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Is cancelling the SG increase a retiree version of ‘Buy now, pay later’?

Following the recently published findings of the Retirement Income Review, questions have been raised about the efficacy of keeping the Superannuation Guarantee (SG) at its current level of 9.5% rather than proceeding with legislated increases to 12.0% by 1 July 2025.

Arguments in favour of maintaining the 9.5% level include:

  • the benefits of additional income for workers pre-retirement (effectively an increase in take-home pay)
  • greater flexibility about whether to spend or save, and
  • savings outside super need not be locked up until retirement.

The contra argument is that increased savings for retirement lead to a better outcome both for the individual retiree (increased retirement income) and for society (decreased reliance on the age pension). The original timeline for the rise in the SG has already been deferred, and now there is talk of deferring it further or even cancelling the increase altogether.

Is this just a form of ‘buy now, pay later’ for retirees?

Arguments on both sides have merit

More income now provides a direct benefit - today - to the individual. More income leads to increased spending, which will flow through and lift the whole economy. This is substantiated by evidence from the early release of super during the COVID epidemic. The early release scheme saw a massive uptake across a wide spectrum of age and income ranges. Over $35 billion was withdrawn from the superannuation system, with 3.4 million initial and 1.4 million repeat applications.

Clearly, a diverse section of the population wanted access to their super early, some for genuine hardship reasons, while for others it was a spending bonus. Evidence suggests that what was intended as a mechanism to ease financial hardship was embraced by many as a windfall to be spent conspicuously and on discretionary purchases including gambling, restaurants, furniture, alcohol and tobacco.

From a report by AlphaBeta:

… early superannuation withdrawals have not been used as intended: of the 1.35 million) Australians who applied ((as at May 25, 2020) for early access to their superannuation, 40% actually saw no drop in their income during the COVID-19 crisis. Only 22% of super withdrawals was used on essentials, while 64% was spent on discretionary purchases including gambling (11%) and clothing (10%).”

This suggests that without constraints, a large section of the population would access their money now and would use it in a way which would not benefit their retirement.

This early release will have a lasting impact, with the long-term cost to the super system estimated at $100 billion or more[1], as those who took their money out early reach retirement.

Research from Industry Super Australia shows that the early release of super is expected to result in higher future pension costs for the government as well as reduced income in retirement. For a 30-year-old on a median income who takes the full early release entitlement of $20,000, the additional pension burden on the Government would be $50,000, while overall the individual would be $41,000 worse off in retirement.

No doubt, any reduction or deferral in the SG increase would be received favourably by many and it would be a popular move for the political party who instigates it. 

The purpose of superannuation

However, this undermines the very foundation of our superannuation system, which institutes a rigid savings regime to ensure that all working Australians contribute towards funding their retirement.

It is easy to ignore the long-term consequences of taking money now rather than saving for later, because they are not immediately obvious. To many, the future value of money locked inside their super is not fully appreciated, whereas the value of money that is immediately accessible is obvious.

This means that the trade-off of ‘now’ for ‘later’ is not viewed as detrimental and long-lasting. The ultimate outcome of reduced levels of retirement income and increased reliance on top-ups from the government through the pension is an abstract concept and thus heavily discounted.

Australia has, by world standards, a top-tier retirement system. Reducing the level of future contributions risks diminishing it and diminishing the quality of life of retirees.

Improvements rather should focus on engaging with stakeholders, creating an environment where the value of retirement savings is better understood. This environment should foster the development of improved retirement products and services, provide better access to and delivery of advice, and focus on reducing complexity. This will ensure that Australia maintains or increases its standing as a leader in providing for a great retirement for its population.

Trading the benefit of future income for the ability to spend now is not the way to a better retirement system or a better outcome for retirees.


[1] Source: BetaShares modelling, as at August 2020, of the estimated future shortfall that will need to be funded by Australian governments, as those who have withdrawn super will be less able to fully fund their own retirement needs. Modelling assumes a long-term return profile of CPI+5% p.a.


Dr Roger Cohen is the Senior Investment Specialist at leading ETF provider, BetaShares, a sponsor of Firstlinks. This article is not financial advice. It is for general information only and does not consider the circumstances of any investor.

For more articles and papers from BetaShares, please click here.


January 31, 2021

As you say above Ango : January 31, 2021 "The SG as a flawed policy that creates distortions and unfair outcomes. It should be dumped in favour of a one-size-fits-all non-means tested, non-assets tested NZ style old-age pension scheme.....will be very simple with no deeming rules, taper rates, Etc. and will probably not cost more than the tax concessions within the SG scheme ......." If ALL the bureaucrats involved in the collection of SUPERANNUATION and then in the distribution of it could be "stream-lined' into ONE SMALL GOVERNMENT DEPARTMENT to administer a realistic PENSION FUND [ use of computers should make this both possible and economical ] then EVERYONE who attains PENSION AGE could be given a "no strings attached" PENSION , which would become PART OF THEIR INCOME and if they had additional earnings , it could be added to it and taxed accordingly. This would be both FAIR and EQUITABLE and then there would be no rancour between the different pension groups AND it would do away with all the SUPERANNUATION FUNDS that literally chew up "our" savings with their fees and advertising ......and "we" could greatly reduce the current numbers of supervisory bureaucrats too , and THAT should also save heaps !!! Of course...."we" would then "have to trust the Government" with our savings ! Perhaps THE EXISTING, SEPERATE GOVERNMENT SUPER FUND [ The FUTURE FUND ] could also be "switched " into the "GENERAL PENSION FUND" so that "they" would have some "skin in the same game" and that would then tie together their financial future and ours , and protect "our mutual interests" !??? The "Super Contributions" would simply go directly towards that GENERAL RETIREMENT PENSION FUND. Hopefully , people would STILL be intent on creating wealth OUTSIDE that scheme as well , because THAT is where ALL the actual wealth is created.

February 04, 2021

Trevor, Hear, hear ! NZ & UK have none of our nonsense. Imagine the Govt. savings in a reduced - size Centrelink. Must be a whole dept. within a dept. administering aged pension instead of filling in just one form at retirement age & never filling in another form ever again except by one's executor to complete a form at death. I'd vote for any party willing to deliver that promise.

January 31, 2021

The SG as a flawed policy that creates distortions and unfair outcomes. It should be dumped in favor of a one-size-fits-all non-means tested, non-assets tested NZ style old-age pension scheme. This arrangement will be very simple with no deeming rules, taper rates, Etc. and will probably not cost more than the tax concessions within the SG scheme that overwhelmingly go to the better off. Releasing SG money for housing is also flawed, this is like putting petrol on the fire, affordable housing will only come by increasing the supply, not by putting more money on the hands of home buyers which only drives the price up, this is basic economics.

January 30, 2021

Once upon a time in Oz all received age pension, because we all worked and saved and could afford to fund it. Since then I have seen so many changes to the super system one wonders if the young will ever see the money. It is locked up and then they complain that you frittered it away because you took one overseas holiday. Note the new legislation: the purpose of superannuation is to supplement or replace the age pension. I read 2 things. They can change the age you access it to 67 or whatever and prevent access to lump sum, then perhaps tax these 'rich' old people. Why control people this way? Most people will use it sensibly. There are some young people so disillusioned they have used the super to fund a deposit on their own home, knowing wisely that at least they have a chance of a roof over their head in old age. I am not in favour of an increase. Good luck kids!

January 29, 2021

John, your assuming people will blow their super to get full age pension of $18,000 each per annum for a couple, $24,000 pa for a single! It's not enough.
So most of my customers are precariously trying to achieve both: a decent retirement without the super running out prematurely. Increasing the Super Guarantee will make it easier for them to achieve this balance.
Cashflow while working is high vs the age pension, so they need the Super Guarantee benefits when they retire, not while working.

January 28, 2021

How does deferring or cancelling an SG rise 'increase' take home pay? It seems to start with the assumption that all employers have a pot of money that they will either put towards a pay rise or to fund the SG rise.

Deferring or cancelling the rise just guarantees that you won't have as much in super as you would have if the rise is allowed.

January 30, 2021

Agreed 100%, and that's the simplest way to put it, that NO ONE seems to be understanding !

January 28, 2021

There have been so many varying estimates of the impact on retirement of withdrawing $20k under the pandemic provision that none have credibility. In their desire to exaggerate the impact of withdrawals and to quote big hairy headline numbers, they always assume unrealistic persistent annual returns on the money if left in super (typically 7%, whereas 10 year bonds yield only 80bps) and no salary sacrifice or other voluntary contribution is ever made in the subsequent pre-retirement decades to compensate for the withdrawal. i.e. they are deliberately inflated self-interested guesstimates. They also never place much value on what the client might actually do with that money now, preferring to assume it is frittered away.

January 28, 2021

There's no admin fees for the fund managers & less benefits for Industry Fund Directors when additional super savings are redirected to reduce mortgage interest payments (over 20 yrs). Unfortunately millions of super fund members have worked this out - hence any policies on this issue taken to the next election will help the party promoting this to romp it in (again).

January 28, 2021

Something that I think should be taken into account in the decision to defer an increase in the SG and provision of access to the proportion of accumulated super to fund a first house is the fact that a proportion of the cost of most new houses purchased/constructed is an "investment value" decision. In the past a family of two adults and four children could grow up happily in a house under 100 m², but today the average project house is 200 m² and above. Buyers are making the decision that because the capital gain in the house is so tax advantaged, they will borrow to the maximum and buy/build the largest house that they can afford at their age and stage in the expectation that the increase in value of the house will underpin their future wealth. So if some money is diverted from accumulating in super, but is instead accumulating in the value of a house, the aim to achieve financial security in retirement is met, but the actual lifestyle of a person buying their home earlier in their life is probably well enhanced. There is probably some spin-off for the overall economy from the multiplier effect of that capital invested into the housing market at an earlier stage in one's life.

Increase the SG
January 28, 2021

I also argue that maintaining the SG at 9.5% does not in fact automatically translate to an increase in take home pay, I have seen clients that never receive pay rises and this just leaves room for employers to continue to do so. At least with the legislated compulsory increase in SG, people will receive it in some form.

January 28, 2021

Unfortunately, the superannuation system is good in theory but doesn't work in practice. People retire and then be able to get their hands on their super. They will spend it (overseas holidays, home upgrades, etc). Some will take the opportunity to retire early (you can get your hands on your super at 60, but can't get the pension until you are 67). So the strategy will be, retire at 60, spend the super between 60 and 67 and then get full pension (not 100% accurate, but more or less right). And if you want to retire before you turn 60, then the strategy is modified, have enough savings outside super to support yourself until you turn 60, then use your super to support yourself until you get to pension age, then rely on the pension. The only way for super to work (stop people relying on the pension.and the government having to fund the pension) is for you to have so much of it, that you can't spend it all and get the pension. You could change the rules for super so that you can only spend a relatively small percentage of the total value each year, but for a government to make that sort of change (particularly retrospectively) would destroy the superannuation system completely. There is simply no way for the super system to achieve its primary goal - reducing the government's need to fund the aged pension

January 28, 2021

John, very well put and exactly right.

January 28, 2021

This doesn't gel with the reality of what the majority of Australians actually do in retirement. broadly, and largely irrespective of their commencing balances at retirement, people are reluctant to draw more than the statutory minimum drawdown limits annually, rarely touch their capital, and tend to go without a lot of things to instead keep most of their private savings intact for a rainy day (be that aged care, health costs or an inheritance).

Put simply, the notion that many spend their super early to qualify and fall back on a full pension is largely a furphy that's now been disproven by many independent and government-sanctioned research and reviews, including more recently the Productivity Commission and Retirement Income Review.

January 28, 2021

I agree with Dean. Having done investment advice for retirees for three decades now I can confirm it is only a very small percentage - usually those with very little balances in the first place - who spend it recklessly and don't then mind being only on the Age Pension. Most people with good super balances are terrified of only having the Age Pension. Terrified to the point that they don't spend as much as they probably can. Hence the recent tendency for many retirees to cut back their spending rather than eat into their savings.

January 28, 2021

Cynical! Most people I know have no interest or intention of being on the pension. It’s pretty much subsistence living. Recklessly burning your assets early on just to get a meagre pension is inane.


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