Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 97

What will super look like in 40 years?

This article paraphrases presentations at the Thought Leadership Breakfast, SMSF Association (formerly SPAA) Conference, 18 February 2015 by:

• David Murray, Chairman of the Financial System Inquiry

• Don Russell, Senior Public Servant and one of the architects of compulsory superannuation.

The subject of the breakfast was: “The future of Australia’s Retirement Income System: What we want the system to look like in 40 years.”

(Presentations by Warwick McKibbin, Andrea Slattery and Sir Anthony Mason will appear in subsequent editions of Cuffelinks).

David Murray

The FSI was specifically asked to consider the financial system in the context of its users and how the system could serve the economy better. The focus was on improving resilience, mainly through strongly capitalised banks; enhancing economic growth through more innovation; building confidence and trust especially in context of financial advice and education; making the regulatory system more accountable and efficient; and extracting more value from superannuation.

It is hard to do a good job on anything unless there are clear objectives, and the FSI saw three objectives of superannuation:

  1. To provide super for those not previously in the system especially low income workers, and it's certainly done that.
  2. To augment national savings, and it's not clear if this has occurred because we don't know what would have happened otherwise.
  3. To improve the government budget position by reducing reliance on the age pension, but this has not happened.

We did not want the financial system to be politicised, but if you have a mandatory system which produces inequities, then it remains politicised.

We also focussed on the costs and they appear to be very high. The compounding effect of this trashes income in retirement. The system is not benefitting from any pooling of risk as might happen with a Defined Benefit system. With better information to superannuants on what income they might earn from their superannuation savings, and some requirement to offer income products, people on average earnings could increase their income in retirement by 25% to 40%.

Australia has a dependency on the rest of the world which can work for or against us. This means Australia has to demonstrate to the world a high quality of management of our system. Australia is a prolific borrower and it is a style of borrower that wants to repay its debt. But Australia has reached the point where we don't manage the budget responsibly, so the imperative with a downturn in the commodity cycle and slowing China is that we must have a more resilient financial system. And in superannuation, we must make the most of those savings.

How do we figure what the system will be like in 40 years' time? Don't try. Don Sanders, my predecessor at CBA, had been Deputy Governor at the Reserve Bank and he told me once, "Before the Campbell Inquiry, the Reserve Bank used to set the exchange rate, we could fix interest rates on deposits and lending, we had qualitative controls on lending, we could control the lot. And we couldn't forecast anything." Nothing has changed. What matters is that the investments made for superannuants meet their needs well and are the most productive outcomes we can achieve.

We can't change the demographics such as the ageing of the population, and we need to make sure the objectives are achieved and we make improvements. If we do not, then we have to ask if we would have been better off without it (the current superannuation system). Would people have saved just as much anyway, invested wisely themselves? I hope we don't get to that point. We must keep the system depoliticised and as simple as we can.

The only priority of the superannuation system should be to provide income in retirement. There are very generous tax concessions in the system and very generous voluntary contribution arrangements, and there is no cap, which drives the inequities. It's not a sustainable system. These are matters for the Tax White Paper.

Don Russell

(Don Russell worked with Paul Keating when compulsory super was introduced in 1992).

It's fair to say a lot of damage has been done to the superannuation industry in the last decade. There is a notion that superannuation is a tax rort for the well-off, and that the industry itself is run largely for the benefit of providers has become almost the conventional wisdom. It has got worse with the focus on budget priorities. Why has it come to this, having started with high hopes and a large amount of public support? Treasury has always disliked tax preferences in superannuation, but the notion that the tax advantages bought the compulsion has been lost. We are asking people to lock their money away, that's why there was an incentive.

People have realised that by locking money away for 35 years, it will run the gauntlet of a minimum of five Treasurers and perhaps 10 Superannuation Ministers and all the bright ideas of hundreds of public administrators for the rest of their lives. With no particular guarantee of whether it will come back to them, people have to believe it's a good deal for a compulsory system to operate. If they don't, someone along the way will say, let's just make the SG voluntary. Most people won't save unless it's a very good deal to lock it up for that time.

It's what makes the Australian system so remarkable. Very few other countries have had the capacity to make people give up such a large part of their current income and get it back in many decades' time.

Why are we in the current predicament? A major reason is the industry has been unable to speak with one voice. The industry has used the political process to try to improve particular competitive positions. This has discredited the industry and strengthened the critics who want to change super. It has enabled the Treasury in particular to hone in on those aspects which are being emphasised within the industry itself, and to remove the tax preferences. The problem for the industry is that people are not listening any more.

Participation in workforce depends on age and the ageing of the population will change the way we view things. The debate about superannuation will change as the population changes. There will be a major collision between the income needs as people age and budget outcomes, and we're seeing it already.

Do we need to create a two-tier system? This notion of income support from the mid-60s may be replaced by support for a fixed time, perhaps private provision helps people from 60s to 80s and then the government picks up the cost after that. If we embrace superannuation filling this 20 years after people leave active employment, then we provide scope for two-tier pension. Or perhaps a lower tier from 65 to 85, and higher when superannuation has run out. We cannot cover longevity risk for most with any type of clever financial planning if people are still alive at 103.

There is scope to cover this first 20 years with significant savings to the budget. I'm sure as an industry we have focussed too much on accumulation, and we need to become active in the debate about ageing. For example, South Australia is dealing with having an older population than the rest of Australia, and is seeing an opportunity to develop a capacity to deal with this which will stand South Australia in good stead as an industry leader, as a creator of technology, where the big picture issues such as prevention and lifestyles are managed. There is a wide range of things people can do to change the costs and the dynamics of living longer.

The system was originally set up to encourage self provision of funding by the majority of people, it was not to channel more income to low income earners. You can only compel people to do things if it's a good deal, and it does need to have tax preference to help savings. It will always benefit high income people because they are the only ones who can save.

But the debate has become, why don't we use the tax preference to channel more income to low income earners? It is a universal system, we were trying to change the behaviour of the entire population to put aside income they probably would have consumed. The equity issue is tricky because aspects of the current arrangements are excessively generous, which go beyond what is necessary, and that's what we should focus on.


Graham Hand attended the Conference as a guest of the SMSF Association.


CIPRs are coming and that’s exciting

Back to the future with Murray's super objective

Has the FSI missed the elephant in the room?


Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

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?

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates


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?


Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?


D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.


Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.


Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?



© 2021 Morningstar, Inc. All rights reserved.

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.