My goodness! A new “My Something” arises into public policy. Following My School and more recently My Hospital, this one is a bit different because it recognises the fallibility of market models. In the previous My products, the basic idea is that we are consumers, rather than citizens, so even our access to publicly funded basic services is dependent on our capacities for making informed choices. So good education would come from parental pressures on under-performing schools, and good health care from the choices made by those seeking health services. These views are unfortunately naively derived from a neoclassical view that humanity is populated by rational, self-interest seeking individuals.
This view is seriously flawed, as is shown in many studies of why and how people use services. It ignores the structural inequalities of geography and service delivery, the emotional load and difficulties of making decisions and the strains of the processes of choice. Increasing evidence is emerging, including a recent local study by the Australia Institute on our financial behaviours, that shows we are far from rational and often quite uninterested in making too-hard decisions.
Interestingly and ironically, the government is confirming this view of our lack of financial competence and interest in changing the processes of decisions in My Super. The evidence in the Cooper Review showed quite clearly that relatively few recipients of compulsory superannuation had much of an idea of what their investments were and where they were. The money deducted from their pay went into funds, usually decided by employers, the default option, and relatively few bothered changing the option. Despite the best efforts of the Howard government to undermine the not-for-profit industry funds, with union involvement, by encouraging choice, few took it up.
Therefore the My Super option is a recognition that most super investors are “passive”, i.e. they just take the default version and were being ripped off by high costs in many of these versions. They need a low-cost option, so the government is finally intervening in the market to prescribe the type of super funds that maybe should have been there in the beginning.
This is because too many default funds have added in options that have not been useful and charged for extra services they did not use. This misuse of a compulsory payment has been allowed to continue because it was somehow assumed that market forces and competition would encourage recipients to seek out the fund that services their best interests. That obviously didn’t work. The changes are estimated to result in middle-income recipients gaining about $40,000 extra in retirement because of the changes. So some funds have been making a motza, ripping of the passive “customer”.
This appalling failure is finally being fixed, in part, with the government taking a firm regulatory role in this so-called market. It illustrates the problems that governments have caused by abrogating their responsibilities for managing compulsorily collected funds. Were this money to have been wasted through tax collection and spending, there would have been a public outcry. However, a de facto tax on income was handed over to the market and low-income workers seem to have been ripped off.
The super system will still be seriously flawed as the unfair tax avoidance options for high-income earners remain, and the proposed unnecessary rise to 12% will disadvantage low-income earners further.
However, hopefully, the refutation of the idea that the consumer can be trusted to fix inequities will spread elsewhere in the policy debates. I wish!
Happy irrational festivities.