Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 3

Do we really need superannuation?

It seems that no matter which way we turn, the government, regardless of which side of politics is in at the time, is stuck in a conundrum. As a nation, we have been told that the tax payer will not fund all our retirement, so we must save for ourselves, but the government has found it difficult to resist the temptation to increase superannuation taxes or wind back contribution limits.

Back in 1983, the Labor Government formalised the tax system on super and, with the cooperation of unions, started 3% award super (non-compulsory at that time). The framework commenced for a compulsory superannuation system which took 10 years to implement. We are better as a nation for it. Our country started down the path of a savings-based future rather than debt-based which we were facing in the days of the ‘banana republic’.

The superannuation era is therefore relatively new for Australia. Compulsory super is only 20 years old, or just one generation. In previous generations, the first investment people made was usually in their own home. This is no longer true. The day someone enters the workforce, their first investment is the 9% of their salary that goes into super. People who are entering the workforce today are the first generation born into compulsory super. We used to be told by our grandparents that in order to retire with the same lifestyle as when you were working, you needed to put away 10% of what you earned. It is little wonder that compulsory super will soon be at that level.

So do we need super? What really is a retirement asset? It’s not just me asking these questions. This was a focus of both the Henry Tax Review and the Cooper Review of superannuation.

A confronting statistic is that for every person on the age pension, we currently have about 7 people employed, but this number will fall significantly over coming decades, reaching about 3.5 people by 2042. After that, it is not expected to fall substantially more because the Baby Boomers will have passed away in large numbers by 2050, and the Gen Xers experienced a birth rate of less than two (ie there were fewer children than parents). Life expectancy depends on many factors such as the extent of further advances in medical science or rising obesity, but we know for certain that we will have a significant retirement funding problem for at least the next 30 years.

To put the outlay into perspective, the age pension for a male retiring at age 65 until normal life expectancy has a net present value cost of $400,000. In addition, it costs $440,000 for health benefits, giving $840,000 in total. This is our current age pension which we are told meets only subsistence living standards. Women are more expensive (no, not shoes!) because they are eligible for the age pension at a younger age and live longer.

We need super to reduce the future tax burden on those employed. Incentives must be provided to help us finance the next 30 years, targeted towards the retirees who this period directly affects. Otherwise, the remaining people who are in the work force will not be able to afford the increased tax required to fund the support system. Do we really want to create a nation where taxes are so high that there is no incentive to succeed, prosper and develop? There is benefit in being a tax payer if the money is well spent, and we must be careful to maintain the balance between overtaxing and taxation which creates value. This is a fine line.

Tax is inevitable, however, our administrators seem to have forgotten that our superannuation system is there to build a retirement asset. The legislative structure of our superannuation pension system says that all the money (plus or minus performance gains or losses) in the fund will be paid back to the people who put it in there and spent over their lifetime. Legislation entrenched that in the Simple Super changes in 2007. However, our age pension system needs to change to ensure people exhaust their own resources before drawing on tax-financed benefits. Tough call but change is needed. The Henry Review discussed this but no one was prepared to confront it.

There is no doubt that a larger tax base will be required over the next 30 years, but where from is the key. There are clear political problems in most alternative revenue raisers, such as an increase in the GST. For example, a 2% change in GST would fund the large majority of the current expenditure proposals but that’s not being considered.

The face of super is changing and will continue to do so. The expectation by 2020 is that we will have $3 trillion in super. Superannuation investments will change. We are likely have access to assets that we did not have before, such as an efficient mechanism for all super funds to invest in government or corporate bonds, or infrastructure projects, or investments that provide natural income streams rather than life offices actuarially creating them in a volatile market. We will have the ability through super to fund all of our banks’ home loans without foreign borrowing. Everyone is learning how collaboratively we can work together to ensure an effective investment and retirement system that benefits all.

So do we need super? Yes, absolutely. We can fund, grow and build a better nation together. We can better provide for the retirement of our people and reduce the burden on workers to support their forebears. Encouraging people to look after themselves, then taxing them for doing so, is not an appropriate answer.

The next five years of superannuation will be the most important of the coming 30 year conundrum. Let’s hope our legislators listen to all sides and create a balanced view.

 

Andrew Bloore is Chief Executive Officer of SuperIQ, a provider of administrative services for Self Managed Super Funds.

 

RELATED ARTICLES

Designing a world-class post-retirement system

How the Intergenerational Report misleads on super

Demographic destiny: a snapshot of Australia in 40 years

banner

Most viewed in recent weeks

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

“Trust your instinct” Hamish Douglass in conversation with Sir Frank Lowy AC

Sir Frank shares his story, including his journey from war-torn Europe, identifying opportunities, key character traits necessary for business success, and the importance of remaining paranoid yet optimistic.

Latest Updates

Investment strategies

Charlie Munger and stock picks at the Sohn Conference

The Sohn Australia Conference brings together leading fund managers to chose their highest conviction stock in a 10-minute pitch. Here are their 2021 selections with Charlie Munger's wisdom as the star feature.

Interviews

John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.

Infrastructure

Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?

Economy

The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.

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.