What’s wrong with super?
In 1992 in an effort to pre-emptively deal with the challenges of an aging population, superannuation was made compulsory in Australia. While our super system may seem like a good idea, it doesn’t function as it should. Nor will it be able to, unless there are some major policy changes.
Recently, former Prime Minister Paul Keating, the man responsible for compulsory super, called for a “national insurance” scheme to support the elderly in retirement. He claimed that only the government had the ability to insure “across the generations”, and that super wouldn’t be enough to support retirees as they now live far longer than they did, on average, in the early 90s.
Keating is wrong for a number of reasons. Firstly, given the attention span of governments, which peculiarly correlates with the electoral cycle, they should not be trusted to develop sustainable long-term policies. This is evidenced by the fact that when Keating introduced compulsory super, Australia already had a 20 year-long trend of lengthening life expectancy. If Keating and Co. didn’t have the foresight to build a policy to deal with a trend occurring right in front of them, why should governments be trusted to do so now?
Secondly, there is a much simpler solution. Super contributions are taxed at 15 percent. Why, you may ask? Well it beats me. I’m not sure if Treasury has heard of compound interest, but that’s the idea behind a super fund. The super contribution rate is currently 9.5 percent, and Keating claims that this isn’t enough. But when you take into account the 15 percent contribution tax, the contribution rate effectively decreases to 8.08 percent. There is also a tax on investment earnings, such as dividends on shares, which stands at 15 percent. And if an asset held in the fund is sold? You guessed it: capital gains tax. Perhaps if the government let us keep the entire contribution amount, along with accumulated earnings, compound interest could work more effectively over the course of one’s working life, and super might just last us in retirement.
Thirdly, super doesn’t work the way it was supposed to and doesn’t actually seem to make anyone better off. The graph below shows levels of household debt in Australia compared to superannuation. The 2013 report from CPA Australia highlighted that savings in super funds have been effectively wiped out by increasing household debt. Individuals know they have a lump of money in their super account and so they feel comfortable taking on more debt. Australians can do this because we still have a pension system, which means that you can spend all your super on servicing debt and still receive an income in retirement.
Finally, and perhaps most importantly, establishing a national insurance scheme, on top of super and the pension system, will completely erode whatever shred of personal responsibility is left. The government should be looking to wind back the welfare state in retirement, especially considering it’s the biggest single component of government expenditure. This was the intention of compulsory superannuation. Unfortunately, it doesn’t seem to have worked yet. If individuals know that they won’t have access to a pension, and their super contributions and earnings are tax-free, they will be motivated to adopt responsible retirement strategies.
Although super reform should ideally occur in conjunction with an easing of the cost of living – through a reduction in excessive and punitive excises and income taxes – reforms are worth pursuing. The Royal Commission, along with a recent Productivity Commission paper, has exposed how super is harmed by excessive fees. While this work is positive, the rort is enabled by a government who has no ambition to fix the super system and encourage personal responsibility. Keating may be slinging mud at the super system, but we shouldn’t ditch it until it’s been properly tried.