Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 24

Paternalism is not a dirty word

I’ve seen many articles, including in Cuffelinks, encouraging people to become more engaged with their superannuation and I feel obliged to provide a reality check. While it would be preferable if people became more aware of their superannuation and their retirement plans, it is simply an unrealistic expectation. And so defaults remain crucially important. A degree of paternalism is necessary in the design of defaults to make sensible decisions on behalf of the disengaged. This is the essence of the Super System (Cooper) Review and MySuper: defaults are here to stay and it is critical that they are well designed and managed.

Unfortunately I see many more articles on the importance of engagement than on the design of defaults. Indeed one of the disappointing aspects of the MySuper implementation, potentially because of the tight deadlines, has been the lack of robust public debate on default design.

Priorities other than superannuation

In some cases a choice to become more engaged with super could actually be irrational. Two reasons explain lack of engagement: the first is competing pressures for people’s limited time and the second is lack of financial literacy.

People only have so much time and most have hectic lifestyles. Have you ever written down all the areas you should be more engaged with?

  • family and friends – direct family, extended family and friends. I wish I was a better husband, was more actively involved with my kids, kept in touch more with my extended family. I wish I caught up with my friends more often so I could be a better friend to them.
  • health – this could be specific health issues, managing a healthy lifestyle including diet and fitness, or being aware of all the potential health issues we need to keep an eye on.
  • career – job security, workplace enjoyment, long-term outlook, a job that will allow someone to work beyond 65. These issues take planning and implementation (perhaps more study for instance).
  • sustainability – surely we want to leave the world in a healthy state for future generations. This can include environmental, financial (eg. government debt status) and social issues.
  • finances – while super is important it is not the only important area of personal finance. Household debt, savings, investment, insurance and taxation management decisions are all important.
  • interests – surely it is healthy to allocate some time to personal interests, be it sport (participant or spectator), travel, or a whole range of other possible interests? I’d love to be able to hit a top-spin backhand on the tennis court but unfortunately it’s not going to happen any time soon!

Many of the above are likely more important areas to allocate our ‘engagement time budget’ than superannuation; it is a case of personal preferences. And so it is quite possible that, faced with competing choices for how to allocate limited time it may be rational not to engage with our super.

The potential payoff from engagement varies across the population. Low income earners who with high likelihood will rely predominantly on the age pension for their retirement income will receive less benefit from engaging with their super than higher income earners.

Financial literacy shortcomings

The second reason that all superannuants will never be engaged is that much of the population simply does not have the level of financial literacy to be able to comprehend what is a highly complex system. Understanding superannuation and retirement outcomes is extremely difficult. Investing and managing a portfolio is hard work. Understanding mortality outcomes is the domain of those scary actuaries. We have one of the most complex superannuation tax systems in the world. Full engagement by an individual with their superannuation is really only the domain of those in the industry and a relatively small group of financially literate people. And so we reach a common model where engagement is via an agent (financial adviser).

And yet basic levels of financial literacy in Australia, as in the rest of the world, are low. Some of the statistics used in the Cooper Review, based on The 2006 Adult Literacy and Life Skills Survey of Australians published by the Australian Bureau of Statistics (ABS) in January 2008 are alarming. The Survey found that 46% of 15-74-year-olds, or some seven million people, would struggle to understand documentation such as job applications, maps and payroll forms. A worrying 53% of surveyed Australians reached just the second of five levels in a practical numeracy test, while 70% (about 10.6 million people) managed only to progress to level 2 in a series of problem-solving exercises. Level 3 is regarded by the survey developers as the minimum required for individuals to meet the complex demands of everyday life and work in the emerging knowledge-based economy.

The need for financial literacy programmes is clear. The outcomes of such programmes will result in economy-wide benefits far broader than simply greater engagement in super. Better engagement with super is a long term, multi-decade objective, which will hopefully be fertilised by financial literacy programmes at a school level.

It is also worth noting that while engagement with super is expected to have benefits, better outcomes are not guaranteed versus well-designed defaults. Well managed defaults are overseen by investment and industry experts but they struggle to take account of personal characteristics (though this is an emerging area of further development). Engaged investors step out of this model (to varying degrees) and may benefit from a solution more tailored to their personal characteristics. Undoubtedly there is large variation in the quality of implementation and so improved outcomes are far from guaranteed.

This brings me back to the importance of defaults. Default solutions take care of those who are not engaged – they may be vulnerable because they have low levels of financial literacy, or they may (in some cases quite rationally) not allocate the time to be engaged with their super. Paternalism seems to have become a dirty word in an age of choice but this is exactly what defaults are all about – taking care and ownership of superannuation for those who are not engaged (ironically, the people who will never read this article). There is a requirement to think and act on behalf of the member. Of course sensible levels of engagement (for example, what you may end up with, retirement intentions, the benefits of saving more etc) are worthwhile alongside financial literacy programmes, and have mass benefits, but this is different to the aspiration of full engagement. Ongoing commitment to best practice default solutions must remain at the top of the priority list of the superannuation industry.

 

RELATED ARTICLES

Behavioural reasons why we ignore life annuities

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.