pension is paid, to lump sum schemes where the amount received depends on the performance of the fund.

    The plug is gradually being pulled on the public pension scheme. Bit by bit more retirees are disqualified. At best, it will become a minimal "safety net" for those who were on extremely low wages, were only in the workforce for short periods, or whose superannuation scheme went bust or whose employer failed to make the compulsory super contributions.

    Workers who struggled through their working lives are doomed to even more hardship in retirement.

    The billions of dollars in superannuation funds — workers’ retirement savings — amount to a privatised pension system. Workers have individual accounts that are fully vested and portable.

    In the majority of cases they receive a lump sum amount on retirement, the size of that payment depending on the performance of their account. Performance depends on many factors including the types of investments they have chosen and the luck of those investments.

    For example, retirement just before or just after a stock market crash or a plunge or surge in the value of the Australian dollar could make a big difference to the payout.

    Superannuation funds have provided financial institutions with a new, ever-increasing source of funds to manage and, at the same time, to increase their control over the economy as they decide what will be invested and where.

    Transfer of risk

    With the shift from public (age pension) to private (managed fund) provision, and from defined benefit to performance-based lump sums, comes an important transfer of risk which poses serious dangers for workers.

    With a state pension the risks are shared by society — the government is in effect guarantor and can draw on its huge resources as well as regular payments (such as taxation) by workers.

    Private superannuation and the many other investment schemes now being promoted shift the risk onto the investor. There are no guarantees. The big banks and financial institutions take no responsibility. They pocket the fees for managing workers’ savings; they do not risk their money on the stock market, in overseas investments, etc.

    The even more parasitic financial planners and advisers pocket huge commissions and more fees for signing up new customers with savings to invest.

    And then on retirement, when the lump sum is paid out, there are more investment decisions to be made, meaning more commissions and more fees, and possibly taxes unless it is placed straight into the bank with extremely low interest rates. Nonetheless, the threat of inflation is always hovering in the background. And banks refer clients to their own investment arms where there are no guarantees.

    The state takes no responsibility. Workers risk all. It is the investor’s (workers’) capital which is at the mercy of "market forces".

    When Enron collapsed in the US in 2002, 31 state and local pension funds lost a combined US$1.5 billion of their investments. The Florida state pension fund lost US$335 million when its 7.6 million Enron shares plunged from US$80 to 28 cents per share. The pension fund covered public sector workers, and was managed by 60 private "money managers".

    Financial institutions profit

    The choices being offered by the Howard government’s "super choice" regime are not real choices for workers. What kind of choice is it when there are thousands and thousands of funds, each with many investment options, fee schedules, and so many unpredictable factors affecting outcomes?

    Howard’s "choice" is an at­tempt to give employers the choice of fund and to draw workers away from the union-initiated, not-for-profit industry schemes, into the for-profit retail system with its millions of dollars of extra management costs and fees.

    Workers moving out of industry funds into these other funds stand to lose thousands upon thousands of dollars and possibly all of their savings in these higher risk, private for-profit ventures.

    In a speech to the ACTU Superannuation Trustees Forum (10-5-2005), the peak union body’s secretary Greg Combet said that "independent research demonstrates that over a 40 year working life an employee on a starting salary of $40,000 could be more than 36 percent or $216,000 better off in an industry fund.

    "However, because industry funds do not pay commissions, financial planners have no incentive to recommend industry funds to their clients and few dealer groups have industry funds on their recommended lists."

    Howard’s "choices" are within a narrow framework which puts financial sector profits first and workers’ interests last.

    Workers’ choice

    There are some basic choices to be made about the type of retirement system:

  • what is in the interests of workers or financial institutions?

  • public or private?

  • collective or individual?

  • type of pension?

  • whether universal?

  • source of funding?

  • how invested?

    Obviously the interests of workers must come first. All workers are entitled to secure retirement, where they can live comfortably and with dignity.

    "Public" is best, most efficient and accountable. Public means every cent possible is returned to workers in their retirement, there are no layers of profit or commissions that eat into savings. No shareholders to please. Retirees’ interests are the key consideration.

    With the collective pooling of resources risk is shared and the state can take ultimate responsibility. A defined pension, indexed and paid regularly, regardless of income during working life, universally available beyond a set age, offers financial security.

    This could be funded through the compulsory superannuation contributions that are paid to various superannuation funds now, with additional contributions through a progressive taxation system (according to ability to pay) as necessary to meet extra demands of an ageing population.

    Those workers, who wish to and are in position to do so, could continue to pay additional amounts, and get their employer to pay more into their funds. This could then be used to supplement — not replace — the basic pension.

    As for the investment of these funds, control should be removed from the financial institutions and the money used for the benefit of the community such as public housing and public infrastructure. This could make an important contribution to job creation as well as meeting important social needs.

    In the immediate future the struggle will be on to defend the industry funds, take the opportunity created to recruit more workers into these funds and to defend the age pension.

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