It is becoming ever more difficult to avoid the conclusion that Australia’s superannuation system has long relied on those funding it — both taxpayers and savers — being ignorant of what is happening to their money.
Thankfully, the uncompetitively high fees charged by super funds are now becoming relatively well known, while the prevalence of unwanted and useless insurance policies has already prompted government action.
And now new figures reported this week show the super system is reducing the nearly $50 billion a year cost of the age pension by less than $10 billion a year.
The closer we examine the cost of our compulsory superannuation system, the less appealing it looks to taxpayers too.
The Treasury Tax Expenditure Statement puts the cost of super tax concessions at well in excess of $35 billion, though this figure assumes superannuation income was taxed at full marginal rates, which is unrealistically punitive. However even under measures that take into account the need to tax savings differently, the cost was still calculated at greater than $10 billion in 2013.
It should be noted that the superannuation system is still not yet mature: Age pension savings will continue to increase as more people retire who have been in the compulsory super system for their whole working lives.
Yet we do not have to wait for super to mature to be able to determine its trajectory and consequently evaluate its effectiveness as an instrument of public policy. As noted previously, at a minimum, these conversations should be had prior to increasing the super guarantee rate to 12 per cent.
“The age pension is doing almost all the heavy lifting with respect to alleviating old age poverty”.
There are two separate and important variables here. Superannuation is not just a savings vehicle; it is a compulsory one.
Recently, the Grattan Institute came to the somewhat surprising conclusion that the retirement incomes system was generating acceptable levels of replacement income in retirement. These findings have been disputed by some in the superannuation industry.
Regardless of whether you accept or reject these findings, there is little doubt that the super industry could do better. The productivity commission has repeatedly demonstrated the system’s flaws in recent years: For too many savers, the returns are far too low and the fees far too high.
Nor does superannuation fit the savings patterns that individuals would follow — based on their income and age — if super did not exist. Younger employees may prefer to save to buy a home, while those with young children may choose to work less if they had access to the extra 9.5 per cent of their income currently going into their super fund.
However, these factors go towards superannuation’s effectiveness as a savings vehicle. And regardless of how well super performs this task, there is a self-evident need for some tax-advantaged vehicle to allow and encourage people to save for their retirement.
But this says very little about whether such a system should be compulsory.
Some might argue that super is such a great deal that everyone should be involved as early as possible — yet if this were true, why would it need to be compulsory? Wouldn’t everyone want to participate in super?
Another potential justification is that people would under-save for their retirement if left to their own devices. The response to this observation is twofold.
First, just because someone who chooses to consume more during their working life will have less in retirement doesn’t make that choice inherently wrong. And even if some people make a choice that is objectively wrong, this alone does not automatically require universal government correction.
Second, and more importantly, a government policy already exists to support those who under-save for their retirement: the age pension — which is compulsorily funded by taxation. To justify the compulsory nature of super on these grounds, it has to be more effective and / or efficient than the age pension. But the evidence suggests it is actually less targeted and does little to offset pension costs.
At a minimum, the age pension is doing almost all the heavy lifting with respect to alleviating old age poverty (and the family home does most of the rest).
All of which suggests the rationale for compulsory superannuation is weak, or non-existent. And the benefits of making super voluntary might be substantial.
Making super funds compete for your savings will lower fees (and probably boost returns). Giving people their income back will boost living standards, and potentially lower government spending on income support. The system would be inherently more flexible.
If compulsory super doesn’t benefit taxpayers, and making it voluntary would help savers, please explain to us again why we need this paternalism.
Simon Cowan is Research Director at The Centre for Independent Studies.
18 January 2019 | Ideas@TheCentre
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