Hands off our super! There are better ways to make housing affordable

Of all the factors that will determine the standard of living most Aussies enjoy in their sunset years, home-ownership status and superannuation balance at retirement stand head-and-shoulders above the rest.

And of those two, owning a home remains by far the more important. Renting retirees are at great risk of poverty, whereas most people who can live rent-free in retirement should find themselves able to eek out a dignified – if not lavish – life relying on Australia’s aged pension payments.

Illustration: Tanya LakeCredit:

So I’m not surprised it makes sense to many – on the surface, at least – that we, as a society, should funnel some of our combined $3.3 trillion in super savings towards ensuring there is enough secure and affordable housing available for low-income Australians.

It sounds reasonable, right?

So reasonable that if you were a progressive political party, say, in search of a housing policy – having abandoned your previous policy to ease housing affordability by abolishing lucrative investor tax breaks on property – you might even decide to nab it and make it the centrepiece of your entire housing policy. That, of course, is precisely what the Australian Labor Party has done, at the urging of influential former party leaders now themselves enjoying a comfortable post-political career in the industry funds sector.

Labor’s plan is for tens of thousands of new dwellings to be offered to low-income renters at below-market rents.Credit:Rhett Wyman

The Albanese government is currently putting the finishing touches on legislation to go to parliament this month to establish its $10 billion Housing Australia Future Fund – a key election promise. Earnings from the fund will go towards helping to pay for tens of thousands of new dwellings to be offered to low-income renters at below-market rents.

Details are sketchy, but the government has also signalled its hope that superannuation funds will be convinced, with the help of taxpayer subsidies, to jump into the market and invest member funds in the sector.

The community housing sector, of course, is crying out for any funds it can get to help build and deliver its projects. Some large industry super funds have already moved into building and owning low-cost housing and have expressed support for the idea.

Like all policies, however, most think the devil will be in the detail.

I have serious doubts about the wisdom of using super to bankroll affordable housing. Why? Because the overriding responsibility of all super funds – enshrined in legislation – is to act in the best financial interests of members. In simple terms, to grow member funds by the maximum possible and deliver them the biggest possible nest egg for retirement.

At a system level, I think they are already failing to achieve this aim. Why? Mostly due to asset allocation. Under the default “My Super” balanced option of most funds, it is not uncommon to have about 10 per cent sitting in cash, and another 20 per cent or so sitting in alternative assets, private equity and commercial property. Quite why a 25-year-old needs any money at all sitting in cash – when it could be invested in high-growth assets like shares – escapes me entirely.

Over the past two decades, there has been a technological revolution in the ease with which investors can park their money in passively managed, broadly diversified, sharemarket funds delivering market returns. For less than a 0.1 per cent management fee (sometimes much less), it is now possible to buy a slice of the entire Australian or global sharemarket.

Instead, most Aussies are still paying closer to 1 per cent of their balance in fees each year to pay super fund managers and their external asset managers to pick and choose winners on their behalf. That’s billions of dollars in fees robbed from super fund accounts every year, and rising.

Our increasingly bloated super sector has, of course, little incentive to downsize itself. Instead, it has every incentive in the world to sit around and dream up new and increasingly novel ways to reinvent the investing wheel by getting into ever more exotic and obtuse asset classes, like, say, affordable housing.

If you designed Australia’s super system today, you’d have a hard time designing anything better than one government-managed fund to invest all member money into a handful of well-diversified and passive sharemarket index funds – perhaps tapered into a higher allocation of cash near retirement.

That is not to say we don’t need more affordable housing. We do. We also already have a system – designed under the previous government – whereby community housing providers can tender for low-cost government loans to build new projects.

A far cleaner solution to the problem of building more affordable housing could have been to expand this existing program. Instead, super fund members are being asked to either accept below-market returns on rental properties owned on their behalf, or – via a rather circuitous route of taxpayer subsidies – to achieve a slightly better return on such assets by also paying higher taxes than otherwise to fund subsidies to boost those returns. Seriously?

If we were really concerned about improving housing affordability, we’d do what Labor was promising in the first place and wind back investor tax breaks, along with reviewing planning regulations and council restrictions, and reforming state-based land taxes which penalise larger institutional investors.

And if we were serious about growing super nest eggs, we’d crack down on the super industry’s bloated army of active investment managers looking for new and exotic ways to justify their existence, and we’d mandate that a greater share of member funds – particularly younger members – be invested in low-cost, passively managed, index sharemarket options.

You don’t need me to point out we are doing neither.

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