Australia’s superannuation “dogs breakfast”

The Australian’s Judith Sloan is the latest commentator to lambast Australia’s compulsory superannuation system. Sloan notes that various reports from the Productivity Commission have outlined the key problems with the system, including its unclear purpose, excessive fees, and unaccountable governance. However, the biggest issue remains the legislated increase in the contribution rate to 12% by mid-2025, which will cost taxpayers many billions, rob workers of disposable income, and accentuate the problems already present:

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…

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…

The bottom line is that superannuation remains a dog’s breakfast from a policy point of view…

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.

Nobody can deny that Australia’s superannuation industry is a bloated parasite.

The Murray Financial System Inquiry found that despite the huge explosion of superannuation balances since the superannuation guarantee (compulsory super) was introduced in 1993, average fees and expenses have barely changed and are way above the OECD average:

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Whereas the Grattan Institute found that the superannuation system has actually become less efficient as it has grown:

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A larger system of larger funds should have incurred lower costs and charge lower fees, because big funds have lower costs…

Australian funds charge fees that are three times the median OECD rate, on average… Many countries have superannuation pools much smaller than Australia’s, yet their funds charge customers much less.

Meanwhile, the Henry Tax Review found that compulsory superannuation concessions costs taxpayers more than it saves in Aged Pension costs:

“An increase in the superannuation guarantee would … have a net cost to government revenue even over the long term (that is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs).”

As did the Grattan Institute:

…both the short and long term, superannuation tax breaks cost the budget more than they save in pension payments:

Given these major short comings, there is zero justification in raising the superannuation guarantee from 9.5% to 12%. All this would do is rob workers of much-needed disposable income, worsen the long-term sustainability of the federal budget, and worsen inequality.

About the only winners would be Australia’s bloated superannuation industry, which would get to ‘clip the ticket’ on more funds under management and earn fatter fees.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. No surprise to see Sloan slamming super (that’s a lot of alliteration). She is a right wing ideologue, whose side has never been committed to superannuation. As for its purpose not being clear, well … isn’t it obvious the system is a means for workers to save money for their retirement ? Agreed – get rid of the rorting by higher income brackets, get residential property out of it, and put pressure on your super fund to reduce fees. If they don’t reduce their fees, move your funds to another provider with lower fees. Simples ! That’s how competition works, matey. And how exactly is there a lack of transparency in this sector ?

    I really don’t understand what you are trying to achieve with your constant attacks on super. What do you seriously propose as an alternative to ensure workers aren’t hitting retirement with no savings ? There’s a carrot and stick approach for a reason.

    • “What do you seriously propose as an alternative to ensure workers aren’t hitting retirement with no savings?”

      The point they’re trying to stress is: they’re not compulsory anywhere else in the world and people outside of straya seem to be doing just fine – and enjoying the benefits of real competition for savings. The compounding impact of paying 3% fees annually vs 1% is colossal over a period of 40yrs.

    • Grattan is unhappy with super ergo super must be bad.
      Grattan wants more tax.
      At the moment high income earners get income tax breaks and concessions, nay handouts, of 51cents in the dollar according to the latest Grattan report.

    • Nope! all those additional worker “savings” can be ploughed right back into residential property….. where they belong!

      Great policy for jobs and growth overall

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