Compulsory Superannuation: Creating New Problems by Solving Old Ones?
Author: Josh Ramsay | Project Leader 2022
1992 saw the introduction of one of the most important and impactful policies in modern Australia; the compulsory superannuation guarantee (SG). Hailed as a landmark reform of the Paul Keating government, the policy made it mandatory for all employers to contribute 3% of each worker’s wage into their superannuation account. (Nielson & Harris, 2010). Although about 70% of workers already received small contributions from their employers, the SG extended this to the entire working population. This solved 3 key problems that Australia was facing at the time (Edey & Gowers, 2000):
Boost retirement savings for people so they can enjoy a higher standard of living in retirement
Increase Australia’s low national savings level
Reduce the pressure of the aged pension on the federal budget
In 1994, Australia’s 3 pillar system of the pension, compulsory superannuation contributions, optional superannuation contributions, and the aged pension, was heralded by the World Bank as the global best-practice for retirement savings (World Bank, 1994).
On aggregate, the SG has been immensely successful at addressing its 3 original goals. But that was nearly 30 years ago, and Australia now faces a completely different set of challenges. Overall, people today retire with a larger nest egg of savings than they ever have before. Superannuation has evolved on a massive scale as Australians now have over $3.4 trillion invested in their funds (Australian Prudential Regulation Authority, 2022), and compulsory contributions are set to ramp up to 12% of income in 2025 (Australian Taxation Office, 2022). With the scheme becoming so large, there are a number of new issues popping up. The SG appears to be contributing to the rising wealth inequality in Australia (Henwood, 2020), as the scheme doesn’t appear to be fit for many lower-income and vulnerable Australians.
Whilst superannuation has allowed all workers to save more for retirement, this has been highly skewed towards high income earners. At its core, the SG is a contributive system, not a redistributive one. As you’d expect, this means that income inequality during people’s working lives leads directly to income inequality during retirement. This means that problems such as the gender pay gap persist in retirement (Australian Human Rights Commission, 2012). Whilst this may not seem like a problem that the SG has created, inequalities actually get worse under the current system.
Whilst superannuation isn’t necessarily designed to reduce these income inequalities, the current scheme enlarges them through things like tax concessions. For example, superannuation contributions are taxed at a lower rate than wages are, meaning that superannuation contributions are a tax concession. Someone earning twice as much as the average full time salary pays a marginal tax rate of 45%, but they pay just 15% on their superannuation contributions (The Treasury, 2020). By 2040, the SG will start to have an impact on the federal budget as tax concessions will begin to outweigh the money the government saves on paying less pensions (The Treasury, 2020). This lost tax revenue would otherwise go towards services and spending that is often directed at supporting lower-income households. Furthermore, many retirees often pass away with even more in their superannuation account than what they started retirement with (Coates & Moloney, 2022). This may sound counterintuitive, but if you retire with $1,000,000 invested in your superannuation account earning 10% returns each year, your balance will grow by $100,000 (there will be fees too, but let’s keep this simple). If your living expenses are $50,000 during your first year of retirement, your superannuation balance will still increase by $50,000. This happens for a lot of retirees, as many become more conservative with their spending to be prepared for things like expensive health emergencies. Tax concessions are often so large for high income earners that they essentially go to waste, whilst at the same time spending on essential government services can suffer.
While some features of the SG allow the rich to get richer, others leave the poor to get poorer. Recent and future increases to compulsory contributions may have had negative effects on low-income earners through contributing to wage growth stagnation. Wage growth in Australia has been relatively flat for most of the past decade, and mounting evidence suggests that increases to compulsory superannuation has been a big factor in this (Coates et al., 2020). Put simply, if companies are unable or unwilling to pay workers a higher wage, how do we expect them to pay more into superannuation accounts? Unfortunately, the answer is that it likely comes at the expense of future pay rises. For many low- and middle-income earners, not only do these higher superannuation contributions come at the expense of much-needed wage rises, it may also mean missing out on qualifying for higher pension payments to supplement retirement income in the future. Perhaps lower- and middle-income workers would be better off with higher take-home pay, and more support from the pension in retirement.
This isn’t the only reason that people on the lower rungs of the socio-economic ladder don’t benefit from the SG as much as they should. The superannuation system can be difficult to navigate, especially for people in vulnerable situations. Selecting the right fund and consolidating accounts have been common problems since the SG was introduced (Collett, 2018). Many people have an account opened for them by their first employer, which may not always be the best option for them. The goal is usually to maximise returns and minimise fees, but many people from low-income backgrounds lack access to the appropriate financial advice to do this (Krishnamurti et al., 2022). With many funds and options offering varying fees and returns, it is important for people from vulnerable backgrounds to be able to navigate these decisions so they can make the most of what they do manage to put away for retirement.
Many people find the superannuation system difficult to navigate, but Indigenous Australians often face more specific challenges in navigating and accessing their superannuation. There can be barriers in the proof of identity process since many Indigenous people have multiple names, irregular living situations, and some don’t have birth certificates (Scheerlinck, 2020). ‘Lost superannuation’ can often be an issue for Indigenous Australians too. The main sources of this are people being unaware that they even have a superannuation account, or people having multiple accounts that they haven’t merged. The process of accessing superannuation from family members who have passed away is another important issue, given the poorer health outcomes of Indigenous Australians. This process is long, costly, and often fails to recognise the family structures of Indigenous people. Efforts have been made to improve access to lost superannuation for Indigenous Australians, such as the ‘First Nations Foundation’s Big Day Out’ event, which helps to boost financial literacy amongst Indigenous Australians and is also responsible for recovering over $24 million (and counting) in lost superannuation. (First Nations Foundation, 2021). Indigenous Australians have just a quarter of the superannuation savings that non-Indigenous Australians have (Sullivan, 2021), and many older Indigenous Australians were part of the Stolen Generation and were victims of long-standing wage theft (Brennan, 2021). For this reason, it is crucial to adapt processes such as proof of ID, and access to lost super to ensure Indigenous Australians are not prevented from benefiting from the superannuation they earn.
Another glaring problem is the lack of early access to superannuation to reflect the gap in life expectancy between indigenous and non-indigenous Australians. The gap still stands at nearly 10 years (National Indigenous Australians Agency, 2020), meaning Indigenous Australians also have shorter working lives, and generally retire earlier. This has already been reflected in aged care as Indigenous Australians can access government-funded aged care services at 50 years of age, 15 years earlier than non-Indigenous Australians (Department of Health and Aged Care, 2021). If provisions are made in aged care to better support Indigenous Australians in retirement, they can, and should, be made in superannuation if Australia hopes to close the glaring life expectancy gap that exists between Indigenous and non-Indigenous Australians. Many Indigenous Australians have no choice but to work until they die because they can’t afford to retire before they reach the pension age (Brennan, 2021). As the primary goal of the SG is to lift people’s incomes and standards of living in retirement, it is important to adapt early access provisions to allow Indigenous Australians to retire comfortably as a step in closing the gap between Indigenous and non-Indigenous Australians.
So far this article has focused mainly on superannuation contributions, but what about the investment side? How can funds themselves address inequality? The superannuation industry controls over $3.4 trillion in assets (Australian Prudential Regulation Authority, 2022), should more effort be made to directing to causes that provide a better future for all Australians and our planet? Recently, more and more people share this view. 86% of people expect their superannuation to be invested in funds that act responsibly and ethically (Myer, 2021). Superannuation funds have been listening and offering ESG products (screening investment opportunities according to performance on environmental, social, and governance factors). In particular,AustralianSuper (Australia’s largest super fund) has committed to achieve net-zero emissions by 2050 in their investment portfolio (Australian Super, 2022), and Hesta (another of Australia’s largest super funds) has invested in projects like social and affordable housing (Hesta, 2022). Unfortunately, this trend has opened the door for some unethical behaviour such as greenwashing; giving false or misleading information that a product is environmentally friendly. This year the Australian Securities and Investments Commission (ASIC) released a warning (Australian Securities & Investments Commission, 2022) to funds to not mislead investors with these products after it was found that around 1 in 10 ‘ESG funds’ had assets that were not ESG-oriented in their portfolios (Myer, 2021). Transparency and honesty are important in ensuring funds invest in sustainable projects and assets that deliver a better future for all Australians.
Another way funds could address inequality is by placing more emphasis on investing in companies led by, and employing, people from minority backgrounds. Founders from minority groups often face a lack of access to financial capital among other barriers (Wishart, 2018), a problem that could in part be addressed by more investment from superannuation funds. This may also even boost fund performance for Australians, as entrepreneurs from under-represented backgrounds often perform better. Female-led start-ups earn twice as much revenue per dollar invested, and deliver higher returns to their investors than male-led start-ups. (Cotter, 2020). Superannuation funds should continue to look for new ways to drive change and reduce inequality with their investments whilst delivering strong returns to their members.
When it comes to increasing people’s savings for retirement, compulsory superannuation contributions have been a successful policy overall. Despite this, it has so far failed to adequately address problems of inequality. In its current form, compulsory superannuation has an outsized benefit for high income earners, whilst at the same time, leaves low-income workers under-supported during both their working lives and in retirement. With the compulsory superannuation guarantee contributing to widening inequality, it might be time to adapt the scheme to solve new problems, rather than the problems we faced 30 years ago.
References
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