Use COVID-19 to drive superannuation reform

MacroBusiness has gone to great lengths over many years to explain why Australia’s compulsory superannuation system is not a genuine retirement pillar and is ripe for reform. This comes despite us offering a superannuation fund via our partners at Nucleus Wealth. Thus, we are effectively talking against our own book.

We see five fundamental problems with Australia’s compulsory superannuation system.

First, the overwhelming majority of superannuation concessions go to those that need them least (high income earners) and misses those that need them the most (lower income earners).

This is highlighted most clearly by the below Australian Treasury chart, which shows that the top 1% of income earners will receive roughly 14-times the superannuation tax concessions over their working lives ($700,000) than the bottom 10% of income earners ($50,000):

Second, because superannuation concessions flow mostly to those that do not need them and were unlikely to ever utilise the Aged Pension anyway, the cost of superannuation concessions to the federal budget far outweighs their savings from lower Aged Pension expenditure.

Third, Australia’s superannuation system is highly inefficient. Australia’s management fees are among the highest in the world with Australian households spending twice as much each year on superannuation fees as they do on electricity.

The number of people employed in the superannuation industry is also astronomical, dwarfing Australia’s entire welfare system and on par with our entire defence force and its bureaucracy.

Fourth, superannuation is voluntary for the self-employed. Therefore, it misses millions of Australian workers.

Finally, superannuation can be withdrawn in full and spent from 60 years of age – way before the official retirement age of 66 (rising to 67). This means that many will quickly exhaust their superannuation funds before retirement and then fall back on the Aged Pension.

In contrast to superannuation, the Aged Pension system suffers from none of the above pitfalls and is Australia’s true retirement pillar.

The Aged Pension is available universally as soon as one reaches retirement age, provided they are not already wealthy.

Because it is means tested, the Aged pension is targeted towards those that need it most – low income earners – rather than being used for tax minimisation by the wealthy.

The Aged Pension is not based on how long one works or how much they earned during their working lives.

And finally, the Aged Pension is far more efficient, with Australia’s entire welfare system costing only $6 billion per year and employing only 33,000 people, while providing $45 billion in pension benefits.

Given the above, the first best policy response would be to disband the compulsory superannuation system and redeploy the budget savings into the Aged Pension system.

However, given how embedded the superannuation system is, this will never happen. Therefore, policy makers should instead focus on limiting the damage by making the compulsory superannuation system more efficient and equitable.

Two low-hanging fruit options immediately come to mind:

  1. Abandon the legislated increase in the superannuation guarantee to 12%, since this will merely accentuate the above problems.
  2. Change the superannuation concession structure from a 15% flat tax on superannuation contributions/earnings to a flat 15% concession (i.e. marginal tax rate less 15%). This will give more benefits to lower income earners and less to higher income earners.

While the above measures won’t fix the myriad of underlying problems in superannuation, they are simple and will at least stop the system from getting worse.

Policy makers should use the COVID-19 pandemic to drive superannuation reform.

Unconventional Economist
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  1. 2 is still official Greens policy I think.

    Administratively it is quite difficult though.

    • Yep, but they’d still rather invite hordes of outsiders in to enjoy the bountiful (and ‘endless’) fruits of the welfare system. After all, it’s only ‘fair’.

  2. The purpose of superannuation was to coerce unions and labour

    Hitching their wagons to the capital train

    It was never about providing in retirement, or balancing government budgets

    The best policy would be to abolish it altogether, and introduce a universal aged pension

    • Jumping jack flash

      “It was never about providing in retirement, or balancing government budgets”

      I disagree. I think when it was created it was exactly with this in mind.
      There are a couple of things that happened along the way:
      Life expectancy increased a lot.
      Inflation increased a lot.
      Incomes stagnated, for the foreseeable future.

      You can calculate the amount of super that is required for the full duration of retirement (around 30 years or so) using simple multiplication.

      A bit harder is the calculation whether 9.5% of an average wage over 40 odd years will get you there, super investment style, compound interest, stagnant wages, the effects of debt and stock market crashes makes this a bit tricky, but it wouldn’t be an impossible task to extrapolate the last 10 years.

      It isn’t a case that super is no good at all, it is a case that if you’re relying on super *alone* to protect you from eating catfood after age 80/85 then you’ll be in for a rude shock.

      In my opinion they should let everyone access it to withdraw a house deposit. You can sell a couple of houses during retirement to give you the money you need to exist, without the need for catfood consumption.
      With no houses to sell, you’re consigned to eating catfood under a blanket to keep warm, or worse, you could be housed in one of those coronavirus-riddled nursing home death traps eating Z-grade recycled food.

      • Wouldn’t this just drive up house prices and enable the ASX to correct, via super selldowns (which is mostly in the aussie sharemarket)?

  3. There is a simpler and more sensible option.

    Allow everyone who wants to withdraw their funds.

    Dismantle the forcing & make it a voluntary scheme.

    “People’s income & wealth being spent on assets & needs today far exceeds in benefit & return any forced taxation of their income to be flensed and lost by this parasite SCG mandate.”

    The Australian Super mandate is basically a pension tax so future governments can deny their social obligation.

    Unlike a sovereign fund or National interest market manager (aka the Singapore CPF etc) It has no strategic market power or capacity. It is a bunch of ex life companies now acquired by the banks and union controlled industry funds flensing the average Australian, along with a cohort of DYI speculating in residential housing (a debt timebomb that will explode into negative equity) and the older / rich rorting it in tax concessions & trustee trickery.

    It’s failed.

    It has failed in every and any test of fairness, equity, performance or wealth accumulation.

    What were some of the supposed drivers?

    ▫️1. An aging population that Australia could support.

    ▫️2. Future taxation rates being lower leading to shortfall in funding aged care.

    ▫️3. To provide ‘investment’ into Australia industry and business venture.

    ▫️4. To allow self sufficiency and independence in funding retirement savings.

    The reality.
    1. Australia does not have an aging population with an impending huge ratio of elderly non contributors for every working age person paying tax (inter Generational report lies). All lies.

    Australia is in the medium if not lower range of OECD countries in its ratio of aged to overall population pyramid.
    Australia is also the medium and projected lower ranges in the outlays on aged pensions & care.
    Australia also has a high workforce participation rate and much higher levels of direct and indirect taxation compared to the rest of the OECD.

    It’s the migrants that kill us.
    Contrary to what the ABC or The Conversation propaganda – the migrant PR are aged, unhealthy, have low (legal) workforce participation, very low declared incomes, low taxation & high health care Medicare, Centrelink and Pension / Aged care burden.

    If we did not have 1.9 million third world migrant PR grants, then Australians could all retire at 50 years old on 80% of Average household income and that would have be well with OECD averages on national outlays & per GDP per Capita.

    We would also have wages that in today’s terms would be 6.3% higher (Treasury) – but mass immigration of 1.9 million unskilled low productivity & highly welfare dependent third world PR and then another 2.5 million third world TR labor blackmarket has destroyed that.
    That has cost Australian citizens tens if not hundreds of of billions in lost earnings & wealth accumulation in the last decade.

    2. Taxes have not reduced. Indirect taxes and additional fixed living costs (housing, rates of rent, communication, food, fuel, gas, power, water, transport) have all gone thru the roof.

    Again the third world migration influx and the fuel power food electricity gas cartels are the key driver in exploding living costs for the elderly.

    3. Provide a pool of capital for investment into Australian industry….
    Has there been a more spectacular failure?
    Australian industry has literally disappeared, either acquired by other foreign countries (using their sovereign funds btw) or foreign interests or has been eviscerated by the high $aud and lack of competitive capability.

    4. To provide self sufficiency & independence in retirement..

    Facts. The average 59 year Australian is now loaded up to the eyeballs in debt.

    For most they will have to use their super to pay that debt / or their children’s debt.

    The Australian in DYI super now has more debt than equity, many having leveraged that into speculative investor residential housing – and that is before it’s about to crater -30% into full blown negative equity.

    The means & the medians of it all.

    If an Australian was in fact debt free in retirement and tried to live off their super.
    An Australian male could only survive for 3.9 years on the median super balance.
    An Australian female could only survive 2.2 years.

    Years at average elderly living cost per year at retirement age..

    Male mean balance 7.2 years
    => Male median balance 3.9 years

    Female mean balance 5.2 years
    => Female median balance 2.2 years

    It’s a joke.

    What’s needed.

    🔹No pension or Centrelink for migrants until they are citizens. (They are foreign nationals, on foreign passports and non Australian).
    Why should Australians be funded welfare, Medicare & aged pensions for foreign nationals?

    🔹No payment of any Pension to a dual citizen whilst overseas, has to be an Australian citizen only.

    🔹No payment of a pension or any other benefit) unless that person lives in Australia at least 18 months of a 2 year period to shut down the Chinese, Indian and Middle Eastern theft.

    That’s $38 billion a year in current outlays saved. (Parliamentary Report is available on this) & hundreds of billions in future outlays.

    🔹All superannuation savings are voluntary with tax benefit concession.

    🔹No leverage into debt investment tax benefits.

    🔹Remove the parasitic fees being paid into corporate and retail life.

    🔹Create a proper sovereign fund funded from resource & other taxes / duties paid as part of the future government funding of pension liabilities.

    Then – Lower the retirement age to 60 for Australia citizens.

    At 80% of the average wage for a household and 60% for an individual.

    Stats / facts

    Around 16.7 million Australians currently have a super account.
    Benefit structure (funds with more than four members)
    Source: APRA Annual Statistics, June 2019.
    Persons receiving regular superannuation income 2015-16
    Source: ABS 6523.0
    Source: APRA December quarter 2019.
    Balances by age & gender.
    Age & Gender Mean $ Median $
    Males 15+ $168,500 $65,000
    Females 15+ $121,300 $45,000
    Males 25-34 $100,300 $31,600
    Females 25-34 $69,300 $20,000
    Males 55-64 $332,700 $183,000
    Females 55-64 $245,100 $118,600

    Cost of living per annum single $47,000 (ABS)

    Average number of years super can provide income. (Excludes debt repayment – an high ratio of Australians over 60 are in net mortgage of other debt).

    Male mean 7.2 years
    Male median 3.9 years

    Female mean 5.2 years
    Female median 2.2 years

    • “For most they will have to use their super to pay that debt / or their children’s debt.”
      There you have it. That’s the reason why nothing is going to change in the foreseeable future. Way too much debt in the system.

      • Jumping jack flash


        None of our leaders’ grand plans to refloat the economy will ever work due to the enormous amount of debt weighing us down. It is an unfathomable amount of debt. Nobody was ever meant to take on as much debt as what is now essential for people to take on. Nobody gives it a second thought though.

        Taking on these ludicrous amounts of debt must be done, there is no other way.

  4. That would be the same Treasury that just modelled the JobKeeper allowance and was out by nearly 100%.
    Yet we are supposed to slavishly accept the graph above with no knowledge of its underlying assumptions.

  5. On a slightly related matter, I note that the interest rate on the Pension Loans Scheme is still 4.5% (which was the rate from 1 January). With rates being slashed since then, surely this should be reduced to something in the low 3s. It would be an easy (and in fact profitable) stimulus measure and one that they can throw back at the retiree rent seekers who now seem to want a universal pension because dividends are being slashed.