February 17, 2023
Who Truly Gains from Compulsory Superannuation?

The question of whether the government should raise the superannuation guarantee (SG) has sparked heated discussion. Our superannuation advisors reveal that determining whether a larger superannuation guarantee will help the majority of individuals is complicated for two reasons.

First and foremost, the proper superannuation advice australia guarantee varies substantially across individuals. This, we believe, reinforces the case for greater flexibility rather than imposing a larger superannuation guarantee on everyone.

Second, the justification for expanding the superannuation guarantee is dependent on the goals of superannuation policy. If the goal is to replace the age pension, a clear case emerges, but not always.

Related: Why are the Super Returns for 2022 different from those for 2021?

Money is pushed from pre-retirement to post-retirement via super.

We identify what could determine the ‘correct’ level for the superannuation guarantee in a recent research, and how it fluctuates based on the individual and assumptions. The study is carried out over nine income levels ranging from $30,000 to $150,000, each with a different goal expenditure level. We follow existing tax, superannuation, and pension requirements. Our model focuses on the trade-off involved in saving through superannuation, which cuts pre-retirement money but produces a gain in terms of post-retirement income. It is critical to evaluate super as a trade-off. Focusing solely on “how much super is required” to create enough retirement income ignores the potential that some people may have other uses for the money.
Forcing lower-income earners or women to contribute to super, for example, may not benefit them if they are trying to make ends meet or might use the cash to help buy a house throughout their working life.

Who Truly Gains from Compulsory Superannuation?

There is no one-size-fits-all superannuation promise. 

The table depicts the broad variety of superannuation guarantee estimates that arise based on income and other assumptions – ranging from around 2% to 20%. The reduced superannuation guarantees are linked to the ASFA modest income objective of 85%-90% coverage by the pension plus supplements. The pension is not included in the greater superannuation guarantees.

Furthermore, our superannuation advisors do not analyse characteristics that contribute to possible inequalities between people, such as household status, gender, assets outside of superannuation, and homeownership. Those who own a house, in instance, plainly require far less income during retirement than those who must pay rent.

The main issue is that there is no such thing as a “one-size-fits-all” superannuation guarantee. Furthermore, there is an imbalance around the superannuation promise. Individuals can now do nothing about an excessively high superannuation guarantee, but they may contribute more if it is excessively low. We believe that this adds up to an argument for allowing some flexibility rather than requiring everyone to save more. The superannuation guarantee should be better positioned as a default rather than a rigid compulsion, while increasing flexibility to adjust contributions subject to constraints that prevent people from opting out too much.

Factors that support a bigger superannuation guarantee.

Our analysis also reveals two scenarios in which raising the superannuation guarantee will benefit the great majority of Australians. Both are related to what the superannuation guarantee is attempting to achieve, so that the Government should first determine the policy goals before choosing whether to raise the superannuation guarantee to 12%.

The first criterion would be to replace the age pension with superannuation. This entails encouraging as many individuals as possible to become self-funded retirees, with the pension serving just as a safety nett. Excluding the pension from our research shows how much savings are needed without the pension, in which case a 12% superannuation guarantee may not be enough. The alternative is to consider the pension as a source of income that is generally available to everybody. 

Who Truly Gains from Compulsory Superannuation?

n this case, the need to save for retirement is significantly reduced because the pension provides substantial income assistance, particularly for lower-income individuals. Policymakers may be explicit about whether the objective of superannuation is to replace or complement the pension. 

The second criterion would be that individuals save enough to sustain themselves in retirement if things do not go as planned, i.e. utilising superannuation as a self-insurance mechanism. There are three major dangers that might lead to inadequate savings:

  • Living to a very late age and running out of money, often known as longevity risk.
  • Low investment returns that deplete collected money 
  • Retiring sooner than intended, causing contributions to halt before the pension becomes available, resulting in a need to support spending by depleting savings. Career breaks have comparable impacts, but there is the possibility of catching up on super payments later, and other income sources

We do not believe that increasing the superannuation guarantee is the appropriate approach to manage these issues. The issue is that pushing everyone to save more ‘just in case’ might lead to over-saving if the predicted hazards do not materialise. If the extra funds are not required, an individual’s pre-retirement level of life would have been sacrificed without receiving a corresponding benefit, as well as greater bequests for the children.

Other risk-management techniques include social security and risk-sharing among people. Annuities and other sorts of member collectives are examples of ‘pooling’ solutions. We would prefer that policymakers investigate these processes.

The ‘who pays’ question

A greater superannuation guarantee may be advantageous for some individuals if it is paid for by employers rather than deducted from their take-home pay through some sort of wage offset. This situation, however, is far from simple. The evidence on whether the superannuation guarantee has been offset by reduced earnings in the past is ambiguous. Even if the employer pays in the beginning, it is unclear where the responsibility finally rests. Profits may suffer, but other possibilities include the cost being shifted back to individuals if enterprises raise prices or reduce jobs.

Final Note

Adding greater freedom to adjust contributions makes more sense than increasing the superannuation guarantee. Furthermore, the rationale for an increase in the superannuation guarantee across the board is dependent on the goals of superannuation policy. If the goal is to replace the age pension, we have a clear justification, but the benefit of an increase is disputed. Get in touch with a superannuation advisor today for a professional consultation on your specific issue.