3 December 2017
Judith Sloan – Contributing Economics Editor
This week in Sydney, the Association of Superannuation Funds of Australia held its national conference. There were nearly 2000 attendees, which tells you a lot.
There is no doubt that superannuation is one of the biggest gravy trains in Australia. With more than $2 trillion under management, the industry supports an army of fund managers, administrators, trustees, lawyers, accountants and executives.
It’s a truly beautiful industry, with guaranteed cashflows coming in like the tide courtesy of the superannuation guarantee charge, now set at 9.5 per cent of earnings. The industry is wont to slap itself on the back. Australia’s superannuation arrangement is among the best in the world, if not the best. Mind you, this assessment tends to be from the point of view of the providers rather than the beneficiaries. But what’s not to love about a privatised industry based on obligatory saving on the part of the vast majority of workers?
There is a lot of ex post rationalisation that goes on about superannuation in Australia, and there was plenty going on at the conference. The reality is that compulsory superannuation began in this country as a result of a high-level industrial relations stitch-up that had nothing to do with rational retirement incomes policy.
In exchange for forgoing a pay rise, workers were awarded 3 per cent of their pay in the form of superannuation. It had always stuck in the craw of then treasurer Paul Keating that only better-paid workers and public servants received the benefit of superannuation while lower-paid blue-collar workers received nothing. In the context of what was a relatively derisory Age Pension, it was not difficult to appreciate his concern. (The Age Pension is now much more generous.)
There was also some economic nonsense put out at the time that superannuation was a means of solving Australia’s saving problem. The Labor government even commissioned a report on the issue by economist Vince FitzGerald. It turned out that in the context of a floating exchange rate, the argument that there was a need for government policy to boost saving (to finance the current account deficit) evaporated. We don’t hear any more about the role of superannuation in promoting saving.
And let’s not forget that while superannuation may promote saving in the form of superannuation, it also can encourage offsetting incentives for people to take out bigger house mortgages than would otherwise be the case, for instance. The argument is that because people know they will receive a hefty lump sum from superannuation on retirement, they can use this, or part of it, to pay down the mortgage. There is clear evidence that more and more people have outstanding mortgages into their 60s. Of course, this
partly undermines the principal purpose of superannuation, which is to fund retirement incomes.
The development of the superannuation industry in this country has been essentially chaotic and ad hoc. Few details were worked out initially, particularly in relation to who would manage the funds, how they would be managed and taxation arrangements.
The union movement clearly saw an alternative business model and pushed the industry super funds to have pole position. This was achieved by virtue of the default fund status given to them in industry awards and enterprise agreements. This protected position continues although self-managed superannuation has eroded their dominance.
The changes that have occurred through the years are almost impossible to track. We have moved from the 3 per cent contribution rate to 9.5 per cent. The industry — as opposed to the members — is desperate to see that figure lifted to 12 per cent, a move that was delayed by Joe Hockey as treasurer. The full 12 per cent is not slated to become compulsory until July 2025.
Aghast at this prospect, ASFA chief executive Martin Fahy told the conference that “all the vocal criticisms of financial services, and within that superannuation, means that superannuation is vulnerable to short-term populist thinking, where somebody would try to appeal to people with an offer to have a sudden increase in take-home pay at the cost of long-term retirement funding. We need to be conscious of that because the 9.5 per cent super guarantee levy won’t get us there. We need to get to 12 per cent.”
This raises the question about where we are going when it comes to superannuation. It was only after more than two decades of compulsory superannuation that the government decided to legislate the purpose of superannuation “to provide income in retirement to substitute or supplement the Age Pension”.
Whether this objective really gets us anyway is unclear because a dollar supplement to the Age Pension would meet the test. The government is forcing people to give up 9.5 per cent of their current pay (and the industry wants this to rise — good luck with that in the context of low wage growth) to provide a potentially meagre supplement to the Age Pension. It is understandable why people may be querying the whole basis of superannuation.
The industry is also frightened at the prospect of being dragged into the banking royal commission. But superannuation is, after all, providing financial services, banks are involved in superannuation and there is even talk of superannuation funds providing debt finance for companies and home buyers. It would be an artificial distinction to exclude the broader superannuation funds from the inquiry.
One useful line of inquiry would be to examine the excessive fees and charges that the superannuation funds impose on members, thereby limiting their final payouts and incomes in retirement. By international standards, these fees and charges remain extremely high even though they have come down slightly with the rise in funds under management.
And let’s not forget superannuation’s role in insurance where members are forced to take out death and disability cover unless they undertake the laborious process of opting out. This arrangement was a clear favour given to the industry by the previous Labor government — thanks, Bill Shorten — but creates a clear distribution of benefits to older, better-paid workers from young, low-paid workers who really don’t need insurance in most cases.
Then there are the complex arrangements in relation to taxation and contribution limits that this government has made much worse. By lowering the concessional contribution cap to $25,000 a year, the proportion of the population who will be totally self-reliant in retirement in the future will probably drop even further from its modest projected figure of 20 per cent.
In combination with other restrictions, superannuation has clearly lost its allure as an investment vehicle for many individuals. And the clear message is that the government is not to be trusted in this area. After all, Financial Services Minister Kelly O’Dwyer, speaking at a previous ASFA conference, described superannuation tax concessions as a gift from the government.
There was a strong message in this statement and it raised fears that future governments would seek to impose higher taxes on present and future superannuation members.
The bottom line is that superannuation in Australia has grown like Topsy but with little rhyme or reason. It’s the best game in town for those who are employed directly or indirectly in the industry, and it’s a great arrangement for trade unions, which continue to haemorrhage paid-up members. Whether it’s a boon to present and retired superannuants is an open question.
(emphasis by Save Our Super)