Proof Australia’s superannuation system is failing

The Association of Superannuation Funds of Australia (ASFA) released research yesterday claiming that 80% of people aged 60 and over died with no superannuation savings between 2014 to 2018, with 90% of these people having no super in the four-years prior to their death:


Australian superannuation savings at death

80% of people died without superannuation savings, according to ASFA.

Predictably, ASFA has used these findings to strengthen its call to lift the superannuation guarantee (SG) to 12%, from 9.5% currently:

Given that a large proportion of current retirees have very modest superannuation balances, the case is strengthened for increasing the Superannuation Guarantee (SG) to 12 per cent (as currently legislated) so that retirees can live in retirement with dignity.

ASFA has clearly generated this report for shock value. But there is nothing to be alarmed about in these findings.

Australia’s compulsory SG has only been in operation for 29 years and began at a low rate (see next chart). Therefore, those that died without super did not participate in the system for the bulk of their working lives.

Superannuation guarantee rate

Australia’s compulsory superannuation system has only been in operation since 1992.

The Australian Treasury’s Retirement Income Review, which handed down its report late last year, also concluded that “most people die with the majority of wealth they had when they retired” and noted that “as the superannuation system matures, superannuation balances will be larger when people die, as will inheritances”.

The Review projected that if current spending/savings patterns persist, then superannuation death benefits would “increase from around $17 billion in 2019 to just under $130 billion in 2059”:

Projected superannuation death benefits

Superannuation death benefits are projected to soar over coming decades.

Moreover, because higher income earners accumulate the biggest superannuation nest eggs, the passing of fund balances onto their heirs will inevitably “increase intragenerational inequity”:

Size of inheritance by wealth quintile

Australia’s superannuation system entrenches inequality.

Ultimately, the above data shows one of the inherent flaws in Australia’s superannuation system: longevity risk. Because nobody knows how long they will live, they risk saving either too much or too little.

Moreover, because superannuation savings depend on how long somebody works and how much they earn, the system is automatically biased towards higher income earners with unbroken work patterns (mostly men). This inequity is made worse by superannuation’s tax settings, which give the biggest concessions to higher income earners.

The Aged Pension holds none of these pitfalls. It is universally available until somebody dies, thereby eliminating longevity risk.  Further, because the Aged Pension is means tested, it necessarily benefits lower income earners more than higher income earners, improving equity.

Lifting the SG to 12%, as advocated by ASFA, will not fix the underlying flaws in the system. Rather, it will magnify existing inequalities and damage the long-term sustainability of the federal budget, as illustrated clearly by the Retirement Income Review:

The budgetary cost of superannuation concessions is enormous and will only worsen if the SG is raised to 12%.

It would be far more equitable and efficient to scrap lifting the SG and instead reforming the concession system to make it more progressive. This way, lower income earners could accumulate bigger retirement balances (with higher income earners accumulating smaller balances) without lowering wage growth or further draining the federal budget.

Sadly, industry groups like ASFA continue to talk their book in lobbying to raise the SG to 12%, since it offers fund managers the opportunity to skim bigger fees. Always follow the money.

Unconventional Economist
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  1. migtronixMEMBER

    Riddle me this, if forfeiting 10% of your income today with zero guarantee of any of it coming back is the reality, but the hard sell is the market does it better – why doesn’t the government just buy the ASX and leave us alone?

    • Ritualised Forms

      Riddle me this, if forfeiting 10% of your income today with zero guarantee of any of it coming back is the reality, but the hard sell is the market does it better – why doesn’t the government just buy the ASX and leave us alone?

      Because that wouldnt enable a mechanism for the 10%ers to avoid taxes using SMSFs or facilitate real estate speculation

    • Is 100% of super in the ASX?
      If not, riddle me this, what is the point of your comment?

      • Cynical snake

        No, some of it’s invested directly in former government owned assets such as electricity and rail, and now has profits taken out before being returned to the people. Would have been better to keep these assets in government hands and use the profits to fund pension.

  2. Superannuation system is failing? You sure thats all thats wrong in Australia lol

    I think I’ve figured another reason why Australias Confidence is so stupidly high… Television.

    TV is the ultimate form of propaganda.

    At this point, Im surprised men arent joining Terrorist Groups.

    The only answer that seems to exist in Australia these days is to wait out the damage.

    I love how all the States are starting to turn on the Commonwealth and ScoMo walks around like a stunned fish.

    Agendas are everywhere. Australias fast becoming dysfunctional.

    • fitzroyMEMBER

      TV and Radio. Acute propaganda observations. Just listened to a CPD about women in the legal profession, where apparently there are insuperable barriers. The Chief Justice of Australia, Chief justices of Victoria present and immediate past, Victorian DPP, recently departed CEO of the Victorian Bar and President of the Bar Council, present and immediate past Attorneys General of Victoria, and the Legal Service Commissioner are all women. Misandry is rampant.

  3. But everyone knows that boomers have $$$Millions stashed away in super not just 20% of em.

  4. Ryan Svensson

    If you die your heirs pay 15% on your super balance.

    Smartest thing is to get all the logins and forms ready for full withdrawal, print them out and fill them in even, and as soon as it looks like the end is near get the owner to sign on the dotted line.

  5. Cynical snake

    Super is never going to work to allow the bottom 50% to retire comfortably.
    Anyone who has enough super to retire comfortably on earnt enough that they very likely have enough to comfortably retire on without super. An average wage earner will never have enough to live for 15-20 years comfortably.
    After 20ish years in the workforce I have just under 2 years salary in super. after 40 I will have maybe 5 years. An extra few % won’t make a lot of difference.

    • Yeah but hopefully your house will be paid off and your kids have left the nest and your expenses will come way down by then so multiply years by 2x or so.

      • fitzroyMEMBER

        Spot on. The authorised ways of tax advantaged saving are super or a house or both depending on the amount of money in either.

      • Cynical snake

        cool so as long as I die by 75 I’m sweet.
        What are average life expectancies again, and which way are they headed?

    • “Anyone who has enough super to retire comfortably on earnt enough that they very likely have enough to comfortably retire on without super.”

      Disco. This succinctly summarises why the current system does not work.

  6. At least longevity risk should be reduced somewhat once those teststo figure out genetically how long your natural lifespan should last become widely available.

    Then we’ll have a whole new ethical dilemma to deal with


    Analogous to retirement accounts in other nations, one’s pre-tax ‘contributions’ (super guarantee, personal) are tax-deductible.
    However, deductible Strayan super contribs attract a 15% contribution tax which turns each $1.00 contributed into $0.85 cents.On top of that, the ‘earnings’ on the fund ALSO attract taxation. Both these ‘dragging brakes’ prevent the fast and efficient compounding seen elsewhere.
    A better play would be to drop the contribution tax and the earnings tax and apply tax when the monies are withdrawn. Is beyond preposterous that >60 year olds draw monies out ‘income-tax-free’; they need to pick up their end of the log too!

    • I don’t know about most people, but for me ‘elsewhere’ means outside of super as taxable Australian income, so say 39.5% marginal tax rate.. now *that* is a drag on compounding growth.

    • 1000. This would give ordinary people a much more well-funded retirement, and it is what is done in most other OECD countries,

      The reason why it isn’t being done here is that it would make the superannuation system a much less effective tax shelter for the very rich people who have bought our major party politicians (and the politicians themselves), especially if there were a cap on how much could be saved tax-free. This is also why our government tolerates far more fee gouging than would be allowed in most other developed countries

      Our system is primarily for the benefit of the rich and the FIRE sector, not us. As the Grattan Institute and the Australia Institute have pointed out, it would be cheaper to abolish the superannuation tax concessions and the pension means testing, give every citizen and permanent resident a universal pension once they are old enough, and make all income in retirement taxable.

  8. Ritualised Forms

    Off the top of my head I can no longer think of Superannuation – as we currently have it – as serving any real purpose apart from pampering a mainly older and mainly wealthier section of society.  I was a keen supporter of Superannuation as Keating proposed it back in the late 80s, and tend to be a beneficiary of the arrangement, but I think it makes almost no sense for anyone younger than me, and anyone not in a scheme delivering reasonably certain outcomes at relatively low fees (including many older than me).

    The original game plan was to take people off the public pension by getting them and their employers to save for their retirements themselves, and in the course of organising that, creating a pool of investment funds which could support an Australian economy which was then being prepared for competition and exposure to global markets.

    Along the way the supporting struts of this concept were kicked out.  Nobody ever clearly defined what super was for, so what was originally intended for pensions and living expenses in later life evolved into ‘wealth’ management – where it was about maximising the assets and avoiding the payment of taxes, and shelters to facilitate this, and returns.  This particular gate was left open by the way, right from the get go, it was possible simply shunt funds into superannuation schemes, have those funds be treated concessionally by the tax system and then reclaim the funds from super. This appealed to the wealthier of course.

    Then there was an ideological struggle which is still in play, with the mainly conservative governments post 1996 trying to break the domination of the pro Union (or Union dominated) industry ‘superfunds’ – which in the main tend to deliver observably superior returns to members (ie ordinary people contributing to those funds) with less fees and greater ancillary supports than the ‘retail’ funds (mainly big banks and insurance companies – often closely linked to dubious activity of the type identified with the Hayne Royal Commission, invariably charging greater fees, and generally delivering more parsimonious returns) the conservative ideology has maintained would provide superior returns. 

    Despite the stance of the current government there is a fairly solid argument that the large super funds could be amalgamated into one mega fund which would be the default fund for all Australians, and that this would likely deliver superior outcomes for contributing Australians.  The freedom of choice mindset when it comes to superannuation, is closely linked to the freedom to be ripped off, or the freedom to rip off the government by minimising tax schools of thought.

    That of course leads us to the phenomena of SMSFs.  Initially brought in to try and wean some off the dominance of the large industry funds they are now the ‘go to’ option for any self respecting accountant trying to foster ‘investment’ in anything from property speculation through to eucalyptus plantations, or all in share plunges on the company of choice, and many of which have provided a nice receptacle for the offtake of JobKeeper not directly needed to live, and for which many of those same accountants have been structuring their clients finances to maximise entitlement.

    From there, there is a concomitant discussion phenomena of lump sum versus annuity which feeds back into the loop of nobody ever having clearly stated what superannuation was actually for.  Most Super funds enable a lump sum payout, which is often taxed concessionally.  Nobody has ever determined to remove access to the government funded old age pension for those who have had access to annuities or lump sums beyond a particular limit.  That means that those in a position to access very significant sums through superannuation accumulation are still entitled to a government funded pension, or social welfare supports if they take a lump sum, splurge on whatever they think appropriate, or are encourage to stash it somewhere where it doesn’t count as income or may not look like theirs, and are encouraged to put their hand out.  This isn’t the case for most people of course, particularly those in the larger industry funds which are influenced by the Union movement, but it is a widespread enough phenomena for many to be perfectly aware of it, and for an entire industry of accountants to be cultivating.

    Even beyond all that there is the positioning of the Australian economy.  Back in the 1980s there was a range of enterprises who were actually thinking that with better investment and a more agile workforce with better training they could compete globally. Superannuation was originally designed to facilitate and support that more competitive and exposed Australia.   Fast forward to 2021 and Australia is the ultimate economic bubble experiment powered by the mining lobby – home to the worlds most expensive people, the worlds most expensive land, and deploying the worlds most expensive energy.  Anyone controlling large volumes of members funds would need to look again at the business case for investing anything in a competing Australian business, and if that is the case then speculating in real estate and pampering the well to do is probably as plausible a use for superannuation as anything else.  But it doesn’t really help Australia or Australians do anything all that much.  Rather it holds them to ransom.

    None of that delivers anything of significance to anyone under their mid 50s (on an ordinary income, may be younger for those on higher incomes, and may be much older for those on lower incomes, particularly if they don’t own their own homes).

    The dizzying heights to which house prices have been driven – by policy, including superannuation – has rendered accumulation in superannuation a particularly feeble post retirement support mechanism – in relation to accommodation needs.  The death of incomes growth over the post mining boom era, and the look the other way approach to fixed inflation sources (starting with energy costs) means that ordinary Australians trying to support ordinary families on ordinary jobs are being ground between rising real costs and declining ability to service those for a range of standard family outlays. The lack of purpose about what super is for and the enthusiasm Liberal politicians (in particular) have for white anting a system which even implausibly eases working lives post retirement, and deforming it into a vast tax avoidance scheme, sees them come up with proposals to shake off 10 or 20 grand here and there to cover their other policy failings (eg Housing, Covid spending support).

    That brings us to the nub of Leith’s posts. Superannuation makes increasingly less sense for more Australians.

    That backdrop to this of course is the Hamlet like figure of Keating.  Super was his baby, and the one he thought would anchor his place in the pantheon of social reformers.  It should have done but hasn’t.  Has he been going mad or has the world he crafted for his genius been deformed by those following?  He comes out to talk to his own younger self in the media from time to time, to try and convince himself, and us, it all still makes sense, increasingly maddened by what he must surely see of his bequest in the world of today.  When the acid test comes – as surely it will – superannuation, as we know it, will be blown away in the winds of history as simply another manifestation of an entitled age


      Top assessment RF!
      One of the deliberate components in the early super blueprint that delighted PK and those in his wealthy ‘circle’ was the way franking credits would easily wash away the </=15% 'earnings' tax on the big Ozzie company share-centered portfolios.

      Heretore, large amounts of money could be contributed witih after-tax monies which naturally bypasses the 15% 'contribution' tax which applies to 'pre-tax' (concessional) contribs. Refer 2006/07 tax year when individuals could apply up to $1.0m ($2.0m couples) to super. Currently, $300k can be a contibuted every three years (per individual) while under age 65. Note: new 'super balance caps' restrictions apply when account vals equal $1.6m.
      So, if a great amount of tax was to be 'missed' by the elite and friends of PK, it follows that it had to be made up elsewhere and that's why we have such an ineffecient and 'tax heavy' program for the peasantry today.

    • “Despite the stance of the current government there is a fairly solid argument that the large super funds could be amalgamated into one mega fund which would be the default fund for all Australians, and that this would likely deliver superior outcomes for contributing Australians. ”
      And only a very small step from there, get the government to run it, change the name of the super guarantee to a retirement levy and provide the money to those who need it most rather than those who need it least.
      Smells a lot like a government provided pension at that point…

      • Vanguard has dropped its mandates with super funds and intends on competing for the Australian Super dollar directly. Done correctly this will push all fees down. I can envisage what effectively is a basket of Vanguard ETF’s compiled in strategic long term allocations for the Conservative to Growth investor where the all in fee could be as low as 0.50% p.a.

        • steven.grellmanMEMBER

          If Vanguard couple that with affordable insurance it will be a game changer.

    • Very good explanation. If the taxation were done on withdrawals in the pension phase, then there wouldn’t be cash rebates on franking credits, because they would be needed to offset tax.

  9. A bit worried that the issues of casualisation of work / gig economy is not being considered in the big picture. Then the banks are seemingly still willing to allow large loans to be owing as at retirement dates. Rejigging concessions / incentives definitively seems necessary.