A think tank’s claim that compulsory superannuation shouldn’t be increased because super is the “least important” part of retirement savings has been criticised for ignoring the reality that Australians need to be forced to save.
Super funds and independent experts defended compulsory super on Monday after the Grattan Institute, a non-partisan think tank, argued that planned increases to the system should be wound back.
Grattan published a report on Sunday which estimated only about 15 per cent of Australian household wealth is in superannuation, based on government and Melbourne University data.
“There are powerful vested interests pushing the idea that super equals retirement savings. Yet such a view is inconsistent with the facts,” Grattan Institute CEO John Daley wrote.
There are three ways to put money into super: the involuntary guarantee (currently 9.5 per cent of income); salary sacrifice (deducted voluntarily from a pay cheque up to certain limits); and after-tax contributions.
Labor legislated the guarantee to increase to 12 per cent by 2019-20. But the Abbott government paused the guarantee at 9.5 per cent until 2020-21, and slowed the eventual increase to 12 per cent until 2025-26 – a delay of six years.
Industry Super Australia CEO David Whiteley said the think tank’s report was “seriously flawed” because it ignored the fact that the introduction of compulsory super has increased the retirement savings of middle- and lower-income earners, and decreased the drain on the federal budget.
“Grattan’s analysis and conclusions are seriously flawed and risk marooning most Australians on the age pension with little or no additional income,” Mr Whiteley told The New Daily.
“For a median wealth person aged 55-64, super comprises almost 80 per cent of their non-housing wealth.
“Without super, most Australians would be entering retirement with virtually no other savings. They would have a lower standard of living in retirement and governments would have to bear higher age pension expenses.”
The generally accepted arguments for increasing the guarantee are to further reduce reliance on the taxpayer-funded age pension and encourage retirement saving that would otherwise not occur.
For example, imagine the government listened to Grattan and repealed the guarantee increase. If Australian workers responded to this in 2025 by saving and investing an extra 2.5 per cent of their wage, and if their chosen investment provided equal or greater returns than super, and if they did not pull the money out until they retired, then they would be in an equal or better position at retirement compared to where the government would have put them. But that’s a lot of ifs.
Professor Rodney Maddock, head of the Australian Centre for Financial Studies, said his research group was “still strongly in favour” of increasing the compulsory rate, despite the Grattan research.
“I don’t think people will ever voluntarily save enough,” Prof Maddock told The New Daily. “The reason we have compulsion is to remedy this.”
As noted by Mercer, the global human resource consulting firm, compulsory saving is “one of the most effective ways to save for retirement”.
“That’s because, despite our best intentions, the majority of us simply don’t make voluntary contributions. Changing the level of compulsory super bridges that gap between intention and action.”
During TV interviews on Monday, Grattan’s Mr Daley acknowledged this quirk of human nature. “The super guarantee protects those who are reluctant to save. A lot of people are short-sighted in how they plan for retirement,” he told Sky News.
But he argued a 12 per cent guarantee would impact the living standards of Australians too severely during their working lives: “Our argument is that 9.5 per cent is the right balance.”
A spokesperson for the Association of Superannuation Funds of Australia, which represents both industry and retail funds, said it would “take the time to analyse this complex report before commenting”.
* The New Daily is owned by industry super funds.