Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 9

Debating the value of super

 

There is much debate about the superannuation system. Constructive and informed debate is welcome on any social and economic issue and in particular super, but we really need to raise the quality of the discussion. So-called facts and figures are quoted and relied upon by commentators, public figures, stakeholders and interested parties. I often feel there is not enough done to balance the debate, which is the aim of this article.

Some examples of misleading statements heard or read are in italics below.

  • The tax assistance for superannuation costs about $32 billion in 2012-13. It is actually about half that and the pool contributes many millions in both direct and indirect tax.

  • Most retirees are still on a full or part pension so the system is not doing its job. Without superannuation, the age pension bill might be some $7 billion per annum higher than it currently is. By 2037 it could be $55 billion per annum higher without superannuation on the basis that the growing pool of superannuation savings will reduce expenditures on age pensions by about 1% of GDP. Further, with compulsory superannuation, a single person who is on average earnings of $70,000 a year will retire with around $425,000 in today’s dollars and have an income in retirement which would be nearly 90% higher than provided by the age pension alone.

  • The very wealthy get the best deal from super. This was probably true in the past but the amount of government assistance provided to individuals at high income levels has been substantially decreased by lower caps for concessional contributions (reduced to $25,000). In addition, the majority of those on above average incomes will receive either no or only a part age pension when they retire. When all these factors are taken into account, the amount of assistance for retirement is broadly comparable across all income tax payers. The Treasury estimates that the present value of government assistance for both the age pension and superannuation is just under $300,000. A low income person will receive this mostly in the form of age pension, while a person at the top of the income distribution will receive it as tax concessions for super. The elephant in the room in this debate is the ability for people to put in $150,000 a year in after-tax dollars and then receive tax concessions in both earnings and withdrawals after retirement age. At this time, few people can and do take advantage of the opportunity – this may or not change in the future.

  • The super pool provides no real economic value to the Australian economy. Superannuation is projected to lift household savings by around 2.5% of GDP, thereby enhancing the ability of Australian businesses and governments to finance investment and infrastructure without undue reliance on foreign savings and investment. As well, superannuation will mean that an increasing proportion of retirees in the future will be important contributors to domestic demand. Current benefits boost domestic demand by over $50 billion a year and this figure could increase four fold by 2040.

  • The super pool is not used for infrastructure investment. About one third of large super funds invest in infrastructure with asset allocation ranging from 2 to 10%. Both figures are expected to increase as funds get larger, mergers occur and investments focus more on delivering post retirement incomes. There are however a number of stumbling blocks including liquidity requirements, portability and the fact that only about $400 billion of super is in default portfolios. The bulk of the $1.5 trillion is in SMSFs and choice portfolios where the investor decides the asset allocation. This is clearly the major difference between the Australian super system and overseas pension systems which are predominantly defined benefit.

There is no doubt that some of the rules on the transfer of business assets and the previous ability to put large amounts of money into super favour certain groups of people, particularly if all income and benefits (no matter at what level) remain tax-free in retirement. Any retirement system must have a ceiling as well as a floor. We need to review the anomalies that promote estate planning rather than retirement incomes, and we also need to fix the gaps (particularly for the self-employed), and move the system to an income-orientation. But let’s stop the hysterical and ill-informed debate.

 

Pauline Vamos is Chief Executive Officer of The Association of Superannuation Funds of Australia (ASFA), a Director of Banking and Finance Oath Limited (BFO), and a member of the Advisory Council of the Centre for International Finance and Regulation (CIFR).

 

 

RELATED ARTICLES

Minister Jane Hume on SMSFs and superannuation reform

You've worked hard, but are you 'entitled'?

Super is delivering for people about to retire

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.