Superannuation and the Aged Pension: Make Super Voluntary

The superannuation system currently provides $40bn a year in benefits to 1.4m beneficiaries, at a cost of $36bn per year in management fees, employing 55,000 people.

The aged pension system provides $45 billion in pension benefits to 2.5m pensioners, at a cost of $1.7bn per year in administration, and employs 7,000 people.

The two systems do not fit well together. They comprise a messy, expensive and inefficient dual system of retirement incomes. New Zealand does not have a superannuation system. It’s aged pension system is universal, and is much more efficient than Australia’s.

Our system of superannuation was introduced in 1992. It is a compulsory deduction of 9.5% of pre-tax wages, scheduled to rise to 12% by 2025, which must be paid into a nominated superannuation fund that cannot be accessed until a certain age is reached (56 rising to 60). It’s purpose is to provide retirement incomes in excess of the aged pension, and to reduce public expenditures on the pension as Australia’s population ages.

After 27 years, it is now clear that this system is not fit for purpose. It has not reduced reliance on the aged pension for the majority of Australians, and it has not lowered public spending on the pension. Nor is it likely to do so in the forseeable future. For 40% of employees, particularly those in low-paid, part-time or precarious employment, superannuation is insufficient to displace the pension as the primary source of retirement income. Those outside the paid workforce accrue no superannuation at all. For the top 20% of households, who already have a mean net worth of $3.3m, superannuation is a supplementary benefit to an already existing capacity to live well in retirement.

Earnings on balances in superannuation funds are taxed at 15% until retirement when earnings are tax free up to a balance cap. Pre-tax and post-tax contributions to super are also taxed at 15%. Regular rule changes on tax arrangements, and continual expansion of super tax breaks for low income earners and high income earners have not altered the overall effectiveness of superannuation as a retirement income option. These changes have, however, been very costly, with $35bn in tax revenue forfeited each year in super tax concessions.

Management fees in the superannuation system amount to a massive $36bn per year. This is significantly higher than in many comparable systems.

The Australian system of superannuation is particularly rigid because it is embedded in the industrial relations system. For many years, a significant proportion of employees were denied their choice of fund, with specific industry-based funds mandated in awards and employment agreements. Some employees are still denied their choice of fund.

Policy Agenda

1. Superannuation should be voluntary. If an employee chooses to opt-out of a superannuation fund, the employer super contribution of 9.5%  of pre-tax wages (rising to 12% in 2025) should be made to the employee’s regular bank account.

2. Members of super funds who choose to opt-out should be permitted to withdraw up to $20,000 per year from their existing super account over a transition period of 10 years, with any remaining funds transferred at the end of the 10th year.

3. Take-home wages will effectively increase by 9.5% for those who opt-out. If 25% of superannuation account holders opt-out and spend $20,000 per year, this would constitute an annual stimulus of $132.5bn to the economy. Much of this expenditure would in turn earn GST and tax revenue.

4. All super tax concessions should be abolished, a saving to the Commonwealth of a staggering $35bn per year. Earnings on balances in superannuation funds would continue to be taxed at 15% before and after retirement, as would annual pre-tax and post-tax super contributions.

5. The qualifying age for the pension would be reduced from 67 back to 65.

6. The asset value of the family home would continue to be excluded from the aged pension means test. The current means testing arrangements for aged pension eligibility would continue.

7. The rent allowance for aged pensioners should be increased by 100% – an extra $3,500 per year. With housing rents being a large share of expenses, renting aged pensioners are at a massive disadvantage. On current trends home ownership for over-65s will decline from 76% today to 57% by 2056. Increasing the rent allowance for aged pensioners would be a huge step to repairing the inequality between renters and homeowners in the aged pension system.