Allowing first home owners to use their superannuation to fund deposits is not a good idea, but even if the Government decides not to pursue this thought bubble that has been running strongly within Coalition circles for the last couple of years, the superannuation industry still has a problem it needs to deal with.
In Australian politics there are some universal issues that governments have to get right. They can be summed up as health, housing and wealth.
Health and housing have universal support. Australians want access to affordable health care, and Medicare is the foundation of that.
It is fair to say that owning a house is not the great Australian dream, it is an expectation.
And whilst it may sound heretical to say this as someone who has worked in the superannuation industry for many years, superannuation, for all its universality through the Superannuation Guarantee, is not a foundation pillar of social policy.
The support in the electorate for superannuation is dependent on other needs being met, namely that an individual has access to healthcare, is able to buy an affordable house, and is able to work over their lifetime.
It is not surprising that as the economy restructures and work becomes more insecure, as housing prices continue to sky rocket, and with expectations amongst young people that retirement itself is a dream, that many people see superannuation as a “nice to have” social policy, but not a necessity.
It is worth reminding even as we debate the objective of superannuation, that superannuation itself was as an accidental social policy. The original industrial agreements that resulted in wage growth being diverted into retirement savings were an industrial compromise. In an era of centralised wage fixation and runaway inflation, allowing workers to have pay increases through superannuation enabled the nation to address inflation expectations and wage growth whilst acknowledging industrial realities.
For a long time there was universal support for superannuation. It seemed such a strong social policy that gave workers more at retirement than the pension, which was condemning many to a retirement on the borderline of poverty.
But over the years a system that started as simply putting money into cash, has become complicated. Superannuation fund members now wade through the mire of regulation that was brought about by the introduction of choice of funds with an increasingly wide range of investment options and decisions.
The system itself, with $2trillion in capital, is now also economically significant to the Australian economy.
The way in which superannuation funds invest has an impact on capital formation in the economy.
As the Australian Centre for Financial Studies said in its submission to the recent Financial System Inquiry, superannuation was structured to invest in financial products. ACFS questions whether superannuation can be expected to meet capital formation needs such as infrastructure.
We should also note that the way superannuation funds invest has been changing over the last few years.
Over the last twenty years a large amount of capital in superannuation flowed into the ASX.
But as the amount of capital in the system continues to grow, superannuation funds will increasingly invest offshore. APRA data shows that over the last couple of years this is already happening.
From an asset allocation perspective this make sense. Investment portfolios are more diversified and theoretically at least more resilient.
But the sight of superannuation capital flowing offshore will only increase scrutiny on the system around how it is meeting capital formation needs at home.
I have long argued that the superannuation system needs to proactively address its role in the Australian economy.
What that means is that superannuation funds need to transition from being product investors to being actively involved in capital formation.
The role of housing in the Australian economy is an important part of this, but superannuation funds should not need see their role as investing in housing, but alternatively about how to address the supply side challenges that exist.
In a continent with landscapes as wide and empty as ours, it is remarkable that housing can be so expensive.
One of the constraints for housing in the regions has been the connections with the city.
One of the solutions to expensive housing in Melbourne and Sydney that no one seems to be talking about is to unlock affordable housing in the regions.
Rather than talking about a fast train between Melbourne and Sydney, we need fast trains to the regions to open up economic opportunities.
And if structured properly, regional fast trains could be good long term investments for superannuation funds.
There has always been a differential in rural and urban land prices that reflects infrastructure.
But with innovations around battery storage, solar costs coming down and innovations in smart water technology we are not so far away from a time when it will be possible for communities to live off the grid. If we have internet connections and transport connectivity to cities then the new businesses of tomorrow may well be in towns such as Castlemaine which has transformed from a ghost town to a thriving village community.
Whilst investing offshore makes sense for individual superannuation funds, at a system level there needs to be investment of resources to create new investment opportunities. The lessons from societies that disconnected their capital and their economies is one that we should heed.
It is worth delving into the economic history of one of the great economic empires of the modern era – the Netherlands.
Kevin Phillips in his polemic book Wealth and Democracy examined the decline of the Netherlands which had been a significant merchant power in the 1600’s but by the 1740’s consisted of a divided society with a wealthy Dutch upper class and growing unemployment in towns that had once been thriving places for industrial production. Phillips attributes the decline of the Dutch empire in part to the fact that the Dutch upper class preferred to invest in economies other than their own, a fact that was not seen to be a significant issue at the time. In fact there were elements of Dutch society that advocated that the increased size of the finance sector that grew to service the Dutch upper class would more than compensate for the loss of domestic industries. This did not prove to be the case and the Dutch empire gradually faded, its demise accelerated by numerous wars.
Whilst things may have moved on over the last three hundred years, the reality is that the superannuation industry and the economy are interlinked.
Opening up the regions is an opportunity for superannuation funds.
But to do this there needs to be a shift of thinking and an understanding that the superannuation system has a responsibility for capital formation in the Australian economy.
Superannuation is being questioned as a social policy. This will continue so long as people feel that they are struggling to meet day to day needs, which is an inevitable result of large mortgages.
The way for the system to respond is to demonstrate not only that superannuation meets the needs of individuals in retirement, but the industry is not just a financial product investor, but an active contributor to capital formation in Australia.