A brief history of superannuation

Earlier in July, Australia’s compulsory superannuation system turned 30 years old.

Alongside Medicare – Australia’s universal health insurance scheme – superannuation is held up as one of the key economic and social reforms of the Hawke-Keating Labor governments of the 1980s and early 1990s.

Join Brendan Coates, Economic Policy Program Director, Joey Moloney, Senior Associate, and special guest, Emily Millane, Senior Fellow the Melbourne Law School at the University of Melbourne, as they celebrate the 30th birthday of compulsory super. They ask how superannuation first came about, what it’s achieved in the 30 years since the system began, and how to make the system more equitable in the future.

Transcript

Brendan Coates: Last week, Australia’s compulsory superannuation system, with mandatory contributions from the employer, turned 30 years old. Alongside Medicare, super today is held up as one of the key economic and social reforms of the Hawke Keating Labor Governments of the 1980s and early 1990s. I’m Brendan Coates, Economic Policy Program Director at the Grattan Institute.

In this week’s podcast, we’re marking the 30th anniversary of compulsory super by stepping back and asking how superannuation first came about in Australia. what it’s achieved in the 30 years since the system began, what we’ve learned along the way, and perhaps what we might’ve also done differently if we had our time over.

To do so today, I’m joined by Joey Moloney, senior associate here at the Grattan Institute, and Emily Millane, senior fellow at the Melbourne Law School and former Grattanite. Okay. So, to kick things off, Emily, I want to start to, by talking about, you know, superannuation is this big reform that came about, but there was a world before super.

So how do people save for retirement before compulsory superannuation came about in the early 90s?

Emily Millane: It depends how far back you want to go. But in my thesis, I went back as far as I could in the late 1800s, which was when we had a world of non-savings. For most people, and indeed we didn’t even have state-based forms of provision for retirement.

It wasn’t until the late 1800s when we had state-based superannuation schemes, and then in the early 1900s when we had the aged pension come in. Came in in 1908, and that was based on general revenue financing. But for most people, there was no form of private saving. There were some limited schemes that were mainly for people working in large companies, like the banks, and they tended to be, for white collar people and for men.

So that was sort of the state of play. Right up until the mid-19 hundreds when you start to see, a proliferation of, industrial superannuation schemes. So, these were by workplace, and it was certainly not a coverage across the board of the population in the late 1970s. There were industrial disputes, about a right to superannuation, some particularly high-profile ones, like the right to superannuation in the workplace, in Woolworths.

that really elevated the idea of superannuation as a workplace right onto the national stage. And it was through these industrial disputes that we started to see an acceptance on the Labor side of politics that superannuation could be an occupational right that could be across the workforce. And so, this was a real turning point in the history of super.

And then we see the lead up to. the 1980s accords and then 1992, ultimately the introduction of the superannuation guarantee, which spread super across a large part of the workforce.

Brendan Coates: So, I want to come back, Emily, to sort of the birth of superannuation that’s modern form. But before we get there, there were also attempts.

to create, you know, universal retirement income contributory schemes in Australia before we ended up with compulsory super in the late 80s, early 90s.

Emily Millane: This goes right back to, you know, the 1920s and 1930s. We see governments trying to introduce some form of national insurance. So, this is governments requiring people to have contributions from their wages in order to then provide a government run scheme, of provision for retirement, but it wasn’t actually just limited to retirement.

It was also for other benefits like the health benefits. This was originally, you know, you look back at the 19, 1928 version, the Bruce Page government’s bill, the national insurance bill, employees could pay national insurance to fund their contributions. The key point here is about wage based social insurance.

And it was then in the 1970s that we saw the Wheatland government on the other side of politics. I have an inquiry, the Hancock inquiry, which essentially proposed the same thing, but of course, The Whitlam government was to be a short-lived government. There was really limited interest in the scheme proposed by Hancock, which was again funded by wages, but was also redistributive from the tax side after contributions were made.

It’s an interesting question to consider. Was this just because the Fraser government came into power that a Hancock style social insurance scheme didn’t come in? I don’t think so. I think it even had a Labor got in the idea of introducing what was essentially a new tax would have been deeply unpopular.

Brendan Coates: So just to be clear here, when we’re talking about, you know, redistribute scheme, we’re talking about like a classic, the government collects a bunch of tax, whether it be like payroll tax, income tax, some sort of, you know, And So you’re pulling together. No one owns their own individual superannuation pot.

It’s all sort of administered by governments and at the end of the day what you get from the government is an income stream and that’s The SIPP kind of systems we saw emerge across a lot of European countries, you know, sort of particularly in that post war era and, you know, Australia was a bit of, as I understand it, a bit of a laggard in some ways and actually generating a sort of a contributory scheme that wasn’t just that sort of that safety net of the age pension to make sure that you weren’t in poverty.

Emily Millane: Yeah. There was this, particularly as you say, in the post war era and with a lot of the influence of beverage style and being UK style schemes on Australian economists, particularly saw a real discussion going on about why should their standard of living drop so significantly once they retire. And this is also a time when there’s.

a discussion, at least in the Western world, about increasing life expectancies. So, if you’re going to live longer and you’re not going to be working for the entirety of that time, and all you’ve got to provide for that longer life is a very minimal age pension, what does this mean for standards of living?

And so, there was this real discussion on both sides of politics actually about we’ve got to maintain people’s standards of living relative to their working lives.

Brendan Coates: And so that’s the core problem that superannuation itself tries to solve when it’s introduced. But you know, how do compulsory 1970s, But how did we get from that world to a world where everyone is required by their employer to save part of their wages and put it into a superannuation account that’s then available to them upon access upon their retirement?

Emily Millane: I find this to me is the most interesting part of the work that I’ve done on the history of super. And it was this period between the late 1970s. through to the mid-1980s. So let me chart that period of history just quickly. In the late 1970s, you see the Labor government and also the Labor movement still very much in favour of a national super scheme.

And what I mean by that is a government scheme of super, at least officially when you go through, you know, the various Congresses of the ACTU and, and, and Labour Party policy. But then we’re also in a period where Labour is out of power. They’re starting to think about, well, if we are to be in power again, how, how do we prove ourselves to the electorate as good economic managers?

How do we prove ourselves to be not Whitlam? That’s pretty, pretty bluntly, but, but in the course of my interviews, which was something that came through quite strongly. You then see the Hawke government come to power in 1983. Recession is running at a really high level. That’s the key concern is what are we going to do to manage these economic conditions?

Note some similarities with the Labor government now, although that’s a separate discussion. What they come up with is this series of accords with the union movement over a trade-off between an increase in wages, which was going to be inflationary and having a right to that increase in wages that you’re foregoing and having it later in life.

So, there’s this bargain and Keating was always, and is still, always talking about the bargain with individuals. Through this series of accords, particularly the one that was signed, there was, there was a number of them, the one that was signed in 1985, that really baked in a trade-off between a wage increase today and superannuation later in life.

Brendan Coates: It’s interesting that you see this trade off. baked into super, super and wages from the beginning.

Emily Millane: There’ve been a whole bunch of debates in more recent times. I don’t need to tell Grattan about that. about how much of a trade-off is in superannuation. But I think the key point is that It’s been there from the beginning.

It’s not too crude to say that superannuation, at least the design of it from the beginning, was solving an economic problem. It’s not to say that there wasn’t a clear design intention to also increase the retirement incomes of vast numbers of workers that didn’t have superannuation up until that point.

It was solving an economic problem. So, the wage trade-off is the basis for the modern superannuation system. Then what we saw in 1986. Was a really important ruling by the high court and they ruled that superannuation was an industrial matter. And up until that point, the high court had said that it wasn’t, it was clear for everyone from a legal perspective that this is an industrial matter.

And this then. Form the basis for superannuation to be an occupational right, and then you see the SG, the superannuation guarantee legislation be introduced in 1992 by the Keating government, which was intended to lift retirement incomes for those people who weren’t covered by award superannuation.

Brendan Coates: So, Joey, we kind of, we start off with compulsory super, it starts as 3 percent of wages.

Back in 1992, it rises to 9 percent of wages by the sort of early 2000s. It’s now gone from 9 percent to 9. 5 percent in the early 2010s, and it’s almost 24 30 years since Super was introduced, you know, what, what has it achieved? You know, how are we seeing better retirement incomes? What other sort of achievements or, you know, and how do those, those achievements compare to what the objectives were of the system at the time?

Joey Moloney: There are at least three sort of broad objectives that you can identified back in 1992, and they’re not sort of written down in any one place. They’re kind of picked up from different speeches at the time and other documents, like the Fitzgerald report. But there’s at least three, and there’s one, like Em said, the goal to lift retirement incomes.

There’s another one, which is to lift national savings in the aggregate, because back in the early 90s, there was a lot of concern about the size of Australia’s current account deficit. And our reliance on foreign capital. And the other one is to ease pressure on future budgets. So, the Keating government was looking forward to a future where there was going to be a wave of baby boomers retiring.

And that was going to basically, increase the, decrease the dependency ratio. Which means that there’s for every, working person, there’s a relatively elder age people to support. So, if you sort of take each of those three in, if we, if we go through each of those three on the first, it’s definitely boosted retirement incomes.

People retiring today have much retirement, much higher, Standards of living in retirement than people did before compulsory super. And that means that they’ve been, they’re saving more because they’ve been forced to save more. So, there’s estimates that have been done which suggest that about 70 cents.

And every dollar of compulsory super is additional savings. So, savings that wouldn’t have happened if not for the fact that it was compulsory. So, what that means is that in the aggregate, yeah, it’s increased national savings, but I suppose that’s not a goal that people centre around anymore. Economists don’t really worry about their current account deficit like they did in the early nineties.

So that, that kind of macroeconomic objective is kind of faded away into history. And then on the other one, has it eased pressure on budgets? This one’s a little more complicated because it’s certainly true that without. DSG age pension spending would be higher than it is today as a share of GDP. But there’s also another side to the equation, which is that the superannuation, the way that it’s taxed is so concessional relative to the income tax system that it costs the budget a lot on the other side of it as well.

There are projections from Treasury that was published in the Retirement Income Review, which I think are quite indicative, and they show That projecting the whole retirement income system forward by 2040, you’re going to see the budgetary cost of those tax concessions are going to outweigh the cost of the age pension.

So, I think on that third objective, the jury’s definitely still out.

Brendan Coates: So, Joey, you’ve talked about the fact that the system has boosted, you know, retirement incomes for Australians. Has it worked for everyone? Are Australians, on the whole, getting what they need to out of the system?

Joey Moloney: I think the short answer to that is no, like not on the whole.

And I think that the, the key point here is that the, the SG is a one size fits all it’s, it’s one number applied to basically every employee in the population. So how that works for you depends on really who you are. So, if we look up and down the income distributions. If you start with low-income earners, I think it’s an open question how well super works for them.

So, if you accept the idea that there is a trade-off between super and wages, which is what the overwhelming weight of evidence suggests, what a low-income earner is being forced to do is to forego income in working low for a bit of extra savings in retirement. Now, there’s two key points here for me.

One is that low-income people are probably most in need of disposable income in their working life. And the other one is, their retirement income is inevitably going to be mostly produced via the age pension. So, a bit of super savings is kind of like a little boost to their adequacy, a little boost to their standards of living in retirement.

Maybe gives them a little bit of flexibility early on in their retirement. But for the most part, their actual standards of living in retirement are going to be supported by the age pension. So, there’s kind of a question whether the amount that you force low-income earners to save, whether it’s worth the boost in living status that they’re getting in retirement.

And it’s, it’s sort of telling that the, a lot of the debate now centres around whether the SG is going to a rate that’s going to force people to over save. And I think that particularly hurts low-income earners. who need as much take home pay as they can get right now. I think to middle income people, the story is different again.

So if you sort of look at middle income people who are in that age pension assets test taper range, which is to say that you know, every additional bit of private savings that they get, which means every additional bit of compulsory superannuation contributions they make, that’s going to eat away at their pension entitlement.

So, as you, you know, modelling shows that we sort of, CSG starts ramping up to 12%. The effect on your typical middle income earners retirement income is a bit of a wash because super goes up, age pension goes down. Now that kind of feeds back to the objective of, Reducing spending on the age pension, but if you, if you sort of take a broader view of your objectives of the retirement income system and you’re thinking about, you know, making sure that people have adequate standards of living, it’s sort of a bit of a wash on that front for middle income earners.

The people that Compulsory Super probably works the best for is high income earners. Additional savings through super is not going to erode any age pension entitlement because they’re, they’re not going to be entitled to an age pension anyway, and they get hugely preferential tax treatment on that super.

So, if you look at, you know, a very high-income earner, someone earning over 200, 000 a year, who has a marginal income tax rate of, 0. 45 in the dollar, their concessional contributions are 0. 15 in the dollar. So that’s a 30-percentage point. concession and it’s the same on the earnings fund as well.

And then in retirement, the earnings taxed at zero, so the concession is even bigger there again. So, I think that, yeah, up and down the income distribution, the how well super works for you is really, it’s a, it’s a question of who you are.

Brendan Coates: But Emily, like the other big sort of issue that does emerge when it comes to superannuation and who, who benefits and who doesn’t is, issues around gender equality.

Can you talk a little bit more about that?

Emily Millane: Superannuation is based on your wage contributions and so at a really simple level, it replicates any inequalities throughout working life and differentials in wages between men and women. As a result, you see women retiring with lower superannuation balances than men.

It’s been one of the things that people working in this area have really wrestled with because of the fact that it is really in the wage part of your life story rather than the retirement part of your story, that we’ve got to solve it there. And so, it’s not really the problem of the retirement. That’s partially true is partially not true.

And so, there’s no question equalizing wages between genders is going to have a good impact for women on their private retirement savings, but superannuation isn’t in isolation in the retirement income system. And so, the rate of the age pension. Is really important for women. And Brennan, we talked about this in the past.

There’s this question of women retiring today or people retiring today, and then people retiring, having had the benefit of superannuation for more of their working life, and it’s, it’s likely for people who will have the benefit of having saved super across their, across their life course, compared to those people having retired or about to retire today, that women will be better off, but while we see wages.

being different between men and women, we’re always going to see a difference in superannuation balances.

Brendan Coates: Yeah, it does seem like this is one of those issues that was perfectly foreseeable when you established a system of superannuation dependent upon wages.

Emily Millane: This is one of the things that gets me, right, is that for so long during those early super schemes that we, or the early proposals for super that we talked about, particularly the ones pre-1970, Labor was opposed to those schemes.

in large part because they’re opposed to contributory financing. So, financing of a pension based on your wages. It’s just a really significant historical shift that we saw governments of the left begin to accept contributory financing.

Brendan Coates: But how that system is then taxed is, You know, the important next part to my mind, you know, when you talk to people who were around when the system was created, I think they, they talk about this as a great success that super exists because they also think about a world where it doesn’t, where you never ended up with a universal system in Australia.

And, you know, that may be in hindsight, that was with a benefit of hindsight, we take for granted that the system would exist, but it is also made on week. And so, I do want to ask. You know, how does the system work for Indigenous Australians?

Emily Millane: This is something really important to discuss this week because it’s one of those areas in superannuation, you know, it doesn’t have enough of a light shone on it.

And there’s Probably, I think fair to say a bit of a dearth of research in the area. but I would call out that the folks over at Curtin back in 2020 did a report on Aboriginal Torres Strait Islanders and their experience of super. In terms of life expectancy, Aboriginal and Torres Strait Islander peoples have A shorter life expectancy relative to the rest of the population.

And what that means is that the access to superannuation is, is, is often at a later point in their life course. so, they won’t actually have access to it. And so, there’s a real case for what we call preservation age. So, when you can access your super being at an earlier age. So, for example, it’s already government policy that indigenous Australians can access aged care services at the age of 50 rather than 65 years.

So, there could be a preservation age that’s earlier for superannuation as well. And their estimates were that a preservation age of 50 years would mean a further 9 percent of the current cohort of Indigenous men and 6 percent of Indigenous women would live to access their superannuation. And so that’s, that’s a really good point.

Really meaningful in terms of balances that people can use.

Brendan Coates: So, I’m interested in the interest of time, and our audience has stayed with us through this podcast and superannuation. but the last question I want to leave the folks with was, yeah, is there anything else you would do differently if we, if we were starting from scratch again, if you were advising Paul Keating when he set up the scheme back in 1921 1922?

is there anything else that you think we should have done differently?

Emily Millane: One of the things that stuck in my head the most in the course of the interviews I did for the PhD was this idea that we’ve got to get something in, in, in, in terms of we’ll get the basic system set up and legislated, and then we’ll deal with some of the other issues and some of the other issues being.

Like the gender impacts down the road, John Daly. And I spent a lot of time at Grattan thinking about how reform happens. And I get that it’s always a compromise, but one of the things that I’d be thinking about from the beginning is how’s this going to work for everyone. 30 years later, we see various attempts to, to do things differently on the tax side, we see.

Attempts to do things differently between, you know, default and choice and, and we see just layer upon layer of complexity. If I was sitting there with a blank page, my question would be, how’s this system going to work for everyone?

Joey Moloney: How about you, Joey? A lot of the equity issues that are bemoaned today, like we’ve said, are entirely foreseeable.

You might have back at the start, yeah, like I said, had a, you More careful consideration of how much emphasis you want to put on your contributory arm and how much emphasis you want to put on your redistributive arm, because I think it’s not acknowledged enough that. Super is not redistributive. What you put in is what you get out.

So, it’s very, very limited in its ability to address equity issues. So, you know, we’ve really emphasized it by ramping up the SG all the way to 12%. You know, if you look at our pillars of our retirement income system, that’s, you know, we’re putting a lot of, we’re putting more and more eggs in the contributory basket and ignoring the income support basket like the aged pension, which is where the redistribution happens.

So, I think I would have thought if we’d had a time again, maybe we’d get that balance a bit better. On the competition front, on the fees front, we might have made a decision earlier on whether we are going for A system that is a pure industry-based scheme where you only have not for profit funds that represent workers from particular industries.

You’re not expecting members to make decisions about where to allocate themselves across different funds, that they would just go into their industry fund. So, you’re not expecting competitive pressure, which means that the regulator is then obligated to make sure that each industry fund is operating efficiently, minimizing fees, maximizing net returns, and has appropriate scale and sustainability.

So that’s like, okay, that’s just, that’s you using regulatory power to try to enforce good outcomes rather than relying on competition. We sort of ended up in this halfway house where you’ve got the banks entered the superannuation system with the retail funds and you’ve got a third of the assets in the system in self-managed super funds.

So, we sort of, we sort of ended up with this weird halfway house and if it was going, if you, if you decided that competition was the way to go. You would have de linked the scheme from the industrial relations system because you can’t have people allocated the funds based on which industry they select and also expect them to select a product based on, you know, what their assessment of the product’s quality is.

Brendan Coates: I suppose for me, it is the tax concessions, you know, we are spending 30 plus, 40 billion dollars now on superannuation tax breaks that are, you know, overwhelming it, you’re going to the top 20%. That is probably the area where Grattan is going to spend some time in the coming months. So, watch this space because if you’re thinking about a budget deficit of GDP, we need to close that.

But I do want to say thank you to Emily and Joey for joining us on the podcast today as we celebrate 30 years of Compulsory Super in Australia. As always, you can find more of our work at grattan.edu.au.