If only generations Y and Z were as exercised about compulsory superannuation as they are about housing affordability. Losing 12 per cent of their wages and salaries every week to untouchable accounts obviously makes buying a home or renting ever harder.
But it turns out it’s worse than that: the consumption and investment they’re giving up when they are raising families and fit enough to enjoy their incomes won’t necessarily deliver the vaunted honey pot of retirement savings they’ve been led to believe will come, which their parents and grandparents enjoyed.
It turns out every generation since the Boomers has experienced progressively lower risk-adjusted investment returns.
That’s according to a recently released landmark analysis of 150 years of Australian asset returns by four Bond University finance academics. “Consistent with current discussion around generational inequity, we document higher returns for prior generations of investors, notably for Baby Boomers in relation to equity and bonds and the Silent Generation for property,” the authors found in their paper, Long-Term Comparative Performance of Australian Asset Classes, published in April in the Pacific-Basin Finance Journal.
Baby Boomers, whose investment period was defined as 1975 to 2019, earned about 2.6 percentage points a year more on property than Generation X (investing from 1992 to 2020) and about 4.6 percentage points a year more than Generation Y (from 2007 to 2020).
The ranking was the same in the sharemarket, where Boomers enjoyed nominal returns of 14.7 per cent while generations X and Y earned four and seven percentage points lower on average, respectively. Inflation narrowed the differences only a little.
“Existing public policy tacitly assumes that the ability of an individual to prepare for retirement is not impacted by their generational circumstances, and therefore the asset class returns … are similar over time,” the paper’s authors write. But clearly the returns aren’t, and these are vast differences across a 40-year working life.
It’s fashionable to beat up on Boomers, but actually it was their parents and grandparents who enjoyed the most salubrious investment conditions. Across the whole period equities averaged 8.4 per cent a year after inflation and property 6.2 per cent. The so-called Missionary Generation (investing 1891 to 1935) lapped up 9.6 per cent a year on average in the stockmarket, while the Greatest Generation enjoyed 7.7 per cent a year after inflation in property across the 40 years to 1976.
“Almost every generation earned lower risk-adjusted returns than the generation before them,” the authors conclude.
The double-digit average past returns big Australian super funds like to advertise to their “members” – as if joining were optional – are before inflation, remember, which is steadily rising, as are interest rates, which also tend to reduce property and sharemarket values.
Moreover, the world has just lived through one of the greatest bull markets in history, thanks to falling interest rates, huge strides in technology stocks and relatively low inflation. In Australia the steady ratcheting up of the compulsory superannuation rate across the past 30 years to 12 per cent itself has probably boosted property and especially sharemarket values, which younger generations are now forced to buy every pay packet. The only sectors generations X and Y could have done best in were government and corporate bonds, which averaged about 5 per cent a year after inflation from 1992 to 2020 (the last year of data in the paper), much higher than any period since 1870.
The Covid experiment would have up-ended that short-lived first prize, given governments have showered trillions of units of currency on their populations since then that will continue to push up asset and consumer prices for years. What else could explain the secular decline in returns, a result probably shared throughout developed nations broadly?
Certainly the genuine private sector here and around the developed world has been shrinking as the formal and de facto government sectors continue their inexorable growth.
Australia is one of the worst offenders in this regard and has produced some of the worst economic statistics in the OECD across the past few years. Perhaps the only good decision the federal government has made in more than four years is to align (as of June) payment of mandatory “employer” super contributions with payment of wages and salaries. The insidious genius of Labor’s system has been that employees have never paid attention to their own savings or typically misunderstand that their gross pay would be more than 12 per cent higher were the whole system abolished.
Even the government knows people are being forced to save too much. The Treasury’s 2020 Retirement Income Review projected that by 2059 $1 in every $3 paid out of the super system would be inherited compared with $1 in $5 then. The best thing the Abbott government ever did was delay the increase in the superannuation guarantee.
The next government should make at least part of it optional, amid uncertainty about future returns and the obvious need for income when workers need it most.
Something one of our greatest historians, John Hirst, said has always stuck in my mind. In a crisis he expected superannuation money, by now trillions of dollars tied in a legally distinct bow, to be nationalised or at least forced into government bonds.
Imagine how bad the returns would be then!
