Australia’s superannuation - DNA and transparency

The ruckus over the government's budgetary plans for super showed that a lot of Australians now are engaged with their super. For the first time, question arose about the sustainability of the super system. Super has become a big deal, in terms of the money at stake, the numbers of people affected and the consequences of its failure. Super is also the result of a big deal, between the unions and the now wistfully-remembered former Prime Ministers, Bob Hawke and Paul Keating – in the so called Accord.

It is not easy to stand back and see what's really going on in our super. This is because the debate is charged with self-interest, and ranges from technical to literary licence. Sometimes it's all rolled into one – such as in the Labor politicians' mantra of "Superannuation is in our DNA". Minister for Superannuation, Bill Shorten, recently said in Parliament: "We invented compulsory universal superannuation…It is Labor DNA". What is it in the genes of Labor that created this quirky form of super imposed over twenty years ago? This is one of many riddles with which I have struggled, in trying to comprehend this nation's fabulously growing stockpile of capital. In what follows I propose an answer to the DNA riddle, which challenges the hitherto unquestioned belief that those responsible for deducting a compulsory super charge from employed Australians acted solely out of altruism - by demonstrating it was not a selfless policy but one which the unions grasped to avoid oblivion.

My inquiry has discovered that breakdown of Australia's super is inevitable, because it was shoddily implemented. Enormous risk has been designed into the system, which was unrecognised from the beginning. Australia's universal super, as it stands, is an error. Yet it's said to be the best in the world. Bill Kelty, who was a union leader for decades ending a decade ago and, it is said, without whom most Australians would never have heard of super, observed that " Every international report looks at Australia's superannuation system and they say it's one of the best in the world."

That was in May last year, at one of the best celebrations ever, of the man Kelty, by the best old Labor and union people, in the world's best city Melbourne. As a result Paul Howes, who is head of the Australian Worker's Union (AWU), tweeted: "Just quietly – I love Bill Kelty – the greatest Australian unionist that ever lived. If it wasn't inappropriate I'd dry hump Kelty right now." Humper Howes is also a director of the trustee board of AustralianSuper which many say is the best super fund. That board is entrusted with the largest single holding of Australians' forced savings (sixty billion dollars) belonging to around two million people, and accepts around five billion dollars of super charge yearly. Why was Howes so pleased to see Kelty? Merely in the Mae West sense or is there more, maybe much more, to this affection?

The veneration of Bill Kelty within the union movement is another riddle. Correlated with Kelty's pre-eminence has been an ugly fall in union membership. Official statistics show that union membership has declined, generally, since the emergence of universal super in 1992. From August 1992 to August 2011, the proportion of those who were trade union members in their main job has fallen from 43% to 18% for males, and 35% to 18% for females. Therefore union income from membership dues must be parlous.

Bill Kelty suggested last year that this decline resulted from Australia's economy behaving properly and growing too well, in unexpected directions:

But we sat there in 1986 and we said unless you can change and get into growth areas, then we are going to decline. And we got it more or less right, more or less right. Our essential failure was to have the economy work. Our essential failure was for employment to grow so rapidly, transform so dramatically, into so many areas where we weren't…

Deciphering Kelty is not always straightforward. Isn't he also saying that he knew unions needed to get into growth areas but they didn't, thereby admitting failure? As it happened the unions were deserted, now representing less than one in five workers. Thus, the means of union influence through organising the employed, has evaporated. Yet here they all are, the best of that period including a couple of former prime ministers, celebrating this annihilation, and acclaiming its overseer Kelty. Elizabeth Humphrys reports that Linda White, Assistant National Secretary for the Australian Services Union, said she "could hardly breathe" at her first meeting with Kelty, she was "so much in awe of him."

I will return to the role of Kelty. Let's get this claim of our super being the "best" into perspective. The reality is that Australia's super is badly deficient. The trustees of super funds exhibit all the symptoms complained of by American Nobel Laureate William Sharpe in 1998, around the time the US shifted from the old type of super where people could be confident about what they would get (ie the benefit was defined). The new American system had, like ours, been poorly researched. In an interview that year, Sharpe complained that people's needs were being brushed aside:

Ordinary human beings have to make decisions not unlike those facing very sophisticated plan sponsors (trustees)… Funds offer some tools to help. But some of those tools are not helpful. The retirement calculators that are on all the websites assume there is no risk: I doubt that it is legally fraud, but it's pretty bad stuff.

Australia's super remains locked in that state today. Australians are expected to plan their retirement with no insight into the risk of their forecast outcome. As Sharpe says this is "pretty bad", at odds with the self-satisfied spruiking that holds sway. Purporting to be the best, when what's on offer is badly flawed, is an ominous sign.

The question then arises: As funds have been unconcerned about basic responsibilities such their product and its risk, what have they been doing? It is little known that public funds' operating expenses, generally, grew every year since the Australian Prudential Regulatory Authority (APRA) began keeping records (1997), at a constant rate mirroring the growth in super charge collections (330% over that period). Expenses are always the same proportion of the employer super charge (around 11%),