The Association of Superannuation Funds of Australia, is pressing the Commonwealth to increase the nine percent compulsory superannuation levy, to reduce or abolish the superannuation contribution tax, and to extend the co-contribution scheme for low income earners. They are particularly concerned that people under 40 may not be accumulating adequate savings to fund retirement.
Their proposals are appealing at first sight. Australian households are spending beyond their means, as many the Centre for Policy Development contributors have correctly pointed out. We know the power of compounding – if a 30 year puts aside just $100 every year, at a real (inflation -adjusted) annual return of five percent he or she will have $10 000 at age 65. And, if the economy is likely to face inflationary pressures, productivity dividends in the form of superannuation provide benefits for wage earners without ramping up demand; this was the essence of the 1995 Hawke Government’s Accord.
Superannuation, however, is already highly privileged in comparison with other forms of saving, and it can easily be extended to the point of diminishing or negative returns.
Young people who have recently entered the workforce are typically facing some of the highest cash flow needs of their lives, particularly if they have children. Their disposable income will already be suppressed by HECS debt, and they will be seeking housing in an inflated market. On the one hand they are contributing to the financial sector through superannuation, and on the other they are usually drawing from the financial sector in the form of a mortgage. If they have to contribute more superannuation they will probably have to take out larger mortgages. The main beneficiaries of this churning of funds are the financiers. Polonius may have been a pompous and unrealistic when he urged Laertes ‘neither a borrower or lender be’, but even the most savvy financial advisor in Elsinore would have cautioned him against being both at once.
Compulsory superannuation is paternalistic; it rests on the assumption that people, left to their own devices, cannot plan for their future.
Conservative politicians often refer to the virtues of ‘choice’, but compulsory superannuation takes choice out of our hands. People whose savings are spirited away by financial institutions are denied the opportunity to make their own investment decisions. Perhaps they will want to build up funds for their own business. Or they may want to invest in the following generation – a parent’s decision to take a few years off work to attend to his or her children is making a decision to invest in the next generation – an investment that will never show up in national accounts.
Admittedly not everyone is so disciplined; there is evidence that people are less than rational in their saving decisions. People generally discount future costs and benefits too heavily. But if public policy compensates for this bias with compulsion we risk encouraging a new form of dependence – dependence on the financial sector. We needn’t save for contingencies or for retirement because there is always a financial institution to look after us for superannuation, health insurance, contents insurance and car insurance to name the main areas. And when we run out of cash there are credit cards and mortgage re-draw arrangements.
There was a time when people disparagingly referred to the ‘nanny state'; we are now in the era of the ‘nanny corporation’. Compulsory superannuation is essentially a privatisaton of what has been a state welfare function, but lacking the benefits of government programs – transparency, accountability and low administrative costs. Dependence on corporations has replaced dependence on government.
Financial institutions themselves have contributed to, and profited from, this dependence. Most Australians would be surprised to know that the financial sector now accounts for eight percent of GDP, up from four percent just twenty years ago. It’s as large as the farming and mining sectors combined, or about $8,000 a household. We spend almost twice as much on the finance sector as we do on education.
In any event saving isn’t just for retirement or the long-term future; it’s also for contingencies and asset replacement. If people’s savings are frozen in inaccessible superannuation funds they have no option but to become more dependent on the financial sector. They won’t be able to pay cash for their next car, they may have to do without necessary house repairs, and they won’t be able to sustain a period out of work. (The loss of household savings has been no less effective than punitive industrial legislation in suppressing strike activity.)
And will their savings in superannuation necessarily contribute to a more comfortable and secure retirement? Perhaps, but there will be losses on the way. Even if fund managers make an impressive six percent real return in their investments, this can fall by two percent once fees are deducted. Around one third of that nest egg can go in fees. That’s not saving; it’s consumption – consumption by those who draw their incomes from the financial sector.
If investment returns fall, then fees will take an even larger proportion of people’s savings. Australia has enjoyed 25 years of high investment returns, but recent rises in equity values and falling bond yields suggest that there may be an excess of savings chasing limited investment opportunities. We may be returning to an era of lower real returns.
Even if people accumulate large superannuation balances, they will benefit little if the economy is not equipped to cater for an older population – if we have too few aged-care nurses and if our housing and urban designs aren’t suitable for older people. Australia in 2040 could be a society with many older millionaires stranded in inappropriate suburban housing, unable to secure nursing and other help, because of our planning failures in 2005.
The greatest absurdity would occur if, through compulsory superannuation, some people enjoy a luxurious retirement after a working and child-raising life of stringency. For someone with the good fortune of unbroken professional employment, who uses a low fee industry fund, a contribution rate of 15 percent, as many are calling for, could result in a sustained rise in income at retirement. On death, that person’s estate will pass to the next generation just at that stage of life when their own high expenditure needs are falling.
We need to re-frame our public policy attention, away from the simple notion of more (or less) superannuation, and towards asking what policies may help us in matching income at our life stages with our needs at those stages.