Summary
Today on the podcast, we have Mark LaMonica, CFA, a Director at Morningstar and co-host of the Investing Compass podcast.
Mark brings a wealth of knowledge and experience, having spent time in both the US and Australia, which gives him a unique perspective on their financial systems and retirement landscapes.
In today’s episode, we dive into:
- The current state of financial planning in Australia (00:09:18)
- Mark’s thoughts on his recent article, “Are We Being Ripped Off by Super?” (00:16:04)
- How the US and Australian retirement systems stack up against each other (00:20:58)
- Why he’s against super funds charging for certain financial advice costs (00:30:57)
- His controversial take on the 4% rule and the FIRE movement (00:47:13)
Links
- Podcast – Investing Compass
- Website – Morningstar
Super is, for the most part supplementing the aged pension and in the case of higher balances replacing the aged pension, not for attempts to solve structural social problems like housing affordability. I don’t see how super could solve issues like supply and the way that housing has become an investment vehicle rather than just a place to live. Regulation and the cost to administer super is important but compulsory super does mean there is practically a 100% involvement rate and I think on that basis alone is worth the cost. One way of reducing the cost is to encourtage individuals to connect, understand, and actively participate in thier super management. If everyone made low cost a major determinate in what fund and investment option they choose then I suspect super would be overall considerably cheaper.
Amusing to hear Aussie Firebug start out arguing for less government regulation and then suggest that the government should take control and limit the super find options and require more transparency from super funds about their marketing expenses. The whole point of government interference and regulation is to mediate the impacts and inequities of pure capitalism.
Agree Barbara – big “man yells at cloud” vibes. AFB doesn’t know what he’s talking about and his arguments make no sense, the majority of what he’s arguing for already exists, even Mark alluded to it being absurd.
The fact that AFB allows these comments on his own website shows that he is open to being wrong at least.
Haha you got me.
But I don’t believe wanting less regulation and aiming for a more efficient super system are mutually exclusive.
Philosophically, I’m against the concept of compulsory super. I get the rationale. People aren’t good at saving for retirement, so the government steps in and forces them to do it. Fine, I can accept the logic.
But if that’s the goal, why not just offer a handful of low-cost ETF options for everyone to choose from and leave it at that?
Why do we have over 100 super funds and more than 45,000 people working in the industry?
Do we really need them providing financial advice?
Selling insurance?
Investing in Social and Political Causes?
Paying executive teams million-dollar salaries?
It feels like the sector has become bloated and is drifting further away from what it was meant to do.
Treasury forecasts that by 2060, super will account for 3% of GDP. By 2036, the cost of tax concessions on super is expected to overtake the cost of the age pension.
I try to be pragmatic. Even if I disagree with something in principle, I can accept it if it delivers results. But as far as I can tell, super fails both tests.
I guess I would question whether you’re genuinely open minded about it? I say this as someone who has followed you for many years and have a lot of respect for your philosophy and your work ethic.
Super has led to genuine improvements in the incomes of retirees and it’s continuing to mature. It has dramatically reduced the proportion of the population on the age pension, and the proportion of GDP going to the age pension has declined in the last couple of decades despite an ageing population meaning an outsized growth in over 67s.
In terms of the super tax concessions – you need to understand that the methodology is on a revenue foregone rather than revenue gain basis. That means they’re purely looking at the tax that would be collected if the same assets and income were taxed at marginal tax rates. But those assets would not have been invested for the vast majority of people without the compulsory super system. The PBO did an analysis of the revenue effects without super without super and it was less than half the Treasury TEIS estimate. The other side is that the age pension is way cheaper almost exclusively because the super system is reducing reliance on the age pension.
By all means be skeptical and question the system, but try and be fully informed. The conversation was none of that, just shooting from the hip on a set of entirely misinformed assumptions.
Thanks for you thoughtful reply Anon.
You seem to be informed about this topic so I appreciate your comments.
Not sure I fully understand this part:
I understand the point about the assets, but I’m not clear on the income side. Why wouldn’t that income be taxed at marginal rates anyway? How else would it be taxed?
I think there’s a straightforward way to look at this.
Is the Super system actually costing the government more in tax concessions than it’s saving through reduced reliance on the age pension?
From what I’ve read across multiple sources, the answer at this stage appears to be no.
If you have any data or sources that suggest otherwise, I’d be keen to read them.
Mark missed the point – although it may be cheaper to invest in the US, the cost to stay tax compliant is many levels higher. Speaking as a dual citizen, I’ve had to pay thousands to stay compliant with the IRS, while not actually owing any taxes.
Interesting conversation. However, Mark is incorrect stating you have to move your super out of Australia if you leave Australia and return to the US. He states that if you’re a PR and leave you lose your perm residency you have to withdraw super and pay tax. This is not true. I too am a dual citizen and you can leave your super in Aus and your 401k in US. You do not have to move them. I was a perm resident who left Aus to UK and left my super. I then moved back to Aus and back to US and still left my super. I would take any info he provides with a big grain of salt.
What he is correct about is that compulsory super is a great thing for Australians. So the short answer to the clickbait title “are we being ripped off by super?” is no.
Yes we are being ripped off by Super. Still. The fees are too high for too many people who don’t have the time or knowledge to understand that default Mysuper investment options are actively managed and attract high fees. The fat cat funds and Unions are still milking it. I don’t want to see my industry super fund plastered all over the uniform of some professional sporting team. I can’t see how that is improving my investment performance %. Can I opt out of super fund marketing and save a few $ on admin fees?
I know little about Super. But I am 46 now. I do know if it is a time to add money in my super. I do not even know how the super insurance works.