Moves by the Coalition government to defer the increase in the superannuation guarantee payment from 9.5 per cent to 12 per cent have eroded the adequacy of Australia’s superannuation system, according to a new report.
The Melbourne Mercer Global Pension Index for 2016 has placed Australia at No.3 in global pension ratings, the same position it held in 2015, behind Denmark and the Netherlands. But the overall rating was cut from 79.6 to 77.7 points while the adequacy component of the index has declined from 81.2 to 76 points.
David Knox, research leader with Mercer, told The New Daily that the end result of the deferral of the increase in the super guarantee (SG) payment to 12 per cent means “the net replacement rate (income in retirement as a percentage of average wages) has dropped”.
“If you enter the workforce at 20 and work till 67, the deferral means you would have fewer years working on the 12 per cent super guarantee.”
Industry Super Australia CEO David Whiteley said the change in the index demonstrates the results of deferring SG increases. “For an average income earner, aged 25, the delay in the SG will cost them around $100,000 over their working life (around $36,000 in today’s dollars).”
The Abbott government deferred the implementation of the 12 per cent SG to 2025 from 2019 in 2014.
However, Mr Whiteley told The New Daily that the report demonstrated the power of the not-for-profit industry-based super system. “Denmark and the Netherlands are the best systems in the world.”
Like Australia’s, “these systems use the ‘industrial model’ for superannuation where the providers are private industry or multi-industry funds generally affiliated with industrial parties and not-for-profit”.
“They are distributed through the workplace, not retail and the default product is determined through either industry or company-level collective agreements between employers and unions,” he said.
“The best performing part of our system is our default system which also follows the industrial model and shares these characteristics,” Mr Whiteley said.
While Australia is rated highly in the index, Mr Knox said there are significant areas for improvement.
“We’re behind Denmark and The Netherlands in coverage across the workforce. Whilst about 70 per cent of the workforce is covered by super in Australia, they have 85 to 90 per cent.”
The self-employed need coverage
“The difference is with the self-employed. In Australia they don’t have to make super contributions whereas in those countries they do. With more people working freelance and on contract that is a problem,” Mr Knox said.
Mandatory contributions for the self-employed “could start at two or three per cent then increase over time”, Mr Knox said.
The Australian super system lags behind those of Denmark and Holland in another way. “We have retirement savings of between 120 per cent and 130 per cent of GDP while they have 175 per cent,” Mr Knox said.
Increasing the SG to 12 per cent and improving super coverage for the self-employed would help bridge that gap over time, he said.
Another improvement would be mandating the provision of benefit projections with annual balance statements, which are a feature of many European systems.
“Your projection might say you’re on track for a retirement income of $25,000 a year which could encourage you to save more,” Mr Knox said.
Could do better
The report, put together by Mercer and the Australian Centre for Financial Studies at Monash University, also suggests three further areas for improvement:
- introducing a mandated requirement that part of super be taken as an income stream;
- encouraging people to work longer as life expectancies rise;
- introducing a mechanism to increase the pension age as life expectancy continues to increase; and
- restricting the minimum age to access super to five years below the age pension eligibility age.