Superannuation industry’s self-entitlement knows no bounds

When it comes to self-entitlement, you would be hard pressed beating Australia’s superannuation industry.

Industry superannuation funds were first to attack the Morrison Government’s decision to allow financially strapped Australians to access $20,000 of their own superannuation savings early, which continues to this day:

“If it’s seen as a regular opportunity to dip into [super] every time there’s a major national problem, that would really ruin the entire, great superannuation system that we have in Australia,” said Gerard Noonan, the chairman of industry fund Media Super.

Non industry funds like Future Super have also attacked the early release scheme:

Since applications opened last week, almost half a million Australians have been approved to withdraw a total of $3.8 billion from their superannuation savings, in lieu of other avenues for support.

The decision many people are being forced to make is this: choose between you, now, or you in the future. It’s not a real choice. When you need to put food on the table, there’s no getting past the fact that you can’t eat compound interest.

The risk of this policy is that we create a second class of citizens in Australia. A group of people who will retire with collectively billions of dollars less than their peers, because we didn’t protect their futures in this time of need… the early access super policy is treating the superannuation of those individuals suffering from COVID-19 as a national relief fund.

Let’s put some facts on the table.

First, the Australian Treasury forecasts that up to $27 billion would be withdrawn from superannuation balances. This is tiny when viewed against the $2.8 trillion of total superannuation savings as at December 2019 (latest available data):

This money belongs to members and they should be allowed to access it in this time of need.

Second, the claim that the early release scheme would “create a second class of citizens in Australia” that “will retire with collectively billions of dollars less than their peers” is laughable when one considers how superannuation tax concessions are distributed.

Superannuation concessions cost the Federal Budget an obscene $43 billion a year. They are also very poorly targeted, with high income earners receiving the overwhelming majority of concessions, as illustrated by the below chart from the Australian Treasury:

Clearly, the compulsory superannuation system is already worsening income inequality. Moreover, the poor targeting of concessions towards high income earners means that superannuation costs the Federal Budget far more than it saves in Aged Pension costs, as confirmed by the Henry Tax Review, the Grattan Institute and actuaries Rice Warner.

The motivations of the superannuation industry are obvious. They want to protect the compulsory system at a minimum and preferably succeed in having the superannuation guarantee lifted from the current 9.5% to 12%.

This would ensure an ever-growing base of funds under management to which superannuation funds could skim management fees from. It has absolutely nothing to do with efficiency or equity, both of which is damaged by the compulsory superannuation system.

This gross inefficiency is evidenced by the fact that the typical Australian spends twice as much each year on superannuation management fees than they do on electricity. However, because these fees are hidden from view, few people realise they are being robbed blind.

The superannuation industry wants to fatten this gravy train, which explains why it continually deflects attention away from the truth that superannuation is a net drain on taxpayers, robs workers of disposable income, and worsens inequality.

Unconventional Economist
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Comments

  1. “First, the Australian Treasury forecasts that up to $27 billion would be withdrawn from superannuation balances. This is tiny when viewed against the $2.8 billion of total superannuation savings as at December 2019 (latest available data):”

    $2.8 Trillion?

    Otherwise the SHTF last week.

  2. “This gross inefficiency is evidenced by the fact that the typical Australian spends twice as much each year on superannuation management fees than they do on electricity. However, because these fees are hidden from view, few people realise they are being robbed blind.”

    Shows us once again, the bigger the trough, the bigger the pigs.

  3. I have been a Member and avid reader of Macrobusiness for more years than I can remember. I appreciate your often contrarian views and analysis. Thanks for that.

    I have noticed that your commentary has become increasingly shrill over the years, and I guess that is how you generate clicks – a bit like the MSM that you constantly deride?

    Industry Funds and Superannuation

    Superannuation in general

    I accept whole-heartedly that the super system in Australia as it is currently structured is nothing short of a tax avoidance scheme for the wealthy and that the tax structure needs to be tilted in favour of the less well-off, as was the original Hawke-Keating intention.

    However, I would like to understand more clearly what your position on the principle of deferring income/consumption now to fund one’s retirement. Surely the usual system of using current tax to fund state pension is not prudent? You seem to be advocating an end to the system altogether rather than a serious look at the fairness. Is this so?

    Any modelling I have seen suggests that a middle income earner contributing at 9.5% will not have anything like enough super without the state pension. You seem to be opposed to any increase in contributions, so what do you suggest? More tax and some kind of state system with the money hidden away from our politicians?

    Industry Funds

    As some of the comments suggest, you article of 8th April, “Let industry superannuation funds burn”, is, shall we say, a little incendiary.

    So, let me ask you, if you were running a marathon and just as you started the judges decided to turn it into a 400 metre race, would you not be justified in thinking “Shit, I trained for a marathon, if I had known that they were going to do this, I would have done some sprint training”?

    The super industry has been told that super is for the long term. They know the rules, they have actuaries to determine life-expectancy, ages etc, they have some of the most sophisticated investment understanding in the market and they are all geared up for the marathon. They also have a fiduciary obligation to “Act in the best interests” of their members. To me that means, given the legal constraints, maximise the returns over the long term whilst ensuring a prudent amount of liquidity etc… Then the Government changes the rules and they and you blame them for not performing in a sprint!

    These funds went through the dot com and the GFC and they know from those experiences what the risks are, and, in the main, they will have managed their books very prudently.

    I put it to you that if the Government changes the rules in such a way as they have, that the Government should provide the liquidity. After all we both know that at some point things will revert to something more normal, so why “burn” those like me who are just weathering the storm?

    As for the accusations about HOST etc not being sufficiently diversified as to their membership, yes, they should have merged ages ago, but that doesn’t alter the fact that they thought they were running a marathon not a sprint. Maybe, just maybe it is politicking of the part of some union-hating Liberals, who forget that half of each fund is controlled by their mates from the employer federations?

    The Industry Funds work very hard to minimise fees to members and most of the fees that Members pay goes to fund managers, not the industry funds themselves. Even then all fees charged by industry funds are ploughed back into the fund, they are after all not-for-profit funds. They use the money to educate and to provide basic financial planning – an essential service for the average member.

    More Generally

    In my experience the Industry Funds (and the Government Funds) are, in the main, very passionate about looking after their members. As we know, people can get complacent, and the biggest risk for industry funds in my view is that they get captured by management. Certainly there is a degree of this creeping in, but I don’t think the solution is to “burn” the funds and by extension their Members, just keep them on a short leash and “burn” the odd individual that steps out of line – as they will.

    If you really want to explore some rorts in super, have a long hard look at the self-managed funds. Some are plain corrupt, but most just inept at managing their investments causing as much drain on the system as the tax breaks!!

    Conclusion

    I don’t see what your solution is to Australia’s super system, burning it down does not cut it I am afraid and to suggest it is to demean what is usually pretty good stuff from Macrobusiness. Apart from anything else, burning them will burn a lot of innocent people.

    Disclosure – I have most of my retirement super in two industry funds and I am a retired Baby Boomer

    • Tassie TomMEMBER

      @Jaduong – fair call. I pretty much agree with everything you’ve said, including unfortunately the first few paragraphs.

    • Can I ask you a question Jaduong – what options have your industry funds given you re post-retirement income?

    • “I don’t see what your solution is to Australia’s super system, burning it down does not cut it I am afraid and to suggest it is to demean what is usually pretty good stuff from Macrobusiness. “

      Burning it down is exactly the right policy. You yourself admitted that it is “nothing short of a tax avoidance scheme for the wealthy”. So why perpetuate a system that: 1) costs taxpayers more than it saves in pension costs; 2) increases inequality (due to being so warped in favour of the wealthy); 3) robs workers of disposable income; and 4) is grossly inefficient?

      It would be far more efficient and equitable if superannuation was abolished and the tax savings were directed into the Aged Pension. That is Australia’s genuine retirement pillar.

      By the way, we run a super fund. Thus, we are talking against our own book. I’d argue that shows integrity.

  4. An interesting article on tax concessions would be how people who don’t pay much tax at all in the first place could ever receive big tax concessions.
    The you could look at how much income tax is paid by which cohorts of income earners and how this compares to overall tax takes and OECD averages.
    It could make a cracking read and even an original article.

    • Why bother? I have explained this many many years ago. (Perhaps you weren’t around?)

      The problem is not that the poor pay too much tax. The problem is that the poor are poor.

      This superannuation tax stuff is a sideshow. The real issues are the other ones that this site writes about. Large misallocations of capital in the country. Destruction of manufacturing. Overpopulation and oversaturation with foreign labour.

      • drsmithyMEMBER

        The problem is not that the poor pay too much tax. The problem is that the poor are poor.

        +Gazillions.

        The only vaguely meaningful way to help out the poor via tax is by raising the tax-free threshold. But the relative benefit from doing this to higher income earners is insignificant, so it’s basically unheard of for any of the “OMGWTFBBQ TAX” crowd to suggest it, even when they’re pretending to give a sh!t about the poors.

  5. Tassie TomMEMBER

    Even though the superannuation industry are a bunch of big fat pigs with their snouts deep in the trough, I don’t agree with this policy of allowing people to withdraw $20K from their super early.

    Who’s going to withdraw the 20K? The poorer people with low balances.

    Who’s not going to withdraw the 20K? People like myself, who have good jobs that pay good money, and still have the ability to earn an income throughout this crisis (even if seriously disrupted).

    Even though my super has taken a hit I will not be “crystallising my losses”, in fact my regular contributions will buy more equities cheaper because of the forced sales by the big super funds. Their loss is my gain. Also, I will continue to enjoy the tax-subsidised compounding effects of the 20K I’ve left in there, plus my continuing contributions up until retirement. This will make me proportionally even richer in retirement compared to the poor who are withdrawing their 20K than I’d otherwise be.

    Also all this money being taken out of super will save the federal government a lot of money going forward as reduced tax concessions (although admittedly it would save the government even more money if low income earners got anywhere near the tax concessions that high income earners do). This future reduced government tax expenditure is tax that I will not have to pay in the future.

    Much better would be to introduce a universal basic income equal to the full-rate single age pension, and pay for it by shifting the burden of taxation from income to capital (broad based land tax/ broad based wealth tax).

    • If poorer people are taking it out as you suggest, then the government isn’t benefiting much in the way of reduced tax concessions.

      I think the move is a very good one. Those that need the money now have access to it. If they don’t need it, they won’t take it or they can even contribute it back at a later time. But for people with no job and few prospects in the short term, up to $20k right now is of immense value if it means you can keep up with your rent or mortgage payments.

    • Even though the superannuation industry are a bunch of big fat pigs with their snouts deep in the trough, I don’t agree with this policy of allowing people to withdraw $20K from their super early.

      Who’s going to withdraw the 20K? The poorer people with low balances.

      Who’s not going to withdraw the 20K? People like myself, who have good jobs that pay good money, and still have the ability to earn an income throughout this crisis (even if seriously disrupted).

      Yep, this is just your standard upward transfer of assets at firesale prices that comes with every disaster. This is exactly how the rich get richer and the poor get poorer.

      • So it is written:
        For unto every one that hath shall be given, and he shall have abundance; but from him that hath not, shall be taken away even that which he hath.
        Matty 25:29

      • “This is exactly how the rich get richer and the poor get poorer.”

        Actually, the compulsory superannuation system helps the rich get richer. Just look at the Treasury chart. Superannuation drives inequality.

        • Nah. Superannuation just holds up a mirror to inequality. It might amplify it a tiny bit.

          The guy with a $130,000 salary will always have much more superannuation than the guy with a $75,000 salary.

          What do you actually achieve by taxing the $130k guys a bit more on super? More dollars for the government to give to negative heaters and franking credit refunds recipients? Seriously.

          It certainly isn’t equality.

          • “The guy with a $130,000 salary will always have much more superannuation than the guy with a $75,000 salary.”

            Exactly. Superannuation isn’t a genuine retirement pillar because it is based on how much one earns and how long they work, not on need. It also gives the most tax benefits to those that need it least. It is reverse Robin Hood.

            Burn it to the ground and put the tax savings into the Aged Pension. Make it universal even.

          • “ based on how much one earns and how long they work, not on need. ”

            From each according to ability, to each based on need…. is that what you’re advocating?