Australia’s superannuation savings pool has overtaken Canada’s and now sits at number four position on the global tables despite Canada’s population, at 36.4 million, being 10 million larger than Australia’s.
The figures, which come from a survey by asset consultants Willis Towers Watson, also show that Australia’s super system has grown the fastest in the last 10 years, at 6.9 per cent a year.
But new figures from Treasury raise concerns about the sustainability of the system with tax expenditures (the cost to the budget of tax concessions) expected to grow 32.5 per cent by 2019-20 to $46.4 billion.
That means super costs are outstripping the growth of the age pension and related expenditures, which cost the budget $44 billion last financial year. Pension costs are projected to rise 18 per cent from there to $52 billion by 2019-20.
Combined superannuation tax expenditures are the largest on Treasury list at $35.01 billion. They are also by far the fastest growing significant expenditure with the capital gains tax discount, the next fastest, costing the government $9.6 billion and projected to grow 25.8 per cent to $12.09 billion.
Australia’s superannuation assets rank at number four globally behind the USA, the UK and Japan and totalled $US1.583 trillion ($2.065 trillion). Australia’s retirement savings total 126 per cent of GDP, second only to the Netherlands at 168.3 per cent and higher than other similar countries, as this table shows.
Paul Newfield, senior investment consultant with Willis Towers Watson, told The New Daily Australia’s position on the tables was a result of four factors.
“It has generally a higher allocation to growth assets, it avoided a recession during the global financial crisis and has a high compulsory contributions level and is predominately a defined contribution (DC) rather than a defined benefit, system,” Mr Newfield said.
Its defined contribution nature has allowed Australia’s system to grow quickly because it has a high exposure to growth assets. Defined benefit systems need a more conservative asset pool as they have to guarantee set payments each year.
“Australia has among the highest asset allocation to growth assets, and to equities in particular, with 49 per cent of the total assets invested in equities. Only the US, the largest pension market by assets for both overall and DC assets, has the same allocation to equities.”
The cost of the super system, while growing substantially, is a net positive on the overall economy, Dr Stephen Anthony, chief economist with Industry Super Australia, told The New Daily.
“Australia is unequivocally better off as a result of the super system, especially the default system where industry funds consistently outperform the market and deliver retirement savings to people who otherwise wouldn’t have any.”
Independent economist Saul Eslake told The New Daily said that the super savings level “is probably still not adequate yet as a large proportion of retirees will still rely partly or wholly on the age pension”.
Housing costs hit retirement
Decreased housing affordability was eroding the adequacy of super savings.
“An increasing proportion of retirees won’t have the zero housing costs that retirement income adequacy figures assume. More people will either have no house or a mortgage they will have to use a lump sum to pay down when they retire,” Mr Eslake said.
Australia’s high level of superannuation savings resulted in a mirror image of a relatively low level of government pension costs. “Other countries that have lower levels of private pension savings often rely more on public pensions.”
The following chart produced by the OECD for 2011, the latest year available, identifies this phenomenon.
Australia spends only 3.5 per cent of GDP on the age pension and the US, UK and the Netherlands all spend well below the OECD average of 7.5 per cent. Japan, number three on the private pension asset list, is an exception as it has a relatively elderly population.
Conversely, countries like France and Italy with low private retirement savings have high state pension costs.
John Daley, CEO of the Grattan Institute, told The New Daily: “Australians already had relatively high levels of retirement saving both inside and outside super which gives them a good income replacement rate in retirement. There is probably a strong argument for not increasing the Superannuation Guarantee beyond 9.5 per cent to 12 per cent as planned.”