Superannuation’s matrix of woes needs a reboot, not a tweak

In The Matrix, Morpheus tells potential saviour Neo that the villainous Agents’ superhuman strength and speed are based in a world built on rules. This, he argues, is the flaw Neo can use to defeat them.

Ultimately, the Productivity Commission’s project to improve the competitiveness and efficiency of the superannuation system has the same problem as the Agents: its recommendations sit inside a system of rules whose flaws may forever limit the benefits that can flow to savers.

This is not the Productivity Commission’s fault. They too can only work within the rules set for them by the Treasurer, and were tasked with looking at improving efficiency within the system.

The Financial System Inquiry noted the need for bigger picture thinking to set a clear objective for the system as a whole. The natural corollary of this should be that policy makers ask whether superannuation will ever deliver outcomes that justify its compulsion and cost. Unfortunately it is not at all clear that this process will extend that far.

And so superannuation may continue to bumble along, providing significant benefits to fund providers but not delivering for many savers or government. It is telling that, though compulsory contributions have risen significantly since superannuation was first introduced, Treasury estimates in the 2009 Harmer Pension Review suggest maturation of the superannuation system will reduce pension spending by only 6%.

And remember, those growing superannuation contributions come out of wages: it is not just the (disputed) cost of tax concessions that matter here — there are substantial opportunity costs of those wages forgone as well.

The Productivity Commission rightly identifies the challenges for superannuation early on in the report. Fund members are passive and disengaged until they approach retirement, while retirement decisions are complex with long timelines; both factors that dull competitive pressures. They go on to argue that policy intervention can improve outcomes.

This may be true; but isn’t the bigger question whether we can do something to remedy the complexity and disengagement in the first place?

This is a key distinction. It will be hard to deliver substantial improvements if people don’t care enough to take even the relatively simple steps to consolidate their accounts — more than 40% of people have multiple super accounts.

The Productivity Commission set out four models that may deal with the multiplication problem, as well as fees that are much higher than the international average. Three of these models rely on employers or government to bring competitive pressure on behalf of disengaged employees. All arguably involve additional regulation and complexity above the current situation.

These models may be better than the status quo but they are not the simplest way to deal with the problems identified, which is to make superannuation contributions voluntary.

It is argued that compulsion is necessary to deal with myopia that leads people to save too little for retirement, but from a public policy perspective the age pension deals with old age poverty already. Shouldn’t superannuation only be compulsory if it does this job better than the pension? Until this question is answered, it is very difficult to pick the best model.

It is the compulsory nature of superannuation that traps disengaged savers in the system and requires complex oversight and administration. If contributions were voluntary, super funds would have to offer competitive fees and returns to entice savers to invest their money.

People would also be free to save at different rates, based on their income and life circumstances. Those with low incomes, those starting a family, or those saving for a house may (correctly) choose to save less for their retirement, while others may choose to save more. The disengaged may not contribute at all.

There is little doubt a voluntary system would disadvantage the superannuation industry, which is currently guaranteed rivers of money — but savers themselves would not have to be worse off. Indeed, if the current system is actually best for them, they could simply choose to save exactly as they are forced to now. That so few would be likely to do so, says a lot about where the benefits of the system really flow.

Taxpayers might even be better off, especially if savings are found in tax concessions and income support payments from those who are no longer forced to save income they would otherwise use.

Back in The Matrix, Morpheus tell Neo he is better than the Agents because he is not bound by the system’s rules. So too might our retirement system be better off if it were not bound by the current rules of superannuation. At a minimum, it is a question that cannot continue to be ignored.

Simon Cowan is Research Manager at the Centre for Independent Studies.