Superannuation ‘fear factory’ stifles reform

The Australian Treasury in June released a position paper calling for reforms to encourage retirees to draw down their super balances rather than passing the money on to their beneficiaries.

Industry Super Australia (ISA) and the Australian Institute of Superannuation Trustees (AIST) have attacked Treasury’s position, claiming it is undermining confidence in the retirement system:

The strategy, which would be in place from July 1, 2022, would address a growing body of evidence showing retirees are dying with most of their wealth intact…

[ISA] cited research from the Australian Superannuation Funds Association (ASFA), which found that households were, on average, not using superannuation for estate planning.

”Using HILDA [Household, Income and Labour Dynamics in Australia] data, [ASFA] show that 80 per cent of people aged 60 and over and 90 per cent of people aged 80 and over who died in the period 2014 to 2018 had no super at all in the period of up to four years before death,” ISA wrote in its submission.

In a separate submission, the Australian Institute of Superannuation Trustees (AIST), which represents industry super fund trustees, warned the government’s focus on super balances risked undermining public confidence in the system.

ASFA’s findings are misleading.

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.

The decision to raise the SG to 12% will obviously 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 have been 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 lobby groups continue to talk their book rather than endorsing worthwhile reforms.

Unconventional Economist

Comments are hidden for Membership Subscribers only.