The Society of Actuaries published a short piece that I wrote about Australian Retirement Incomes in the May 2018 International Section newsletter. If you are interested in reading it, it is available at this link.
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Author: AustralianActuary
What is the opposite of advocacy?
The intent and the outcome often differ, especially when it comes to legislation aimed at correcting perceived injustices. Today’s example comes via the Chief Executive of the Women in Super group in Australia. According to Investment Magazine, Sandra Buckley believes increasing the Superannuation Guarantee minimum contribution rate, possibly to 19% of earnings, is essential for women to catch up on their super after time out of the workforce for raising families.
Would that be in the interests of women? The short answer is no. It would disadvantage the very group that Sandra wants to help.
To understand why, Sandra should ask herself where would the extra money come from to make those higher contributions? It does not come from the taxpayer, nor from the employer. It comes from the individual herself. It is a forced wage deferral. There is nothing stopping women, or anyone for that matter, from voluntarily increasing their contributions now. They can do so and defer their income, the result of which would be a larger retirement savings pot. If they can do so now but don’t, that must mean they value take-home pay more highly than an increased superannuation contribution. There are plenty of reasons why that could be the case.
Why does the Women in Super CEO argue that such choice should be removed from women?
Helping Australians build adequate retirement savings is an important objective for policy makers, advocates and practitioners. Attempting to do so by calling for higher compulsory contributions is a lazy option, devoid of imagination and ultimately counterproductive.
Longevity risk and an abhorrence of annuities
“Certainly not; but if you observe, people always live for ever when there is an annuity to be paid them; and she is very stout and healthy, and hardly forty. An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it. […] I have known a great deal of the trouble of annuities; for my mother was clogged with the payment of three to old superannuated servants by my father’s will, and it is amazing how disagreeable she found it. […] My mother was quite sick of it. Her income was not her own, she said, with such perpetual claims on it; and it was the more unkind in my father, because, otherwise, the money would have been entirely at my mother’s disposal, without any restriction whatever. It has given me such an abhorrence of annuities, that I am sure I would not pin myself down to the payment of one for all the world.”
From Sense and Sensibility, by Jane Austen (1775-1817)
When is it right for government imposed contraints on pay?
I want to gather my savings, invest the capital to open a corner shop business, and pay myself a salary while i’m running the business. Should the Government determine my pay? I don’t think so.
Say my corner shop does even better than I had hoped. This year’s profit was terrific. I think I deserve a bonus and pay myself a handsome sum. Should the Government limit my bonus? I don’t think so.
Now I want to expand my shops and open two new shops in the next suburbs. I ask the bank to lend me money to finance the expansion. The bank agrees. Does the bank care what I pay myself? Not much, as long as its loan is repaid. Should the Government care? I don’t think so.
Years later, my business was doing very well and I wanted to release some of my capital back to me and my family. We wanted to have luxurious holidays and drive fast cars. A stockbroker finds investors who want to invest equity in the business as part ownership. We agree and the business now has independent stockholders. Are the stockholders interested in my pay? Yes, they are. They devise a means by which I must report to them what I am to be paid for the next year and they have the voting power to refuse (or sack me). Should the Government care about what the stockholders and I agree to? I don’t think so.
I am now paid in mega dollars. The business has suffered a little in recent years as probably, I am paid more than I am worth elsewhere. Do the stockholders care? Yes. They decide to change my remuneration. In future, there will be a small(ish) base but a big performance bonus if the business turns around. Should the Government interfere and limit my possible bonus? I don’t think so.
The Government has no right to interfere. Not ever. Not for a sole proprietor corner shop and not for a publicly owned institution. It is never acceptable to pander to petty jealousy and try to call it socially responsible policy making. If the shareholders of Company XYZ want to pay their CEO an excessive sum, that is no business of mine, unless I am a shareholder. And therefore, it is no business of Government, unless Government is a shareholder.
Inconsequential
Another week, another apology. This week saw the CEO of Facebook apologising. The CEO of the Australian bank the Commonwealth Bank apologised. A spokesman for the telco Optus apologised for an inappropriate job advertisement. Jon Faine apologised for an ‘insensitive’ interview he conducted on ABC radio. Meanwhile, political figures are being ‘forced to apologise’ for things they said 20+ years ago. John Alexander’s joke in a pub in 1986 springs to mind. Apologies abound. Not a week goes by without some public business figure being ‘forced to apologise’.
The apologies all carry a similar plot – mea culpa, mea sorry, mea must do better and it won’t happen again. The internet, bless it, gives access to any number of pages on ‘how to deliver a sincere apology’ complete with a template document on what to say as you top and tail the details. Sincerity is so useful. And so cheap and easy to obtain. But of course, the apologies are meaningless; meaning, the supposedly bad behaviour that we are meant to see less of, will continue.
Why do these business leaders apologise and to whom? Apologies are actually a personal sentiment between two individuals. The CEO of one of the world’s biggest businesses in making an apology in a public forum to the world in general is simply mouthing a few words that are meaningless and insincere. They are worthless. Why do they do it?
They do it because they know that in doing so, they get out of their current predicament and allow them back to their business with the current scandal over. They act rationally. It is the media that should do better in exposing bad corporate behaviour. (Forget the regulators – business regulators everywhere are worse than useless; they actually entrench bad behaviour by enforcing oligopolies wherever they go with barriers to entry such that competition is strangled.) Where is the public exposure via the media?
Seemingly too many investigative journalists’ work output today relies on following the latest ‘twitterstorm’ and baying at the perceived miscreant until that person is humiliated and apologises. At that point, the story is over. Until it repeats with a new twitterstorm over some new bad behaviour and a new apology will be extracted. Nothing actually changes.
The twittersphere, shorthand label for social media generally, is filled with primary school students that have never grown up. Their early training in the playground has carried through into adulthood. At a perceived slight in the playground, tears erupt and the teacher rushes over to demand the offender apologise to our precious offendee. The tears dry up and they move on. That behaviour is now commonplace in adults. Apologies have become meaningless.
The best regulation against bad business behaviour is a strong moral fibre and an ethical framework that has, at its heart, do no harm to others. This, together with consequences, is the best way to minimise harmful behaviour. There are still individuals with morals and ethics. What is disappearing are the consequences. True criminal activity will sometimes be detected with real consequences but the legal system itself has problems, is excessively expensive and can only deal with the most egregious cases. There is much bad behaviour going on that will never be brought to court, nor should it – our society could no longer function if we relied solely on the legal system to enforce ‘good’ behaviour.
I don’t expect much to change in the life of the CEOs who apologised last week. They know that there are no consequences. Real consequences would result in losses not profits. Real consequences would see customers turn away and use alternatives. Real consequences would see job losses. This is where the regulation and regulators fail us. Governments do not want firms to fail because they fear the political damage. That is why large businesses are bailed out by taxpayers all the time. They are bailed out with direct subsidies, tariffs or constraints on competitors, interest free loans, grants, elaborate barriers to entry for new competition, stifled innovation, enforced public ownership, cronyism and corruption. Despite this menu of techniques, if some firm does happen to fail, then public money is used to pay compensation to the unfortunate employees out of work. There are no consequences anymore. The media in the main, does not investigate and report on this because too many are looking for the next twitterstorm. CEOs of small firms generally lobby for less regulation. CEOs of large firms lobby for more regulation. It’s easy to see why.
We witness the gradual outsourcing of responsibility for our own lives. With that comes the natural blame game. The political class has taken over the decision-making responsibility for individuals and the arbitration of grievances. Consequences have become disconnected from behaviour. No wonder the CEOs apologise and carry on business as usual – that’s the way of the world.
The great DB to DC switch hits the airlines
Around the time of the GFC in 2009, I wrote a satirical piece about how the switch from defined benefit retirement pensions to defined contribution accounts might look if it were applied in the airline business. Investment Magazine in Australia published the light hearted piece. This is how it went…
I needed to travel to London. I began my preparations with a call to an airline that I hadn’t used before but that I was keen to try, given its appealing advertising. “Wombat Airways, good morning, this is Margaret and how can I help?”
“Good morning, Margaret, I’d like to book a ticket for a flight from Melbourne to London at the end of next month. My name is David.”
“Well, David, I can help, but before we talk about where you want to land, can I ask how much you want to pay?”
“Well, whatever it takes, I suppose. What’s your price?”
“I’m sorry, I can’t tell you that since that would be giving you advice. No, you must tell me how much you want to pay.”
“But you must give me some idea? What if I said $5000; is that enough?”
“It might be, David, but we won’t know in advance.”
“Well what are other people paying? What would you pay if you were me?”
“Look, I can’t tell you. It’s a risk and you have to make that choice; I can’t make it for you.”
At this stage, I was starting to become just a little tense, but did my best to be civil with Margaret. After all, she was probably following a script.
“OK,” I sighed, “we’ll stick with the $5000.”
“Fantastic,” she said “let’s pretend that $5000 is enough and see what happens!”
“Margaret, what happens if $5,000 is not enough?”
“If your money runs out, we will ask you to get off. There are an increasing number of passengers being ejected these days, so you probably won’t be alone. If you do fail to reach your objective, you will have to rely on a pair of roller skates and a dodgy plastic compass to get you home.
Those items are provided by the Government, but only to those people who don’t already have a pair of roller skates and a dodgy plastic compass. They call it their ‘means test’.”
“And if $5,000 is more than enough?” I asked, looking forward to hearing a sensible answer for a change.
“In that case, we will send you a cheque for the balance, less a payment fee.”
“Will you pay interest?”
“Yes, but we don’t know how much. It could be positive or negative.”
I didn’t feel like entering into a discussion about interest and the theoretically interesting diversion about whether interest could be negative. In fact, I just wanted my tickets booked, paid for and the phone call to end. But Margaret wasn’t finished.
“Now,” she said with renewed brightness. “What type of aircraft would you like to fly in? At Wombat, we have a range of options for you to choose from, to allow you to tailor the flight to your personal situation.”
“Margaret, you tell me which one is appropriate, given where I’m going and how much I’m paying.”
“I’m so sorry David, but I’m not allowed to. That would be giving advice. But I can tell you that our different aircraft have different characteristics; some are slower and noisier but they are exceptionally reliable, in that they will get there, but we don’t know when they’ll get there! The really new versions are very exotic, fast and quiet but we’ve lost a few recently.
Their engines have this new device fitted called a cognitive double-quick orbiter (CDO) that can fail unexpectedly but the engineers don’t really know why. It seems some of the pilots weren’t even aware the CDOs were installed.
The really scary thing was that a pilot would report a problem with their CDO on the Los Angeles route and a plane sitting in the hangar at Tullamarine would suddenly collapse under its own weight.”
“Excuse me, does that mean I’m less likely to land in London?”
“Yes, that’s right. There is a full description of all the risks in our Plane Details Specification, or PDS for short. I will send you a copy of the PDS. If after reading it you still have questions, you really should consult a licensed aeronautical advisor. But be careful, make sure your advisor is licensed by ASIC, the Aeronautical Surreptitious Investigations Commission.”
At this point, Margaret clearly felt the conversation wasn’t going as well as it should. She was only young and may have been put off by my surly manner coming over the line.
“Margaret, when I used to fly with one of your competitors, I said where I wanted to go and the airline told me how much to pay. It was easy.”
“I’m sorry, David. We have moved away from a Destination Bound (DB) system to a Destination Concealed (DC) system.”
Bewildered, I thanked Margaret, paid my $5000 and crossed my fingers.
On the social responsibility of business
As countries get wealthier, the citizenry has more time to forget how economic well-being and rising living standards are actually created. Prosperity is not a natural human condition. In fact, the reverse is true. But when too many people think wealth is a natural state, they believe exercising their political imperatives, for example agitating for entitlements, benefits, hand-outs, redistribution to favoured interests and cronies, constraints on the freedoms of others, has no opportunity cost. When business leaders indulge publicly in such idealism, it becomes even more dangerous. In many businesses today, we observe social responsibility objectives affecting business decisions. What is deemed to be socially responsible, of course, varies by political persuasion. These actions are not costless.
Milton Friedman explained the social responsibility of business in an article published in 1970 by the New York Times Magazine. It is worth every minute of reading time. It should be read and re-read by captains of industry and students alike. I re-print it here in its entirety:
The Social Responsibility of Business is to Increase its Profits
by Milton Friedman
The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The New York Times Company.
When I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system,” I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
The discussions of the “social responsibilities of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom. Continue reading
Corporate tax rate
The topic of the month is the rate of corporate tax in Australia. When it comes to discussing the rate, two points are worth concentrating on. Firstly, the rate of tax does not reflect the tax burden on the economy. The true tax burden is measured by Government expenditure. Tax rates determine how the incidence of that tax is shared around and over what time periods. Reducing the tax rate will not reduce the tax burden. Secondly, the rate of tax is very important to potential overseas investors who weigh up the marginal costs of a project against the marginal gains. If tax rates are reducing in other countries, then Australia will attract less foreign investment, and that is bad for the economy, bad for people and our living standards will fall.
So it is important than both the rate of tax is reduced and Government expenditure is reduced. Both are necessary.
Civilization Cluelessness
William S.Smith points out, with clarity, the cluelessness of the western political elite (so-called).
The best way for businesses to make a positive contribution to society
Businesses have a social obligation? Laurence D. Fink is wrong about that. Mr Fink, head of investment firm Blackrock, has drafted a letter to business CEOs due to be delivered this week, according to widespread business press reporting. Strangely, Mr Fink has shared his draft with the media in advance – that is genuinely a puzzle partly because it makes public a fundamental misunderstanding. If the reporting is correct, then Mr Fink plans to tell the CEOs of businesses that Blackrock may invest in that their firms need to contribute to society: “To prosper overtime, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”
What does he mean by a positive contribution to society? There is clearly an implication that he thinks businesses that deliver financial performance are not necessarily making a positive contribution to society. Who does he think should decide what represents a positive contribution? By what means should such judgement be put into practice? Therein lies the obvious inconsistency in this tired old mantra. As an aside, this mantra is old and tired. It is nearly 50 years ago that Milton Friedman published a piece on this very topic. Mr Fink may think he is delivering a new message, but he’s not.
Put simply, businesses make a positive contribution to society, as judged by society, when they make profits. It is only when making profits that businesses are making effective use of scarce resources. By making a profit, a business is adding value to the mix of inputs of raw materials, land , labour and capital and the output is valued more highly by consumers. If a business is making a loss, then the output is not valued by consumers to the same extent as some alternative purposes to which the inputs could be employed. Nothing further than a profit is needed to demonstrate a positive contribution to society.
Now, if someone argues that “their” view of what constitutes a positive contribution to society differs in some way, then the obvious questions are a) what makes your view any better or worse than anyone else’s view? b) in what way should business activity change to satisfy your view? and c) who will pay for that different activity? Enforcing any action upon business activity owing to a perceived will to better society is inherently an attack on personal freedom. It is simply another means of gaining and exploiting political power: controlling or inhibiting the behaviour of some people and taking their economic resources away in doing so, typically by enforcing higher consumer prices or lower shareholder returns.
Businesses are not moral entities. They do not have obligations. Contrary to what some people believe, the don’t even pay tax. Only people pay tax and only people have moral obligations. We have political institutions that are formed, more or less, along democratic grounds, that make laws that constrain the behaviour of people. Company managers, agents as they are of the shareholders, who believe that they must contribute to society by doing anything other than make profits, are attempting to exert political power. In doing so, they are acting in breach of their obligations to their shareholders and almost certainly, making a negative, not positive, contribution to society.
