Why have a superannuation system?

Why have a superannuation system at all?

It’s a question never asked during debates over changes to super, including Labor’s recent proposed changes to franking credits — an issue that was almost completely about the taxation of super in retirement — and its plan to pay super to those on Paid Parental Leave.

The point is not necessarily that we should abolish super in its entirety but that it’s far from clear what the major parties believe the purpose of the system should be. As a result, we are constantly tinkering with the super system for short term effects, without assessing the longer term implications.

While there are good reasons to tax savings concessionally — especially long term savings — our system of compulsory super with its ridiculous fees, progressive marginal tax rates, and balance and contribution caps, is far from an ideal, tax-efficient savings vehicle.

One might argue people would under-save for their retirement if super was not compulsory, but this raises nearly as many questions as it provides answers.

First, because super is a fixed percentage of a worker’s salary, it ignores that people’s savings preferences change over time. Saving for a home, or to fund additional expenses around starting a family, may rightly be a higher preference than retirement saving at certain points in a worker’s life. They may choose to save more in later years, though the system doesn’t let them catch up.

Savings preferences also vary by income level. And those on lower incomes would almost certainly be better off taking their super as additional salary, rather than being forcibly deprived of income to save meagre amounts over their working lives. Is a compulsory system really better than the alternative?

Perhaps more importantly, the paternalistic response of making people save for their own good makes little sense given the role of the age pension. Workers would not be made destitute by a lack of superannuation savings, indeed the median super balance for this generation of retirees is zero.

This suggests, other than measures to improve the tax efficiency of savings, government support for pension alternatives only make sense if they cost taxpayers less than the expected value of the age pension they supplement or supplant. It’s past time to assess new changes to super against these tests.