Australia is facing a cost-of-living problem.
It’s pointless to pretend it’s any different.
Rent is costly. So are mortgages. Groceries are costly too. Other expenses such as insurance, electricity, fuel, and childcare are also affecting household budgets.
It is easy to see why such a proposal suggesting that Australians should be allowed to put more of their compulsory superannuation into their own pockets today has appeal.
The One Nation proposal would enable renters and people who have mortgages to have three percentage points of the present 12 per cent compulsory superannuation contribution redirected into their take-home pay for a period of up to three years; for a worker with an income of about $90,500 that amounts to around $2,300 per year or approximately $44 per week.
As an accountant, I can see why $44 a week seems attractive.
But I think we need to ask a much more important question:
Are we improving the situation for Australians, or are we merely transferring some of tomorrow’s wealth into today’s bank accounts?
In my opinion, the proposed solution is incorrect. The most significant problem with the proposal is surprisingly simple: superannuation is meant to be invested over decades; if you withdraw money from that investment process now, you don’t merely lose the contribution.
You also forfeit the future income from that contribution, and this is both the strength and the risk of compound growth; a dollar invested today can become several dollars over a working life.
On the other hand, the amount of money you have today isn’t just one dollar less when you retire; it’s one dollar together with the potential for investment returns over many decades that you’ve lost.
The figures cited in this discussion indicate that an average 30-year-old would be about $25,000 worse off at retirement because of the proposal. Obviously, the exact amount will vary according to age, income, the rate of return on investments and the length of time that a person stays in the scheme, but the basic principle in question is not in dispute: that is, the less money that is put aside for retirement, the less money will be available at retirement. This in turn leads to another issue.
So, if millions of Australians have less superannuation when they retire, where is the money coming from to support them?
Some of it could instead be funded by taxpayers via the Age Pension, which means that what should be a private issue concerning retirement savings might end up as a future burden on the government. The suggestion treats a structural problem as a cash-flow problem, and that is where I believe the policy fundamentally fails. Australia isn’t facing a problem amounting to $44 a week; we face a structural affordability problem.
Housing costs have risen sharply. Building is costly. In many areas, housing supply is limited. Interest rates have raised borrowing costs. Rents have risen as well.
It won’t remedy any of those issues to give households access to extra retirement savings.
There is, in fact, a real possibility that giving millions of households more spending power might raise demand without increasing the supply of housing and other goods and services, which is the kind of inflation concern economists and the government have raised.
An even more unpleasant possibility exists. If people take their extra super-derived income and use it to buy property, part of that additional purchasing power might just be reflected in higher property prices. We have encountered similar problems in the past.
If governments take steps to make it easier for people to borrow larger amounts of money without increasing the supply of housing, that does not always lead to more affordable housing; it may simply mean more money for buyers to pursue the same number of properties.
I believe that the solution is not just to defend the existing superannuation system and assert that no changes should be made. That approach is also insufficient. Compulsory super should be reviewed.
The Grattan Institute, through its independent research, has for many years claimed that Australia should consider whether 12 per cent should be the mandatory contribution rate. It has stated that compulsory superannuation can be advantageous but may also end up being “too much of a good thing”, especially since the opportunity cost involves earning less income during people’s working lives.
That is a much more sophisticated debate than:
Since super is good, twelve per cent must also be good.
Or:
Since people need money now, they should have access to their super.
Both of those approaches are too simple. Therefore, what ought we to do? I think Australia should consider a more focused reform. Continue with compulsory superannuation but doubt the rate.
The first question should be:
At what level does mandatory superannuation result in an adequate retirement outcome?
Not:
How far can we make Australians save?
There is a difference.
We should be ready to consider it if independent modelling indicates that a reduced compulsory contribution rate can still offer an adequate retirement income for most Australians.
For instance, instead of letting people voluntarily raid their super for three years, we might investigate whether a reduced baseline contribution rate, such as 9 or 10 per cent rather than 12 per cent, better balances present living standards and future retirement security.
A structural reform, rather than a one-off financial injection, would provide workers with extra income without asking them to make a personal decision to give up their retirement savings.
There’s another lesson to be learned: although Australians do need greater financial flexibility, the solution doesn’t have to be to make superannuation more accessible.
We should be encouraging people to build wealth through multiple buckets:
- superannuation for retirement;
- mortgage equity;
- cash savings and emergency funds;
- investments outside super; and
- where suitable, government support.
The difficulty with investing a large portion of a person’s wealth in a locked-in retirement account is that they end up being asset-rich but cash-flow poor.
A 30-year-old with $50,000 in superannuation and $10,000 in the bank might have a reasonable balance sheet, but it offers little help if the car breaks down or the rent goes up.
The solution isn’t necessarily to make super more liquid. It may be to ensure Australians have enough accessible wealth outside super.
If our aim is to help Australians genuinely under financial strain, I’d prefer targeted aid rather than a general policy that enables millions to cut back on their retirement savings.
For example, governments could consider:
- expanding targeted rental assistance;
- improving support for households experiencing genuine mortgage stress;
- strengthening emergency financial assistance;
- reviewing income-tax thresholds and brackets;
- reducing inefficient taxes and charges;
- increasing housing supply;
- accelerating planning and infrastructure reform; and
Looking at the tax concessions associated with superannuation.
That point is very important; if we really want to make the retirement system fairer, we should look at where tax exemptions provide the biggest benefit.
The goal should be to achieve adequate retirement incomes, not merely to build up the largest possible superannuation balances.
In my opinion, the discussion then becomes even more interesting.
It can be reasonably argued that a person’s financial situation in their 30s can have a huge effect on their financial position at retirement, and owning a home is one key example.
A retiree who owns their home free and clear is in a very different financial position from one who is still having to pay market rent. The fact that fewer people will own their homes when they retire should be a real concern. Earlier, Grattan pointed out the vulnerability retirees face when they rent.
So perhaps the policy question shouldn’t be:
Should Australians be given the right to take 3 per cent of their super?
Perhaps it should be:
What can we do to help younger Australians establish both retirement savings and housing security?
That’s a lot better question.
If I were designing the system from scratch, I would look at something like this:
1. Introduce a compulsory super rate based on evidence
The Treasury, the Productivity Commission and the independent actuaries should regularly examine what contribution rate is needed to ensure an adequate retirement income.
If 12 per cent is justified, then go with it; if the evidence shows that 10 per cent is appropriate, then take 10 per cent. The rate must not be determined by political considerations or by the superannuation industry’s influence.
2. Ensure that compulsory retirement savings are maintained
I support keeping compulsory super because behavioural economics is relevant. The average person will prioritise current financial difficulties over retirement, which is thirty years away. Compulsory saving helps people overcome their short-term incentives. Yet compulsory need not imply inflexibility.
3. Build a stronger “financial resilience” system
Australians should be encouraged to set up an accessible emergency fund outside of their superannuation.
The government could promote this by offering targeted tax incentives or setting up matched savings schemes for lower- and middle-income households.
The goal should be:
Super for retirement. Savings for life.
Not super for everything.
4. Give early access that is specifically aimed at a narrow group.
There are situations in which getting early access to super does make sense.
- Serious illness.
- Permanent disability.
- Severe financial hardship.
- Housing interventions that have been thought out with care.
These should be exceptional cases, not a second spending account linked to each person’s superannuation fund.
5. Tackle the problem of affordable housing at its root.
If housing is unaffordable, increase the supply of housing.
If construction costs end up being too high, look into why.
If planning gets in the way of progress, change how you plan.
If the infrastructure can accommodate new housing, go ahead and build it.
If tax rules change how people invest, look at those rules.
Do not use your retirement savings to mask a housing shortage.
6. Review superannuation tax breaks
Australia should also have a serious discussion regarding how super is taxed.
It is not very worthwhile making Australians save ever more through their superannuation fund while at the same time giving them ever more generous concessions, since these concessions may advantage people who were already able to accumulate a large amount of wealth.
The aim must be a sustainable retirement system, not a constantly increasing superannuation balance sheet.
When I see clients with a financial problem, I first consider whether the suggested solution addresses the problem or merely shifts it elsewhere.
That is precisely the way I see this proposal.
Taking the amount of forty-four dollars from your future pension and investing it in your bank account at the present time could improve your current cash flow.
However, if the real issue is that your rent is too high, your mortgage is too big, your income isn’t keeping up with your expenses, or housing is essentially unaffordable, $44 won’t solve the problem.
It will just leave you with another three years before the problem returns.
As a result, you may have weakened your retirement position.
The debate shouldn’t be about whether Australians deserve more money. Of course they do. It should focus on where that money should come from.
If the problem among Australians is that the tax system is taking too heavy a toll, then reform the tax system. If housing is too costly due to a lack of supply, then improve the housing supply. If wages are not keeping up with rising living costs, then look at ways to boost productivity and competition. If people are not saving enough apart from what they have in superannuation, then set up better incentives to encourage accessible savings. If the level of compulsory superannuation exceeds what is necessary, then hold an evidence-based discussion about lowering the rate.
Of course, don’t pretend that transferring money from a person’s retirement account into their bank account somehow creates wealth.
It doesn’t.
The change occurs when the money is spent.
And sometimes, as an accountant, the most important financial advice you can give someone is:
Having access to the money doesn’t mean you ought to spend it.
Australia must completely reconsider certain aspects of its retirement and housing systems.
The solution is not to spend tomorrow to pay for today.
The best option is to create a system that ensures Australians have sufficient income now, adequate flexibility throughout their working lives, and enough wealth to retire with dignity in the future.
This is the reform worth having.