Australia’s superannuation system is often described as “world-class”. It is a phrase repeated by governments, industry bodies, and fund executives, and it has become part of the national mythology. Yet when judged against the basic economic principles that should guide a retirement income system, the claim does not hold.
In this piece we concentrate on three important structural failings of our system which impose real welfare losses on Australians, particularly lower-income earners. Any discussion of reform, including the proposals now being floated by One Nation and the Coalition, must begin with these failings.
Superannuation is ultimately about consumption: giving up consumption during one’s working life in order to fund consumption in retirement. A retirement income system should help individuals achieve the best possible pattern of consumption over their lifetime.
How we got here
The system originated as a compromise between the Hawke Government and the ACTU to deliver a 3% pay increase in the form of superannuation rather than wages, thereby avoiding additional inflationary pressure.
In 1991–92 the Keating Government made this arrangement universal through the Superannuation Guarantee, beginning with a contribution rate of 3% and legislating a gradual increase to 9%.
Subsequently, the 2012 Gillard Government legislated a further increase from 9% to 12%.
An absence of analysis at each stage has played a central role in creating the failings that follow.
1. The contribution rate
Four major studies — by the Grattan Institute[1], Treasury[2], ANU[3] and our study at UTS[4] — were conducted between 2017 and 2020, when the contribution rate was frozen at 9.5% and consideration was being given to increasing it further. All four studies reached the same conclusion: 9.5% was more than adequate and there were no grounds for increasing it.
At 12%, most accumulate more retirement savings than they require, at the expense of consumption during their working lives. Our analysis showed that the current system leaves most individuals worse off, with welfare losses for lower-income earners reaching as high as 30%[5].
2. Home ownership
The second structural failing concerns home ownership, which — along with the Age Pension — has always been a central pillar of Australia’s retirement safety net. When mandatory superannuation was introduced in 1992, around 85 to 90% of individuals owned their home outright by the time they retired. Since then, this figure has steadily declined and now sits at around 75 to 80%, with almost half of homeowners retiring with a mortgage.
The decline has been particularly severe for younger Australians, with ownership among those in their early thirties falling from around 50% in 1992 to around 35% today.
Superannuation is not the only cause of this decline, but it is a significant one, with the timing of the turnaround in home ownership being closely linked to the introduction of mandatory superannuation contributions. Mandatory contributions reduce the ability of younger Australians to save for a deposit and to meet mortgage repayments, crowding out the very asset that underpins retirement security. This distortion is particularly harmful for lower-income earners, who face the greatest difficulty entering the housing market.
Our analysis suggests that home ownership will be unattainable for those in the bottom third of income earners in the absence of family assistance. A generation entering retirement without secure housing is likely to face higher living costs and greater reliance on government support. A retirement system that undermines home ownership ultimately undermines itself.
3. Tax concessions
The third failing concerns the fiscal and distributional impact of superannuation tax concessions. Based on Treasury’s estimates, the current cost of these concessions is $63 billion, which on current trends will reach $80 billion by 2030. They have never been given a clear policy justification, and it is questionable why they are needed at all in a system where contributions are compulsory.
They are sometimes defended on the basis that compulsory superannuation reduces the demand for the Age Pension. The Age Pension currently costs about 3.1% of GDP, or roughly $80 billion a year. When compulsory superannuation was introduced in 1992–93, the Age Pension cost around 3.8% of GDP. Given the demographic ageing that has occurred since then, we estimate that in the absence of compulsory superannuation, this figure would currently be around 4.2%, translating to a current cost of almost $110 billion. The saving in the Age Pension attributable to compulsory super is therefore in the order of $30 billion a year.
Australia therefore spends more than two dollars in concessions for every dollar saved on the pension. This is a poor fiscal trade-off. Worse, it is inequitable. The concessions overwhelmingly flow to high-income earners, while the Age Pension savings come from lower-income earners. Superannuation is now a major contributor to Australia’s widening wealth gap. Governments have chipped away at concessions for two decades, but their cost continues to grow. The structural problem remains: the system delivers large tax benefits to those least in need of support, while imposing welfare losses on those least able to bear them.
Why these failings persist
These failings create structural weaknesses that weigh most heavily on lower-income earners, who suffer the greatest welfare losses, the greatest barriers to home ownership, and effectively no benefit at all from the tax concessions. And they have persisted for a simple reason: the system has never been built on rigorous economic analysis.
The original 3% contribution was introduced as a wages workaround during high inflation, not as part of a coherent retirement income model. When the Keating Government later made superannuation universal and set the path for future contribution rates, it did so without releasing any detailed modelling of the system’s economic or fiscal impact. The Howard Government then extended generous tax concessions to voluntary contributions without serious analysis of their behavioural or distributional effects. And the Gillard Government legislated the increase in the Superannuation Guarantee to 12% without publishing modelling of its impact on wages, consumption or retirement incomes.
Treasury and the Retirement Income Review have since acknowledged this history: at no stage has compulsory super been subjected to the level of assessment that a policy of this scale demands. The result is a $4.8 trillion system shaped more by political policy decisions than by coherent economic design.
The new proposals
Against this backdrop, the proposals now being advanced by One Nation and the Coalition are best understood as political responses to cost-of-living pressures and housing affordability rather than serious attempts to correct the structural failings of the superannuation system.
Neither proposal was designed with the system’s underlying weaknesses in mind, and neither is supported by the kind of economic analysis that those weaknesses demand. Even so, they intersect with the failings — and in some cases, partially address them — not because they were conceived as reform, but because the failings are now so large that almost any change to the system brushes up against them.
One Nation’s proposal
The One Nation proposal would allow individuals to access 25% of their compulsory superannuation contributions for three years. This would temporarily reduce the effective mandatory contribution rate to 9%, with the additional 3% being optional.
The current contribution rate of 12% should not be regarded as sacrosanct. The consensus of the studies previously discussed was that a contribution rate of around 9% is closer to the rate that would facilitate an optimal consumption pattern. In this sense, the One Nation proposal does address the first failing at least for a short period of time.
What is worrying is the calls being made to increase the rate even further, with figures as high as 18% being suggested to improve retirement outcomes for women.
More recently, some economists have proposed increasing the contribution rate, as an alternative to raising interest rates, as a means of addressing inflation. This suggestion is reminiscent of why mandatory superannuation was introduced in the first place and reflects a tendency to treat superannuation as a tool for solving almost any economic problem, while ignoring its role within retirement income policy.
The Coalition’s proposal
The Coalition’s proposal directly addresses the second failing. Allowing first-home buyers to access their superannuation for a deposit — and potentially for mortgage payments or as collateral — would improve access to home ownership for younger Australians. The details of the proposed extensions are unclear, but the overall direction is sound: superannuation should not stand in the way of home ownership.
The Coalition proposal acknowledges this, even if it does not fully address it.
What neither proposal addresses
Neither proposal touches the enormous and inequitable cost of superannuation tax concessions. Fixing this problem requires politically unpopular decisions. If concessions are to remain, their scale and distribution should be reconsidered. No party appears willing to undertake meaningful reform in this area.
Conclusion
A system built without rigorous analysis and marked by structural failings will not be repaired by politically driven proposals that only brush against its weaknesses.
The proposals advanced by One Nation and the Coalition intersect with some failings but do not confront the deeper design flaws. Until policymakers are willing to rethink the system, Australia will continue to devote billions each year to a retirement structure whose outcomes fall well short of its potential.
[1] Daley, J., Coates, B., & Young, W. (2018). Money in Retirement: More Than Enough. Grattan Institute, Melbourne
[2] Commonwealth of Australia (2020). Retirement Income Review: Final Report. The Treasury, Canberra.
[3] Khemka, G., Tang, Y., & Warren, G. (2020). The ‘Right’ Level for the Superannuation Guarantee: A Straightforward Issue by No Means. College of Business and Economics, Australian National University.
[4] Bird, R, Hue, J, & Hulley, H (2017), How Good is the Australian Superannuation System, In Reality? Paul Woolley Centre, University of Technology Sydney
[5] Welfare is calculated as the present value of lifetime consumption and wealth at time of death.
Emeritus Professor Ron Bird (ANU) is a finance and economics academic and former fund manager.