The freedom afforded fund managers in Australia means funds may not be
managed respectfully of members’attitudes to risk. Indeed, SMSFs are man-
aged more conservatively than funds managed on behalf of members, sug-
gesting individuals might prefer less risky portfolios. The latest, 2014, data
show less than 25 per cent of SMSF funds were invested in shares (0.5 per cent
were invested in foreign shares compared to 22 per cent for APRA-regulated
funds), while 30 per cent in cash and term deposits. Certainly, real net returns
in Australia have been more volatile than elsewhere. Australian funds topped
the OECD’s international league table in 2013, returning a real net return of
10.2 per cent, second only to the USA (11.7 per cent). But over thefive years to
2013, the average annualized real return was 2.1 per cent, thefifth lowest
among the twenty-seven OECD countries.
While individuals bear the investment risk in DC schemes in contrast to DB
schemes, the political risks to retirement benefits are far greater in the latter.
The lack of a clear link between contributions and ultimate benefits gives
governments scope to alter the real value of benefits. In the 1960s and
1970s, during which time consumer prices rose around 300 per cent, the UK
government failed to index a public DB scheme and has repeatedly watered
down pension commitments since (Bozio et al. 2010). Recent travails of
Greece provide a starker example. In 2012 a Greek on average earnings enter-
ing the workforce could expect to retire on a public pension equal to 110 per
cent of hisfinal salary, the highest replacement ratio in the world (Antolin
et al. 2012). As of 2015 there seemed little prospect of this undertaking being
fulfilled.
10.4 A Costly Remedy for a Manufactured Problem
Once it becomes the recognized duty of the public to provide for the
extreme needs of old age...irrespective of whether the individuals could
and ought to have made provision themselves...it seems an obvious
corollary to compel them to insure (or otherwise provide) against those
common hazards of life. (Hayek [1960] 2006, p. 249)Frederick Hayek’sConstitution of Libertyprovided a cogent case for compulsory
saving, years before any such schemes existed. Hayek argued that, in a dem-
ocracy, the bulk of people would recognize that they could vote themselves
pensions (raised via economically damaging taxation), thereby systematically
under-saving and shifting the burden of their future upkeep onto other tax-
payers. Compulsorily saving would be an antidote, dramatically curbing the
need for publicly-funded retirement pensions. So a measure that in appear-
ance was paternalist could be, in reality, a hard-headed savings measure. But as
We Must All Be Capitalists Now