The Morrison government has commissioned the Australian National University to analyse whether wages will be harmed if the scheduled increase in the superannuation guarantee to 12 per cent is allowed to go ahead.
Appearing before a Senate Estimates committee on Thursday, Robb Preston, the manager of Treasury’s retirement income policy division, revealed the government’s key economic department had contracted a number of independent economic researchers to provide analysis of the superannuation system for Scott Morrison’s retirement income review.
Mr Preston said the ANU’s tax and transfer policy institute, a well-respected policy research unit headed by Professor Robert Breunig, would be providing Treasury with modelling of the relationship between wages and the superannuation guarantee (SG).
The SG is legislated to rise from 9.5 to 12 per cent by 2024, but critics have warned that forcing workers to carve off more savings into nest eggs will cull wages growth, cost the federal budget billions in foregone revenue thanks to generous super tax concessions, and mainly benefit wealthy retirees.
Mr Preston said modelling of how changes in the superannuation guarantee affected rates of voluntary saving would be provided by Monash University, while Curtin University would be examining how the superannuation system affected pre-retirement behaviour.
“The panel is very interested in understanding the trends affecting the retirement income system going forward,” Mr Preston said.
“We’re endeavouring to take a very comprehensive approach to our work,” he said.
“We’re planning to release a report to government by 30 June,” he said. Australian Taxation Office deputy commissioner James O’Halloran on Thursday said the government revenue agency disqualified some 300 self-managed superannuation fund trustees every year, noting there were a small number of funds engaged in “tax mischief”.
“In terms of criminality, there are instances perhaps where a SMSF might be carrying out the avoidance or minimisation of tax,” Mr O’Halloran told Estimates.
Labor, the ACTU and the $700bn industry fund sector have argued for the higher rate.
Confidential Treasury modelling of the super system, obtained under Freedom of Information laws and reported by The Australian last year, is “broadly consistent” with the Grattan Institute ’s findings.
According to the documents, Treasury also warned increasing the super guarantee rate would cost workers wage rises and would exacerbate the gender income gap, a position also recently argued by the Australian Council of Social Service.
The Age Pension is the biggest government expenditure at nearly $50bn a year . In 2002 it cost 2.9 per cent of GDP and is tipped to hit 4.6 per cent by 2042.
largest superannuation funds have spent close to $400m on advertising,
stadium naming rights and sport sponsorship over the past five years in a
bid to get a bigger slice of workers’ compulsory savings.
figures, which provide an insight into the spending habits of a handful
of the country’s 200 super funds, come amid a fierce industry debate
about whether the current 9.5 per cent of worker wages being set aside
for the retirement system will be adequate to maintain living standards
An analysis of parliamentary disclosures by The Australian has found nine of Australia’s biggest super funds have spent $384m on advertising campaigns, sponsorship of sports teams and stadiums, marketing and brand research since the 2015 financial year.
This includes more than $100m spent by the
country’s largest fund, AustralianSuper, on marketing, brand promotion
and media broadcasting over the past five years. Over the same period,
AustralianSuper also shelled out a further $24m to the not-for-profit
super sector’s lobbying and research arm, Industry Super Australia,
which runs its own advertising campaigns, including one launched this
month calling on the government not to dump the scheduled increase in
the superannuation guarantee from 9.5 per cent to 12 per cent,
reportedly at a cost of $3.5m.
which manages the savings of hospitality and tourism workers, has spent
more than $60m on brand advertising, along with an extra $18.5m on
payments to Industry Super Australia, since the 2015 financial year.
made to the House of Representatives’ economics committee, in response
to questions on notice from Liberal MP Tim Wilson, also cover
submissions from the construction workers industry fund, Cbus, which
spent $48m on a number of brand advertising ventures over the same
Cbus, Hostplus and
AustralianSuper attract a large degree of their membership from having
won “default” fund status with employers through enterprise bargaining
agreements, which means workers who fail to nominate their own super
fund will have their savings managed by the default provider.
trustees are required by law to only spend money in members’ best
interests and for the sole purpose of providing benefits to members when
Advertising spending is
not unlawful, and is monitored by the Australian Prudential Regulation
Authority. The super industry argues building brand awareness and
attracting new members helps drive economies of scale that support the
efficient growth of retirement savings for their members. However, only
about 3 per cent of super members switch funds each year, while about 80
per cent of new employees do not make an active choice and go with the
default selection chosen by their employer.
outlined a number of advertising campaigns, including a five-year, $30m
“brand campaign”, a program targeting younger members, and another
bolstering its status in Queensland where the rival BUSSQ super fund
manages the savings of workers in the construction industry. Firms paid
to keep track of Cbus’s spending include Kantar TNS, Nielsen Sports,
Empirica Research, CoreData and Essential Research.
$57bn Hostplus said its brand advertising included “advertising on
television, radio, online billboards and on public transport”,
sponsorship of logos on sports teams and “advertising on stadium signage
scoreboards” and sending mail, emails and text messages to its members.
promotional activity of Industry Super Australia includes advertising
on television, online, on radio, in the press and on billboards,”
Australian Super, which
manages $180bn, told parliament it tracks the “efficacy of campaigns in
either retaining or gaining new members” for each of its campaigns.
for-profit retail super sector has also spent millions on marketing,
including Commonwealth Bank’s superannuation arm Colonial First State,
which spent $22m over five years on advertising campaigns.
only invited ad agencies Leo Burnett and IKON to compete for contracts,
and only awarded contracts to those two firms, but said it commissioned
KPMG to “track brand awareness and consideration over time and report
this on a monthly basis”.
placing ads during the Tour de France, money for a “content
partnership” campaign with The Guardian online newspaper and a series
with Fairfax media titled The Road Next Travelled.
Australia Bank’s wealth management arm, MLC, spent more than $22m on
marketing, about half of which was attributed to the superannuation arm,
NULIS, on campaigns such as Save Retirement between 2014 and 2016, and
Life Unchanging between 2017 and last year.
objective of both campaigns was to drive client and member engagement
in their retirement savings and all aspects of proactive wealth
management, while positioning MLC as a prospective partner as they seek
to save for and live well in retirement,” said NULIS, which was exposed
by the royal commission for charging some of the steepest fees while
delivering the lowest returns in the $2.9 trillion superannuation
Rest Super, which manages the
savings of retail employees and derives most of its membership through
the default system, said it had spent $30m over the past five years on
advertising. REST has employed creative firms Carat Australia,
Customedia, Arnold Furnace, Mr Wolf and Bauer Media Group.
engage a consultant to provide performance reports on advertising brand
campaigns, which is presented to the Rest Board Member and Employer
Services Committee,” Rest said.
which manages the savings of Queensland public servants, spent $31m on
advertising, promotion and direct marketing, while StatePlus, which
looks after the nest eggs of NSW public servants, spent almost $10m on
ad campaigns and sponsorship over the past five years.
“A strong focus of QSuper’s current direct marketing to members is financial wellbeing,” QSuper said.
includes informing and educating members on the value of financial
advice, educational seminars and insurance — that is, services which aim
to improve the financial literacy and retirement outcomes of our
members. While this may be categorised as marketing it may also
reasonably be categorised as education of QSuper members of their
retirement options and opportunities.”
which has contracted creative agencies 303MillenLow, the Lexicon Agency
and Reef Digital Media to run its marketing campaigns, has spent a
little over $9m since the 2017 financial year.
runs always-on above-the-line and below-the-line campaigns with the
objective of building brand awareness and consideration and generate new
members to the fund,” said StatePlus, which looks after the savings of
NSW public sector employees.
its brand awareness increased by 44 per cent, and its “informed
awareness” level rose by 58 per cent following the advertising.
The result of
last year’s federal election is described as a miracle, but I prefer to
deal in facts. So, if we examine a long list of facts and sum them up in
a few words, the Coalition didn’t win the election, Labor lost it.
the reason Labor lost, again summing up a long list of facts, is
because it gave the impression that it was going after people’s ability
to create and preserve personal wealth.
Mind you, before the election the Coalition also had given the community this impression with its superannuation changes. However, the Coalition came after the retirement savings of the self-funded, and therefore only a certain number of people in a certain age category felt assaulted. When the time came, as much as those people wanted to object at the ballot box, anger probably gave way to fear of something even worse.
Hindsight is a wonderful thing, and now
senior thinkers in the government have engaged in some reflection. A few
grudging concessions have been muttered; there is acceptance that the
government went too far and that some of the adverse superannuation
changes have been counter-productive.
there is a desire to undo some of the damage, as long as the government
isn’t seen to be unwinding its changes. It wants a remedy that isn’t a
backflip, a retreat without an undoing. In other words, the government
wants to give the cake back that it has already eaten, without the
indignity of regurgitation.
government review into something can cover a thousand sins and provide
enough justification for anything. It is just fortuitous then, isn’t it,
that Treasury has commissioned a retirement income review that is
tasked with “establishing a fact base to help improve understanding of
how the Australian retirement income system is operating and how it will
respond to an ageing society”.
independent panel leading the review released a consultation paper last
year and this week the timeframe for submissions passed.
review is due to report by June, and if there is a pathway to
redemption then here is where we will find it. The clues to this
intention are sprinkled right throughout the consultation document.
section headed “Changing trends and one-off shocks” admits “the trend
in interest rates … has (continued), and may continue, to affect the
public cost of the retirement income system through changes in the
social security deeming rates and the interest rate used by the Pension
Loans Scheme”. One consultation question asks: “What factors should be
considered in assessing how the current settings of the retirement
income system (eg tax concessions, superannuation contribution caps and
Age Pension means testing) affect its fiscal sustainability?”
There is an opportunity here, then, to remedy a past error.
a low interest rate environment, the self-sufficient need far more
money than anyone imagined. We need to relax the contribution caps and
allow people to shovel their savings into superannuation. Unfortunately,
the idea of people creating wealth for themselves causes policymakers
to break out in hives.
The paper says
“the tax advantaged status of superannuation may encourage some
individuals to partly use superannuation for wealth accumulation and
estate planning rather than solely for retirement income purposes.”
a shame that everybody cannot organise themselves to save precisely the
right amount for their retirement and then promptly drop dead the
minute they’ve spent it, ensuring there is nothing left over.
a thought now for politicians and Treasury, who are tortured by two
competing desires. On the one hand, they don’t want to bear the cost of
people on the pension but, on the other, they don’t want people to be
too wealthy either.
Perhaps the only
thing worse than the poor who require support are the rich who generate
envy. Maybe this is why there is the endless search for the in-between
solution, one that brings comfort but cannot possibly exist: the
not-too-poor but not-too-rich perfect retiree.
a global free market with a fluid cost of living, the measure of what
is needed to be self-funded will always change. Therefore, it is
impossible to keep people down to a level of poverty that is just above
the level where they require government support.
nothing of substance will ever be achieved in the retirement savings
space unless the government comes to terms with the following: if you
don’t want people on the pension, you must allow them to create their
own wealth. Tax some of it if you will, but at least allow it to be
Further, it is time our
political class accepted that superannuation is a wealth-creation
vehicle. It should be a wealth-creation vehicle. It must be a
wealth-creation vehicle, for if retirees are not going to be poor enough
to go on the pension, then they must be too rich to go on the pension,
by a long way, because the market can easily erode a slim margin.
Governments of all persuasions, but especially a Coalition government, must get over their squeamish reaction to the idea that people are using their superannuation to create wealth because that is exactly what superannuation is for.
The Save Our Super lobby group has called on the federal government to grandfather any future negative changes to superannuation and abolish the $1.6m cap on the amount of money that can go into tax-free super retirement accounts.
In its submission to
the federal government inquiry into retirement incomes, Save Our Super
argues that the fall in interest rates since the 2016 budget has
significantly reduced the income retirees can earn from savings since
the $1.6m transfer cap was announced.
The submission argues that the cap, which was announced as part of a broad package of changes, including cuts to super contribution limits, should be either abolished or raised.
“The interest earnings from $1.6m is now almost 40 per cent lower than it was in early 2016,” the submission says.
the continuing drift of interest rates towards zero, whatever
unexplained calculations arrived in 2016 at the $1.6m on the
superannuation in retirement phase should be re-examined with a view to
grandfathering the cap, raising it or abolishing it.”
Our Super was set up to lobby against the 2016 budget changes to super
by a group including retired Melbourne QC Jack Hammond.
organisation has consistently argued that it is a basic principle of
the Australian taxation system that there should be no negative
retrospective changes to tax and superannuation.
2106 changes were announced after the Tony Abbott-led Coalition went to
the polls in the election of September 2013 promising not to make any
negative changes to super during the first term of its government.
Save Our Super submission argues any future negative changes to super
must be grandfathered so that “those people who committed in good faith
to lawfully build their life savings are not blindsided by policy
changes with effectively retrospective effects”.
need assuring that any future changes in policy will not have any
significantly adverse effects on lawful prior savings,” it says.
Federal Treasurer Josh Frydenberg announced a review of retirement incomes policy last September.
The review is expected to report in June this year.
SOS submission argues that the current compulsory super system should
be recognised as a success in encouraging saving for retirement in
Australia and reducing the number of people on the full Age Pension.
argues that any assessment of the impact of super policies should
consider the benefits of the compulsory super system and not just the
narrow annual cost of super tax concessions.
of cost-benefit work, we see reporting which highlights only the
estimated gross costs of retirement policy — expenditures on the aged
pension plus problematic estimates of the ‘tax expenditures’ on
superannuation,” it says.
“There is no
measure anywhere of the fiscal and broader economic benefits in moving,
over time, significant numbers of those age-eligible for the pension to a
higher living standard in self-funded retirement from increased
saving,” it says.
It argues that the
review’s “highest priority” should be in establishing a fact base on the
situation around retirement income in Australia that would include
long-term economic modelling of retirement income trends and their
social costs and benefits.
that the current focus on the tax forgone from super tax concessions is
“misleading” and “hugely overstates gross costs” and ignores other
positive outcomes such as encouraging saving for retirement and reducing
a potential drain on the Age Pension.
The submission also argues for a reform of the current compulsory super guarantee system.
says the compulsory 9.5 per cent contribution to super, which is set to
rise to 12 per cent, is too high for people on low incomes.
says the current income level threshold for super contributions has
been kept at the low level of $450 a month — a level set when the super
guarantee system was introduced at 3 per cent in 1992.
Retirement Income Policy Division
Parkes ACT 2600
Save Our Super submission:
Consumer Advocacy Body for Superannuation
Save Our Super
has recently prepared an extensive Submission to the Retirement Income Review
dealing in part with the many ‘consumer’ issues triggered by the structure of
retirement income policy and the frequent and complex legislative change to
That Submission was lodged with the Review’s Treasury Secretariat on 10 January 2020 and a copy is attached to the e-mail forwarding this letter. It serves as an example of the analysis of super and retirement policy and of the advocacy that superannuation fund members, both savers and retirees, can contribute. Its four authors’ backgrounds show the wide range of experience that can be useful in the consumer advocacy role.
We note both the
policy and the advocacy consultations are running simultaneously, exemplifying
the pressures Government legislative activity places on meaningful consumer
input. Consumer representation is
necessarily more reliant on volunteer and part-time contributions than the work
of industry and union lobbyists and the juggernaut of government legislative
and administrative initiatives.
breadth, complexity and fundamentally important nature of the issues raised for
the Retirement Income Review by its Consultation Paper, we have prioritised our
submission to that Review over the issues raised by the idea of a Consumer
Advocacy Body. This letter serves as a
brief submission and as a ‘place holder’ for Save Our Super’s interest in the
consumer advocacy issues.
The idea of a
consumer advocacy body is worthwhile in trying to improve member information,
engagement and voice in superannuation and in the formation of better, more
stable and more trustworthy retirement income policy. It should help
government to understand the perspectives of superannuation members.
“Functions and outcomes: What core
functions and outcomes do you consider could be delivered by the advocacy body?
What additional functions and outcomes could also be considered? What functions
would the advocacy body provide that are not currently available?”
Consult with superannuation fund members on their concerns, including issues of legal and regulatory complexity, frequent legislative change and legislative risk which has become destructive of trust in superannuation and its rule-making.
Commission or perform research arising from consultations and reporting of member concerns.
Tap perspectives of all superannuation users, whether young, mid-career, or near-retirement savers, as well as of part- or fully self-funded retirees.
Publish reporting of savers’ concerns to Government, at least twice-yearly and in advance of annual budget cycles.
Contribute an impact statement – as envisaged in the lapsed Superannuation (Objectives) Bill – of the effects of changes to any legislation (not just super legislation) on retirement income (interpreted broadly to include the assets, net income and general well-being of retirees, now and in the future).
The advocacy body should:
take a long-term view, and could be made the authority to administer, review or critique the essential modelling referred to in Save Our Super’s submission to the Retirement Income Review. Ideally, the Consumer Advocacy Body should have the freedom to commission Treasury to conduct such modelling, and/or to use any other capable body.
give appropriate representation and support to SMSFs, and be prepared to advocate for them against the interests of large APRA-regulated funds when necessary.
advocate specifically for the very large number of people with quite small superannuation accounts, when their interests are different from those of people with relatively large balances.
The biggest risk to the advocacy body in our view is
that it would over time be hijacked by special interest groups, or hobbled by
its terms of reference. Careful thought
in its establishment, key staffing choices and strong political support would
be helpful to protect against these risks.
Membership of the Body should be part-time, funded essentially per diem and with cost reimbursement only for participation in the information gathering and consumer advocacy processes. A small part-time secretariat could be provided from resources in, say, PM&C or Treasury.
Membership opportunities should be advertised.
Membership of the Body should be strictly limited to individuals or entities that exist purely to advocate for the interests of superannuation fund members. (This would include any cooperative representation of Self-Managed Superannuation Funds.) We would counsel against allowing membership to industry entities which might purport to advocate on behalf of their superannuation fund members, but might also inject perspectives that favour their own commercial interests.
Membership should include individuals with membership in (on the one hand) commercial or industry super funds and (on the other hand) Self-Managed Superannuation Funds. We see no need to ensure equal representation of commercial and industry funds, though we would be wary if representation was only of those in industry funds or only commercial funds.
We offer no view at this stage on whether the Superannuation Consumers Centre would be a useful anchor for a new role, but we would suggest avoiding duplication.
Functions not currently available
asks what functions the Consumer Advocacy Body for Superannuation could perform
that are not presently being performed. SOS’s
submission to the Retirement Income Review and earlier submissions on the
changes to retirement income policy that took effect in 2017 shows the range of
superannuation members’ advocacy concerns that are not at present being met.
to establish consultation arrangements for superannuation members appear to us
to have focussed mostly on the disengagement and limited financial literacy of
some superannuation fund members.
Correctives to those concerns have heretofore looked to financial
literacy education and better access to higher quality financial advice.
Clearly such measures have their place.
But in the view
of Save Our Super, these problems arise in larger part from the complexity and
rapid change of superannuation and Age Pension laws, and in the nature of the
Superannuation Guarantee Charge. Nothing predicts disengagement by customers
and underperformance and overcharging by suppliers more assuredly than
government compulsion to consume a product that would not otherwise be bought
because it is too complex to understand, too often changed and widely
There needs to
be more consumer policy advocacy aimed at getting the policies right, simple,
clear and stable, as was attempted in the 2006 – 2007 Simplified Super reforms.
In the time
available, we offer no views on questions 2,3 and 4, which are more for
The Review’s Terms of Reference seek a fact base on
how the retirement income system is working.
This is a vital quest. Such
information, founded on publication of long-term modelling extending over the
decades over which policy has its cumulative effect, has disappeared over the
Not coincidentally, retirement income policy has suffered from recent failures to set clear objectives in a long-term framework of rising personal incomes, demographic ageing, lengthening life expectancy at retirement age, weak overall national saving, low household and company saving and a persistent tendency to government dissaving.
A new statement of retirement income policy objectives should be:
to facilitate rising real retirement incomes for all;
to encourage higher savings in superannuation so progressively more of the age-qualified can self-fund retirement at higher living standards than provided by the Age Pension;
to thus reduce the proportion of the age-qualified receiving the Age Pension, improving its sustainability as a safety net and reducing its tax burden on the diminishing proportion of the population of working age; and
to contribute in net terms to raising national saving, as lifetime saving for self-funded retirement progressively displaces tax-funded recurrent expenditures on the Age Pension.
With the actuarial value of the Age Pension to a homeowning couple now well over $1 million, self-funding a higher retirement living standard than the Age Pension will require large saving balances at retirement. It is unclear that political parties accept this. It seems to Save Our Super that politicians champion the objective of more self-funded retirees and fewer dependent on the Age Pension but seem dubious about allowing the means to that objective.
Save Our Super highlights fragmentary evidence from the private sector suggesting retirement income policies to 2017 were generating a surprisingly strong growth in self-funded retirement, reducing spending on the Age Pension as a share of GDP, and (prima facie) raising living standards in retirement (Table 1). (Anyone who becomes a self-funded retiree can be assumed to be better off than if they had rearranged their affairs to receive the Age Pension.) Sustainability of the retirement system for both retirees and working age taxpayers funding the Age Pension seemed to be strengthening. These apparent trends are little known, have not been officially explained, and deserve the Review’s close attention in establishing a fact base.
Retirement policy should be evaluated in a social cost-benefit framework, in which the benefits include any contraction over time in the proportion of the age-eligible receiving the Age Pension, any corresponding rise in the proportion enjoying a higher self-funded retirement living standard of their choice, and any rise in net national savings; while the costs include a realistic estimate of any superannuation ‘tax expenditures’ (this often used term is placed in quotes because it is generally misleading – see subsequent discussion) that reduce the direct expenditures on the Age Pension. Such a framework was developed and applied in the 1990s but has since fallen into disuse.
Policy changes that took effect in 2017 have suffered from a lack of enumeration of the long-term net economic and fiscal impacts on retirement income trends. They also damaged confidence in the retirement rules, and the rules for changing those rules. Extraordinarily, many people trying to manage their retirement have found legislative risk in recent years to be a greater problem than investment risk. Save Our Super believes the Government should re-commit to the grandfathering practices of the preceding quarter century to rebuild the confidence essential for long-term saving under the restrictions of the superannuation system.
Views on whether retirement policy is fair and sustainable differ widely, in large part because the only official analysis that has been sustained is so-called ‘tax expenditure’ estimates using a subjective hypothetical ‘comprehensive income tax’ benchmark that has never had democratic support.
This prevailing ‘tax expenditure’ measure is unfit for purpose. It is conceptually indefensible; it produces wildly unrealistic estimates of hypothetical revenue forgone from superannuation (now said to be $37 billion for 2018-19 and rising); and it presents an imaginary gross cost outside the sensible cost-benefit framework used in the past. It also presents (including, regrettably, in the Review’s Consultation Paper) an imaginary one-off effect as though it could be a recurrent flow similar to the actual recurrent expenditures on the Age Pension.
An alternative Treasury superannuation ‘tax expenditure’ estimate, more defensible because it has the desirable characteristic of not discriminating against saving or supressing work effort, is based on an expenditure tax benchmark. It estimates annual revenue forgone of $7 billion, steady over time, not $37 billion rising strongly.
Additional to the four evaluative criteria proposed in the Consultation Paper, Save Our Super recommends a fifth: personal choice and accountability. Over the 70-year horizon of individuals’ commitments to retirement saving, personal circumstances differ widely. As saving rates rise, encouraging substantial individual choice of saving profiles to achieve preferred retirement living standards is desirable.
We also restate a core proposition perhaps unusual to the modern ear: personal saving is good. The consumption that is forgone in order to save is not just money; it is real resources that are made available to others with higher immediate demands for consumption or investment. Saving and the investment it finances are the foundation for rising living standards. Those concerned at the possibility of inequality arising from more saving should address the issue directly by presenting arguments for more redistribution, not by hobbling saving.
While retirement income ‘adequacy’ is a sensible criterion for considering the Age Pension, ‘adequacy’ makes no sense as a policy guide to either compulsory or voluntary superannuation contributions towards self-funded retirement. Adequacy of self-funded retirement income is properly a matter for individuals’ preferences and saving choices.
The task for superannuation policy in the broader retirement income structure is not to achieve some centrally-approved ‘adequate’ self-funded retirement income, however prescribed. It is to roughly offset the government’s systemic disincentives to saving from welfare spending and income taxing. Once government has struck a reasonable, stable and sustainable tax structure from that perspective, citizens should be entitled to save what they like, at any stage of life.
The Super Guarantee Charge’s optimum future level is a matter for practical marginal analysis rather than ideology. Would raising it by a percentage point add more to benefits (higher savings balances at retirement for self-funded retirees) than to costs (e.g. reduced incomes over a working lifetime, more burden on young workers, or on poor workers who may not save enough to retire on more than the Age Pension)?
The coherence of the Age Pension and superannuation arrangements is less than ideal. Very high effective marginal tax rates on saving arise from the increased Age Pension assets test taper rate, with the result that many retirees are trapped in a retirement strategy built on a substantial part Age Pension. Save Our Super also identifies six problem areas where inconsistent indexation practices of superannuation and Age Pension parameters compound through time to reduce super savings and retirement benefits relative to average earnings. These problems reduce confidence in the stability of the system and should be fixed.
Our analysis points to policy choices that would give more Australians ‘skin in the game’ of patient saving and long term investing for a well performing Australian economy. Those policies would yield rising living standards for all, both those of working age and retirees. Such policies would give more personal choice over the lifetime profile of saving and retirement living standards; fewer cases where compulsory savings violate individual needs, and more engaged personal oversight of a more competitive and efficient superannuation industry.
Terrence O’Brien is an honours graduate in economics from the University of Queensland, and has a master of economics from the Australian National University. He worked from the early 1970s in many areas of the Treasury, including taxation policy, fiscal policy and international economic issues. His senior positions have also included several years in the Office of National Assessments, as resident economic representative of Australia at the Organisation for Economic Cooperation and Development, as Alternate Executive Director on the Boards of the World Bank Group, and as First Assistant Commissioner at the Productivity Commission.
Jack Hammond LLB (Hons), QCis Save Our Super’s founder. He was a Victorian barrister for more than three decades. He is now retired from the Victorian Bar. Prior to becoming a barrister, he was an Adviser to Prime Minister Malcolm Fraser, and an Associate to Justice Brennan, then of the Federal Court of Australia. Before that he served as a Councillor on the Malvern City Council (now Stonnington City Council) in Melbourne.
Jim Bonham (BSc (Sydney), PhD (Qld), Dip Corp Mgt, FRACI) is a retired scientist (physical chemistry). His career spanned 7 years as an academic followed by 25 years in the pulp and paper industry, where he managed scientific research and the development of new products and processes. He has been retired for 14 years has run an SMSF for 17 years.
Sean Corbett has over 25 years’ experience in the superannuation industry, with a particular specialisation in retirement income products. He has been employed as overall product manager at Connelly Temple (the second provider of allocated pensions in Australia) as well as product manager for annuities at both Colonial Life and Challenger Life. He has a commerce degree from the University of Queensland and an honours degree and a master’s degree in economics from Cambridge University.
It was all going so well for the industry super funds. The election of a Labor government and they would be home and hosed.
There would be no talk of cancelling or deferring the legislated increase in the superannuation contribution rate from 9.5 per cent to 12 per cent. Those pesky requests to improve the governance of the funds by having more independent trustees would fade away.
Life and total and permanent disability insurance would remain an effective compulsory part of superannuation; after all, the opt-out arrangement had been introduced by Bill Shorten when he was the responsible minister. There would be some pretence about dealing with multiple accounts but no real action.
As for removing the quasi-monopoly position of industry super funds nominated as default funds in the modern awards, all discussion would abruptly end. And why would the ambition end there? Fifteen per cent sounds better than 12 per cent when it comes to a guaranteed regular flow of money to the funds.
All those dreams are now a fading memory as industry super funds confront a government that is not entirely convinced of the rationale for compulsory super and is determined to fix problems in the system that disadvantage far too many workers and retirees.
We don’t hear so much these days about our superannuation system being the envy of the world.
These claims were always made by those with deep vested interests in the system; in particular, the vast industry that hangs off the management of funds and their administration.
Some of the core problems of our superannuation system have been highlighted by various reports of the Productivity Commission. They include:
• The unclear purpose of superannuation.
• The excessive costs attached to investment and administration.
• The problem of multiple accounts leading to balance erosion.
• Unwanted (and sometimes worthless) insurance.
• Unaccountable governance with too many trustees having inadequate skills.
• The continuation of poorly performing funds.
Don’t get me wrong; superannuation has been a great product for some people, most notably those with earnings in the top quarter of the distribution. However, this observation is not sufficient to justify a system of compulsory superannuation. Moreover, it is clear any savings on the age pension have to be weighed against the cost of the variety of superannuation tax concessions that apply.
It also needs to be noted here that, on average, the investment performance of the industry super funds has been very good and superior to most retail funds, although there is the qualification of the absence of like-with-like comparison. Self-managed superannuation funds also generally have produced very good returns.
The government has been attempting to deal with some of the problems in the system after the remedial efforts that were made in its previous term were largely thwarted. Two changes have been implemented to merge inactive low-balance accounts with active ones and to make insurance an opt-in product for young workers and for those with low-balance accounts. Both changes were opposed by the industry super funds.
Neither of these changes deals comprehensively with the problems of multiple accounts or forced insurance but they are a start. More surprising have been the recent boasts of Superannuation, Financial Services and Financial Technology Assistant Minister Jane Hume about recent merger activity of industry super funds. Examples include the linking of Hostplus with Club Super and First State Super with VicSuper. Certainly the issue of failed mergers was raised in the Hayne royal commission into banking.
However, the issue of fund consolidation is actually two separate issues. One relates to funds that are clearly of sub-optimal size, leading to a failure to capture economies of scale. The second is about poorly performing funds and the need to remove them from the pool of default funds.
The work of the Productivity Commission makes it clear that a member who lands in a poorly performing fund and stays there by dint of inertia stands to lose up to several hundreds of thousands of dollars in terms of the final balance. It’s not apparent, however, whether the recent spate of fund mergers will deal with the problem of poorly performing funds.
In the meantime, the mergers of some large industry super funds could potentially lead to an anti-competitive configuration of a small number of behemoths that will be able to dictate many aspects of corporate behaviour given their large shareholdings. It’s hard to see how the government would regard this as a desirable outcome.
The hottest topic in superannuation remains the fate of the legislated increase in the superannuation contribution rate. Unless the statute is changed, this rate will be ratcheted up by 0.5 percentage points every year from July 1, 2021. A rate of 12 per cent will apply from July 1, 2025.
Every annual increase will cost the government about $2bn a year in forgone revenue given the cost of the tax concessions. This is a significant sum in the context of the likely tight position of the budget in that period.
The superannuation industry is highly committed to these legislated increases going ahead. Some absurd pieces of research have been released to suggest that higher superannuation contribution rates do not involve any reduction to wage growth, something that is contradicted by the theory and actual practice, including on the part of the Fair Work Commission.
In the context of low wage growth, it will be a big call by the government to ask workers to forgo current pay rises in exchange for higher superannuation balances in several decades.
Moreover, for many workers, these higher superannuation balances will simply have the effect of knocking off their entitlement to the full age pension. For them, compulsory superannuation is effectively just a tax — lower current consumption now and the loss of the full age pension in the future. It’s not clear what the government’s real thinking on this important matter is. The Prime Minister and Treasury are maintaining their support for the legislated contribution increase but may be happy to include the Future Fund in the mix of investment options to improve the competitiveness of the industry.
Other members of the government favour a cancellation of the increase or smaller rises across a longer timeframe. There is also some support for making the increase voluntary; workers could choose between a current pay rise or a higher super contribution rate.
The bottom line is that superannuation remains a dog’s breakfast from a policy point of view. The government has made some small strides to improve some aspects of the system, but the high fees and charges imposed by the funds remain a significant issue.
Far from being the envy of the world, it has become apparent that our system of compulsory superannuation was a serious policy error enacted for short-term reasons to fend off a wages explosion. It may be too late to turn back but thought needs to be given to significantly reforming the system in ways that reflect the preferences of workers as well as generating a better deal for taxpayers.
For three decades compulsory superannuation has afforded Australians the best chance of simultaneously providing a decent retirement for us all while building a fighting fund of capital for our nation to invest in its own future.
Already the $2.8 trillion pool of savings is bigger than our gross domestic product, and bigger than the GDP of all but seven countries, just behind India but bigger than Italy and growing fast.
Much of that wouldn’t exist without compulsion, but remarkably it’s still not enough.
A just-released analysis from the Association of Superannuation Funds of Australia shows there continues to be a significant gap between the $640,000 it considers necessary for a comfortable retirement for couples and what people are actually accumulating.
That’s why it’s so critically important that the superannuation guarantee is lifted from 9.5 per cent to 12 per cent on the currently legislated timetable.
Analysis by actuarial firm Rice Warner shows that without that further lift in super, most working Australians will be forced to rely on the Age Pension for most of their retirement income. But a gradual rise to 12 per cent would provide most with adequate income after they finish working.
Industry Super Australia has shown that the substantial difference between 9.5 per cent and 12 per cent for today’s 30-year-old worker on about average full-time earnings would be $90,000 by retirement. In this environment it beggars belief that Liberals in the Morrison government want to freeze the superannuation guarantee at 9.5 per cent. When the additional 2.5 per cent could go into super or wages, they want it to go to neither but instead to further pad the extraordinarily high company profits that have fuelled a record stockmarket.
The superannuation guarantee has been frozen since 2014 and since then wages have barely moved either. When savings are inadequate and wages growth is sluggish, Liberals want to rob almost 13 million Australians of the super increases they need, deserve and were promised. The party of wage stagnation and rampant wage theft is now coming after workers’ super as well.
The same party opposed universal compulsory super; froze it multiple times; tried to abolish the low-income super contribution scheme; and even tried to weaken penalties for employers who don’t pay the right amount. Now some want to freeze super and, worse, others want to make it voluntary for some workers. They want to take the compulsory out of compulsory super.
Australians never heard a peep about these plans during the election. Coalition members and candidates wandered around the country crying crocodile tears for retirees at the same time as they harboured extreme plans to cut super and attack pensions. Then, after the election, when the Prime Minister told his partyroom to stop commenting publicly on these plans, the campaigning only intensified — a direct and deliberate challenge to his authority.
These Liberals’ latest attack is built on one heavily contested and disputed think tank report that claims an increase in super would lower living standards for some Australians. This conclusion is partly driven by the tougher pension assets test which penalises retirees for saving, and which the government introduced with the Greens to cut the pension for 370,000 pensioners and kick 88,000 pensioners off the pension altogether.
Australians will see through these faux concerns for low-income earners and weak wages growth, and the Coalition’s crocodile tears for retirees. They know these are just excuses to undermine and diminish a super system that the Liberals and Nationals never believed in from the beginning.
Super was conceived as a trade-off between wages and savings but most Australians will not be convinced that much or any of the 2.5 per cent of forgone super in today’s climate will find its way into the pockets of low-income earners as wages.
Nor will Australians be comforted by the weasel words of Scott Morrison and Josh Frydenberg who, in one week, refused to guarantee the legislated super increases, then committed to them, and now say they will be subject to a retirement incomes review. A review that could become a stalking horse for these proposals and worse, such as including the family home in the pension assets test.
On behalf of the government, the Treasurer needs to give a far more definitive statement in support of the legislated increases to the superannuation guarantee on the current timeframe. Anything less risks a repeat of the national energy guarantee debacle, when extremists on his own backbench forced him into a humiliating retreat and proved that in the Liberal Party the tail wags the Treasurer.
Australia’s retirement savings system is the envy of the world. It has its imperfections, but lifting the guarantee rate to 12 per cent by 2025 is not one of them. When the adequacy of retirement incomes is a pressing challenge, and when our ageing population puts pressure on pensions, Australians need more super, not less.
Jim Chalmers is the opposition Treasury spokesman.
Josh Frydenberg is facing growing backbench calls to ditch the superannuation guarantee increase to 12 per cent as the government prepares to launch a far-reaching review into the effectiveness of the $2.8 trillion savings pool.
Seven Liberal MPs in the four biggest states, including chairmen of two parliamentary committees, have criticised the increase as unfair and inefficient, urging the government to halt the legislated increase from 9.5 per cent, or wind it back for low-income workers.
The MPs include Andrew Hastie, chairman of the house intelligence and security committee; Jason Falinski, MP for Mackellar; Amanda Stoker, who succeeded George Brandis in the Senate; and the newly elected senator for Queensland, Gerard Rennick.
Their remarks follow a series of reports that have questioned the efficiency, fairness and effectiveness of the savings system established in 1992 by the Keating government.
Mr Hastie told The Australian said he would prefer more people retired owning their homes.
“I’d rather have people have more of their own money to pay down their existing debt such as their mortgage and ease the cost of living now,” he said.
The superannuation guarantee requires employers to pay 9.5 per cent of workers’ gross incomes into retirement saving accounts they can access at 60.
Senator Rennick said lifting the compulsory saving rate drained money from the regions, which needed it, to the funds management industry in Sydney and Melbourne, which didn’t need it.
“The money doesn’t go into greenfield investments; they just buy existing shares rather than contribute money to the economy by starting infrastructure projects,” he said.
“There’s enough going to super now, and the best people to decide how they earn their money are the people who earn it,” he said.
In 2013, the Abbott government delayed by two years Labor’s timetable to increase the rate, which is now on track to reach 12 per cent by July 2025 following an increase to 10 per cent in July 2021.
The Treasurer has welcomed the Productivity Commission’s recommendation for an inquiry into the impact of super on national savings and the Age Pension.
“What we need to fully understand with this (legislated) increase is what is happening to retirement incomes, what is happening to the nation’s balance sheet,” Mr Frydenberg said recently, reiterating that the government had “no plans” to stop or delay the increase.
The review, yet to be formally approved by cabinet, puts the Coalition on course for a historic clash with the union movement and financial services sectors, which influence and manage the nation’s superannuation savings pool.
The super sector fears the forthcoming inquiry could recommend against lifting the compulsory saving rate, as the Henry tax review did in 2010 — advice the Rudd government ignored.
The tax concessions cost the government more in revenue than offsetting reductions in Age Pension outlays, it found.
Tim Wilson, chairman of the House of Representatives economics committee, said workers should have the option to opt out.
“I struggle with the idea that we should compel business to increase super contributions for the distant tomorrow when people are facing wage and debt pressure today,” he said.
Super accounts incurred more than $30 billion in fees in 2017, according to the Productivity Commission’s review of the efficiency and competitiveness of super, completed last year, which found a third of accounts were unintended and “evidence of excessive and unwarranted fees”.
Senator James Paterson said he hoped the review would look at the “wisdom of forcing workers to lock away even more of their income”. “All the evidence shows it comes at the cost of their take-home pay today and might not even improve their standard of living when they retire,” he said.
Mr Falinski said the super system was opaque. “Like many Australians, and the Productivity Commission, I am unconvinced the system is serving its customers, much less its intended purpose,” he said. “So in those circumstances, how can you possibly support an increase?”
A Grattan Institute analysis earlier this month found workers faced a $30,000 hit to their lifetime income if the rate increase went ahead, from a combination of lower wages during their working life and reduced access to the Age Pension later in life.
Craig Kelly, the MP for Hughes since 2010, said the increase would not need to be compulsory if it were a good deal for workers.
“If you want to go to 12 per cent, everyone is free to do so,” he said, referring to $25,000 concessional contribution caps that let workers to make voluntary super contributions.
“And there’s a strong argument for workers on lower incomes to be able to access it now, especially if it’s not going to change their pension entitlement,” he said.
An estimated 7 per cent of employees, including a fifth of those under 30 on low incomes, would prefer to take their 9.5 per cent super contributions as wage and salary income, according to the Parliamentary Budget Office in a policy costing released last year.
Senator Stoker said wage rises “must take priority” over higher superannuation contributions.
“This is an urgent economic and political imperative,” she added.
Two Nobel prize-winning economists, Eugene Fama and Richard Thaler, were critical of superannuation late last month, singling out the high fees and inferior default arrangements compared with systems abroad.
A typical member’s balance would be $165,000 higher in retirement, or about seven years’ worth of Age Pension, were uninterested workers contributions put into better performing funds, the commission found.
Economist Nicholas Morris found Australian super funds were about four times more expensive than equivalent funds in the US and Europe.