“Rotten” superannuation system needs major overhaul

Adam Creighton has penned another thought provoking article questioning Australia’s compulsory superannuation system, which he claims has turned “rotten” and needs major overhaul:

I remember where I was a decade ago when I read the section of the Henry tax review that dealt with retirement income policy. It was a shock. “An increase in the superannuation guarantee would also 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)”…

Excuse me? I reread it. It’s true. Increasing the compulsory rate of superannuation from 9 per cent to 12 per cent doesn’t save taxpayers money.

Indeed, it’s worse than that. The vast, artificial, highly complex edifice of compulsory super costs taxpayers a fortune. That, in turn, requires other taxes to be higher than necessary…

“The $32bn a year in fees and the $36bn fiscal cost of superannuation should be taken into account when calculating the overall success of the system,” [Senator Andrew] Bragg notes.

Together, that’s more than the cost of the Age Pension, the federal government’s biggest single expense — about $50bn this financial year. Those fees are money that could be spent by workers on goods and services. And the forgone tax revenue from taxing super contributions and earnings at concessional rates is money that could slash income tax, boosting incentives to work and save. The entire revenue “cost” of the government’s legislated tax cuts over the four years from last July is $5.7bn. Imagine what you could do with $36bn every year…

Despite offering a superannuation fund via our partners at Nucleus Wealth, MB has consistently argued against Australia’s compulsory superannuation system (in turn against our own financial interests).

There are six critical flaws in this system.

First, superannuation is voluntary for those that are self-employed or homemakers, thus missing millions of people.

Second, superannuation can be spent many years before the official retirement age of 66 (rising to 67). Indeed, at age 60, superannuants can remove all their superannuation balance and spend it on consumption goods immediately before falling back on the Aged Pension.

Third, the bulk of superannuation concessions go to where they are not needed (i.e. high income earners), costing the federal budget far more than it saves in Aged Pension costs:

Fourth, superannuation balances at retirement depend on how long one works and how much they earn. This inevitably means that it misses lower income earners and those with broken work patterns.

Fifth, superannuation nest eggs are subject to market risks, meaning one sharp correction in the share market can wipe out a large chunk of retirement balances.

Finally, Australia’s superannuation system is highly inefficient. 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 Australia’s superannuation industry is also wasteful, dwarfing Australia’s entire welfare system and on par with our entire defence force and its bureaucracy.

By contrast, the Aged Pension suffers none of these flaws and should be considered Australia’s genuine retirement pillar.

The Aged Pension is universally available and subject to means testing, meaning it is targeted at those most in need. It is not based upon how much one works or earns prior to retirement. And the Aged Pension is not subject to market risk.

Given the obscene cost, inefficiency and poor targeting of superannuation concessions, optimal public policy dictates unwinding these concessions and using the money saved to boost the Aged Pension.

Unconventional Economist
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  1. kannigetMEMBER

    turned? It was always rotten, Making it compulsory without any checks on ticket clipping, over charging or value manipulation was always going to lead to a problem. Add to that the idea you had to invest it in a limited set of “investments” and through a small set of “funds” just constrained the value.
    Personally I think out super system was about taking money from wages and pumping up the stock market.

    How many fund managers use the money in super to steer the market for their own personal gain? e.g. put $50K into a stock, then a week later direct $30M of fund money towards that stock, selling your personal portfolio when you know you are about to stop injecting money from the fund….. Sure, the fund makes money on paper but they personally get really good returns outside the fund….

    Renee Rivkin did similar things in the 90’s… tell his loyal followers that a stock was a good buy, wait for them all to pile in then sell his interests… if he wanted to buy a stock cheap he would tell them all the stock was a bad buy, wait for it to drop and then by in.

    The only difference is how the market gets manipulated, and I would argue a fund with billions buying into a stock has more effect than Renee’s little stock tip newsletter did….

    • Fees are used well. Half of the he 36 Billion supports real estate prices. !
      Fundies invest in high end property – their families insist – they know better than to buy shares) – and who else is new wealth – no one else can afford it except the inherited high wealth crowd.

  2. ‘Financialized’ equals ‘Rentier’ society. At least fix it so the fees are somewhere below the international average! It is compulsory after all. Had a lecturer in the tax area who said keep as much money out as possible, smart dude.

  3. Jumping jack flash

    Agree. Unless you make significant additional contributions or hold debt-inflated assets at retirement, super is simply not going to cut it for the entire duration of retirement, and a part pension, or even a full pension will be essential.

    Since only the comparatively well-off can be eligible for the correct amounts of debt to afford the houses, and be able to make the additional super contributions that are necessary to make super adequate, then of course it will be only they who can experience the luxurious retirements that are marketed to everyone in the name of super.

    And since we all know that government pensions are already grossly inadequate unless you own your own home at retirement (which is almost impossible without achieving eligibility for taking on the essential and crippling amounts of debt to obtain one – something that becomes harder and harder to achieve), when considering the rising costs of housing and energy due to the “quest for debt” and the resulting gouging, then welcome to the gradual but inevitable slide into the catfood years.

  4. The time for an Aussie version of the Canadian Tax Free Savings Account (TFSA) has arrived. Get behind it.

    • kannigetMEMBER

      So, I can invest my savings into a bank, get Sweet FA interest, charges out the Wazoo and not pay any tax on the money almost earned….

      • No. You can contribute above your employer contribution to the annual max and invest that as you see fit with all gains tax free AND pull it back out as you see fit for life events… Pregnancy, going back to Uni/tafe, house deposit etc. If you have it in cash/term deposit you’re missing the point.

        Simplify the bs. If super is to be flexible then better to look at this than raising the statutory contributions.

  5. Great article. Totally agree but I do not pretend to have experience in the area. Simple fact is Super costs far more to the tax payers than an old age pension would. This therefore means super is a device for upper class welfare combined with all the other gains a wealthier person gets with super over an averaged wage person. Also I would assume fund managers in super are upper class who also benefit greatly both ways. $36 billion in fees a year is a handout from the taxpayer to the wealthy.

  6. Executive summary…Keating’s wunnerful Super legacy is a load of old wank aimed at further enriching the rich while vigorously Rogering everybody else in the country without benefit of lube.

    You can replace “Keating’s wunnerful Super legacy” with “immigration policy”, “sports funding”, “water policy”, “infrastructure development”, “tertiary education” or any other matter of public concern in this country and that sentence will still be correct.

    • Jumping jack flash

      I disagree, super was and is a great idea, but in the age of debt it will always be inadequate unless one can plough additional resources into it, and/or hold debt-inflated assets to supplement it.

      And since additional resources and supplementary assets are generally in the domain of the wealthy, wealthy people get the most out of their super, and are in a position to get the most out of the advantages that come with it.

      Its a little bit like stone soup, where base super contributions at 9.5% out of an average wage is the stone. Not really worth anything at the end of the day. And even if you put it up to 12%, its just going to be a little bit larger, maybe, but certainly still a stone.

      I would also argue that the 36billion in fees is a direct result of living in the age of debt and the fact that everyone, including fund managers, needs debt, and the only way to get the debt they need is to increase their fees.

  7. All superannuation is is a transfer of wealth from workers to fund managers to ensure politicians pockets are lined for election day.

    It has terrible utility.

  8. superannuation can be spent many years before the official retirement age of 66 (rising to 67). Indeed, at age 60, superannuants can remove all their superannuation balance and spend it on consumption goods immediately before falling back on the Aged Pension.

    This is a key factor in why the super system has basically become an intergenerational fraud.  Anyone younger than the mid 50s has to ask themselves….

    1.    What is their likely ‘income resulting from the super they contribute to?

    2.    Is that likely to see them with a remotely ‘comfortable’ retirement?

    3.    What are the risks to that forecast earning being achieved (prolonged economic downturn? Prices of essential needs rising such that the income accrued doesn’t sustain access?)

    4.    What is the opportunity cost of outlaying that money now in terms of addressing other competing needs?

    A very large number of super contributors would readily identify that the real beneficiaries of the super system are the currently aged and near retirement.  They would rightly ask themselves if they are likely to get in retirement that which they can see being accessed by the present retirees.

    As Leith rightly notes the capacity to spend the entire box and dice accrued in super at age 60 (or whenever) as a lump sum and fall back on the public pension obviates the very point of the introduction of the super system to begin with – to enable people to fund themselves in retirement, and to get them off a public purse which wouldn’t be able to sustain them.

    The entire system was further undermined by the advent of Self Managed Super Funds which enabled the accumulation of assets and the contractual relationship with those assets by the beneficiary of the super scheme as a both the individual ultimately benefitting from the scheme and same individual as any one of a range of fictitious accounting entities.  From there the step towards making the system a vehicle for leeching from the taxpayer (in a small number of circumstances, but invariably the asset and income rich end of town) rather than relieving the burden on taxpayers undermines the whole point of it even further.

    So help me if I hear another financial advisor offer to set me up with an SMSF with assets suitable stashed/concealed/made speciously not really mine, with a view to still access the public pension (or maximise your entitlements!) I am going to gob on someone in public.

    For starters identifying the actual purpose of super would be a step forward. Since the 1990s nobody has made clear if it was for ‘wealth creation’ or was to support a basic quality of life in retirement

    • Jumping jack flash

      “For starters identifying the actual purpose of super would be a step forward. Since the 1990s nobody has made clear if it was for ‘wealth creation’ or was to support a basic quality of life in retirement”

      Agree completely.

      If it was to self-fund retirement then it fails completely.

      I may be able to afford a winnebago with the paltry amount in mine at retirement, or it is much more likely it will all be seized by the bank to repay whatever load of debt I still have left owing, and I hope it will be enough to cover it.

    • I like to think of it in terms of “years worked versus current salary”. Me: 20 years contributions. $350k balance. Recent salary $150k. So it’s 2 and a bit years worth. Where’s that going to be at in another 10 years or 20?

      • Jumping jack flash

        Exactly my point. $150K is about double an average wage, too.

        I think of mine in terms of average wage, because I reason that surely as a pensioner an average wage would do each year.
        I don’t even get 2 years out of my “nest egg” at my current salary!

        with 350K you’ll get about 4, maybe 5 years drawing an average wage, not considering any additional growth over the period, which may or may not give you maybe an extra year or two, so let’s be generous and say a total of 8 years of average income out of at least a 20-year retirement! Not too shabby, but not too good either. You’ll be eating catfood with the rest of them at around 80 years old, or sooner.

        It will fall short every time unless you hold debt-inflated assets to liquidate in exchange for an enormous pile of someone else’s debt, and/or make significant additional contributions.

        For this very reason, in my opinion, super should be able to be used to acquire the debt-inflated assets du jour, as it is far more important to have those than a grossly inadequate pile of money heading into retirement.

    • As I understand it the purpose was for Keating to allow ‘wage rises’ without people actually being able to spend more, combatting the inflation the wage rises would other wise cause. The retirement income is just a side effect.