The inconvenient truth superannuation managers hide

While the superannuation industry complains incessantly about the $30-plus billion being stripped out of the system due to the Morrison Government’s early release policy, it is conspicuously silent about the $36 billion in fees stripped from superannuation accounts.

On this front, Harry Chemay – co-founder of Clover.com.au – has penned an excellent article at Michaelwest.com.au dissecting Australia’s wasteful, inefficient and inequitable compulsory superannuation system:

If superannuation didn’t exist, and you went to the Treasurer of the day proposing a retirement system that would require 10 times the operating cost of running the Australian Taxation Office but wouldn’t deliver a net benefit to the Commonwealth budget for at least 50 years, you’d get short shrift.

If you further proposed that same retirement system primarily be a vehicle for the highly paid to supercharge their accumulation of wealth through tax concessions worth some $36 billion each year, you’d probably be expected to be shown the door.

But this is the system we have ended up with today, nearly 30 years on from Paul Keating’s defining speech outlining his vision for Australia’s retirement system.

The annual cost of administering the super system, and investing for the nation’s 16 million account holders, is in the order of $32 billion.

The ATO runs on the smell of an oily rag by comparison – with an annual budget of about $3.4 billion, a tenth of the super industry. On that budget the Tax Office oversees the tax affairs of 12 million individuals, 4.2 million small businesses, 865,000 employers, 36,000 large multinational entities, 35,000 registered tax agents, 201,000 not-for-profits and all self-managed superannuation funds (SMSFs).

Either the ATO is comically underfunded, or the super industry is obesely inefficient. Very possibly both…

The system feeds on $120 billion in annual contributions, 80% via employer payments…

The direct cost to members is estimated at about $32 billion a year – 1.1% of account balances, plus annual insurance premiums of some $9 billion.

These costs appear remarkably resistant to the benefits of scale, as the chart from the 2017/18 Productivity Commission review into super indicates…

Superannuation has been an absolute boon for the highly paid to turbocharge their accumulation of wealth… [They] take advantage of a raft of super tax concessions – the cost of which exceeds $36 billion annually…

As a recent study by the Tax and Transfer Policy Institute reveals, much of the tax benefit of super flows to higher income and older, wealthier Australians…

The largest tax advantage for higher income earners building wealth is achieved through concessional super contributions, as the below chart depicts…

It should, by now, be abundantly clear to policymakers that this current level of taxpayer largesse is simply unsustainable.

I will add that despite the superannuation industry’s gargantuan size ($2.7 trillion), Australia’s average management fees are well above the OECD average, as illustrated by the Murray Financial System Inquiry:

ScreenHunter_3313 Jul. 15 13.06

Thus, what has been created is a giant inefficient suck hole.

From the outset MB has argued against lifting the superannuation guarantee (SG) to 12% for the following primary reasons:

  • It would lower workers’ take-home pay, hitting lower-income earners especially hard.
  • It would increase inequality, given the lion’s share of concessions flow to high income earners.
  • It would worsen the long-term sustainability of the Budget, since the cost of superannuation concessions outweighs the benefits from lower pension outlays.

In reality, Australia’s superannuation system works more as a tax avoidance scheme for the rich than a genuine retirement pillar.

The only real beneficiaries from lifting the SG to 12% are superannuation funds, which would get to earn fatter management fees at the expense of both Australian workers and taxpayers.

Unconventional Economist
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Comments

  1. “While the superannuation industry complains incessantly about the $30-plus ***million*** being stripped out of the system …”
    “Billion” perhaps?

  2. Recessionburg was on the wireless this morning trying hard not to admit that they will look to postpone the increases. The interviewer was too dumb to realise that it needs a vote of Parliament to achieve and so didn’t press on how those negotiations were going.

  3. I took great pride in giving AMP the middle finger last week and kicked off the roll over process via ATO.
    The only reason I had that account was due to starting a new job and the employer plan had automatic insurance coverage. AMP then kicked me out of that plan after realising employer contributions had stopped. So a big F-U to them.

    When is Nucleus going to have insurance available?

  4. While I wholeheartedly agree that super has wandered from its original premise in to being largely a vehicle for wealth accumulation,lots of the comparisons in the article aren’t really valid. The $36bn in costs relates to managing a pool of $2.7tn in savings. If you got rid of super you’d still have lots of those savings and lots of those costs. The comparisons with the ATO are largely meaningless, it does not even remotely carry out the same function.

    As to costs, what does MB charge for its super fund? Isn’t it 1%, the same as the industry average? If the industry is so bloated, surely you guys can do it way cheaper. Drop your fees to 50bps and you’ll have some credibility on this point.

  5. One thing not often mentioned is that one of the benefits for compulsory super for government is that it hides the effective tax rates if the alternative is universal aged pension. That is, for the $9.5 extra dollars you get at the moment, 85% of that, $7.65, goes into the super system which can then be used to pay retirement income.

    To get that amount into consolidated revenue (and then, say, put into the Future Fund to pay future pensions) you would need to tax that extra $9.5 at 85% rather than current marginal rates. Alternatively, the average tax rates have to go up.

    For someone currently earning 100k+ super, the average tax rate would need to be over 5% higher for the same amount to go into the retirement system if they were earning $109,500 with no SGC. How do you think a 7.5% Medicare levy would look, even if it was in exchange for a 9.5% pay rise?

    (And yes there are complexities at higher incomes because of Div 293 and Concessional limits, plus you need to make simplifying assumptions of how the money is invested under each regime etc).