Despite managing $3.5 trillion in assets, Australia’s superannuation system, and our retirement income system more broadly, have never had legislated aims.

Without moorings, the super system has seen repeated policy failures.

It provides excessively generous tax breaks that cost the budget $45 billion each year and will soon exceed the cost of the Age Pension.

It forces most Australians to save more than they are likely to spend in retirement, turning superannuation into a taxpayer-funded inheritance scheme that exacerbates wealth inequality.

And it is being used in costly and fruitless attempts to boost the retirement incomes of poorer Australians, when better tools are available.

Setting clear policy objectives can help by anchoring policy changes, boosting public understanding, and by providing a framework for assessing the system’s performance.

Unfortunately, the government’s proposed objective for the superannuation system — `to preserve savings to deliver income for a dignified retirement, alongside government support’ — is unlikely to prove an effective guide for the system.

There are two fundamental problems.

First, the proposed objective is an objective for superannuation, rather than the retirement income system as a whole.

The objective of superannuation is to preserve savings to deliver income for a dignifed retirement, alongside government support, in an equitable and sustainable way

Yet the objective proposed for super is too broad, encompassing outcomes that are primarily the responsibility of other parts of Australia’s retirement income system, and especially the Age Pension.

This is despite the fact that superannuation accounts for less than half the income that retirees draw on today and will account for little more than half the income of retirees in future.

The proposed objective also leverages the concept of a ‘dignified’ retirement. But to the extent `dignity’ has any commonly-understood meaning in relation to retirement income, it pertains to a minimum standard of living, which superannuation cannot guarantee.

Super is a contributory system – you only get out what you put in. And those that struggle in retirement are those that struggle beforehand.

For most low-income earners, adequate living standards will be achieved almost entirely by government support – via the Age Pension, Rent Assistance – among other supports.

Giving a role to superannuation to help provide a “dignified retirement” – including a baseline level of income – opens the door to more ineffective and costly policies that divert resources and attention away from more effective policies to assist low-income earners.

For example, co-contributions – a scheme in which the federal government makes contributions alongside the voluntary contributions of eligible low-income people – has cost the government more than $12.7 billion since it began in 2003-04.

But recent research has shown much of the benefits of the scheme goes to the partners of high-income earners.

There are real challenges to ensuring our retirement income system delivers for all.

But the Age Pension and Rent Assistance, rather than superannuation, remain the best tools to help people at risk of poverty in retirement.

The second major issue is that the proposed objective enshrines the principle of preservation of super for retirement, but says nothing about how the superannuation system should trade-off current and future consumption.

This is despite the fact that the core outcome of the compulsory Superannuation Guarantee is to force Australians to forego spending today in return for more in retirement. 

Our research, as well as that of the independent Retirement Income Review in 2020 and the ANU Tax Transfer Policy Institute, concluded that much (if not all) compulsory superannuation contributions come at the expense of lower wages for workers today.

Setting the system’s objective as preserving income without acknowledging the costs of doing so is ignoring one half of this fundamental equation.

Preservation is an important component of superannuation: preserving superannuation contributions for retirement has resulted in Australians having higher incomes in retirement than otherwise.

But preservation is a means to an end, not an end in itself.

There is good evidence that the typical Australian in saving more in retirement than they need to. That is, they will have a higher living standard in retirement than they enjoy in their working lives. That is, the rate of compulsory super contributions is higher than it should be, making Australians poorer during their working lives when they are typically under higher rates of financial stress.

Ultimately, ignoring the costs of preservation opens to door for the system’s functional purpose being to preserve savings for taxpayer-funded bequests, rather than retirement income.

Given current policy settings for the compulsory Superannuation Guarantee, Australians should therefore be offered the opportunity to ‘cash out’ a portion of their compulsory superannuation contributions each year – anything beyond 9 per cent of their wage – when they submit their personal income tax return.

This change would give Australians greater flexibility in managing their finances during their working life, particularly in securing a home of their own. It would save the budget, since any super contributions cashed out would be taxed as wage and salary income on individuals’ personal income tax returns. And it would not compromise the adequacy of Australians’ retirement incomes, since most are already saving more than they will need for retirement.

The government should go back to the drawing board and establish an objective for the retirement income system as a whole, as recommended by the Retirement Income Review in 2020.

The Retirement Income Review argued that the retirement income system should aim `to deliver adequate standards of living in retirement in an equitable, sustainable, and cohesive way’.

The Retirement Income Review recommended that the retirement income system should aim ‘to deliver adequate standards of living in retirement in an equitable, sustainable, and cohesive way’.

This remains the best starting point for future work on a more effective objective.

In addition to an objective for the retirement income system, a separate objective could be set for superannuation. Such an objective should not allocate superannuation a responsibility for ensuring all Australians enjoy a minimum ‘adequate’ standard of living in retirement. This role is better served by the income support system via the Age Pension and Rent Assistance.

And it should make clear that superannuation is to support retirement income, rather than to help the wealthiest Australians minimise their tax.