20
Nov
2018

Raising superannuation won’t help your retirement — unless you’re already wealthy

by John Daley and Brendan Coates


Published by ABC, Tuesday 20 November

A couple of weeks ago, we published a report that showed that most retirees today are financially comfortable, and have enough money to fund a lifestyle in retirement better than they had when working.

And we showed that this was likely to be true for future retirees as well.

This sounded like pretty good news to us. But Paul Keating said we had a “miserable view“, and the Association of Superannuation Funds of Australia (ASFA) said we wanted an “impoverished underclass of retirees“.

Both claimed we wanted “two Australias” where a lot of retirees live on nothing but the Age Pension (it’s not clear who was repeating whose talking points). At least no one’s labelled us “enemies of the people” — yet.

So what did we do wrong?

We showed that superannuation is doing its job: for people entering the workforce today, superannuation will substantially add to retirement incomes across the board.

Of course, average superannuation balances today don’t sound like very much — the average man only has $112,000 and the average woman $68,000 — but this includes a lot of young people who have 30 years of saving ahead of them, and many older workers who only got compulsory super later in life.

We were slammed for ‘favouring’ the pension

Our biggest thought crime seems to be the idea that most people in retirement will get some age pension. While this might be portrayed as penury, a retired couple today receive a part age pension even if they have $848,000 in assets other than their home.

In 40 years’ time, about half the population will retire receiving some age pension.

Many more will qualify later in retirement, once they’ve spent enough of their savings to be eligible.

No, we don’t want you to ‘eat your home’

We were also accused of wanting people to “eat their home” in retirement.

We did suggest that more people might want to take advantage of the Pension Loans Scheme that allows people to receive a bigger pension, which the Federal Government then reclaims when their home is sold.

But this isn’t “eating your home”. This is “eating your bequest to your 60-year-old children”.

In any case, we don’t assume people have to borrow against their home to fund their retirement: we find that most will have more than enough income in retirement at least until age 92 even without touching their home.

Lift rent assistance for those without savings

We are worried about the relatively small number of people who have little income in retirement except the age pension and who rent their house.

The ACTU’s assistant secretary claimed we ignored them, but we can’t work out which report he read — we devoted nine pages out of 103 to this precise issue, and highlighted it in the one-page overview.

As a result, we recommended lifting the maximum rate of Commonwealth Rent Assistance by 40 per cent.

If anyone’s miserable, it’s Big Super

If anyone is miserable, it’s the superannuation lobby. They’re the group always claiming that you won’t have enough for retirement.

The superannuation lobby worries about career breaks. But even if people only start earning at 30, have incomes that go up and down during working life, and take a career break completely out of the workforce for 10 years, most people will still have enough income in retirement to fund a lifestyle better than the last few years while working.

The superannuation lobby worries about our assumption that people voluntarily save more than the compulsory super contributions.

These voluntary savings are demonstrated in real life. But even if we exclude all voluntary super savings, most people will again have incomes in retirement sufficient to fund a lifestyle better than when they were working.

And Paul Keating frets about low returns — but even assuming returns of 6.5 per cent while working and 5.5 per cent in retirement (much lower than the past few decades), retirement incomes are still going to be adequate.

Lifting super won’t help workers

The real issue is that while super might be a good thing, you can have too much of it.

And in particular, what balance should government require through the superannuation guarantee? Because if the superannuation guarantee goes up, then wages won’t go up so much.

Paul Keating said that this was a “nasty polemic” — an “outrageous claim without any basis in fact”. That’s curious, because in a past life Paul Keating said that the introduction of the super guarantee depressed wages.

The Henry Tax Review also thought a higher super guarantee would lead to lower wages. And the Fair Work Commission expressly said that the minimum wage would have gone up by more in its last determination except that the super guarantee had increased from 9 to 9.5 per cent. And a whole host of academics agree — as we laid out in the footnotes in our report.

There’s no need to stagnate wages

We think that when government already requires you to put 9.5 per cent of your income into superannuation, there’s no need to depress wages today any further.

Our research showed that even if the Super Guarantee stays at 9.5 per cent, most people will have enough income in retirement to fund a lifestyle at least as good as when they are working.

If unions and those on the left start thinking and reading our analysis more carefully, they will realise that increasing the superannuation guarantee will primarily benefit the top 20 per cent of Australians. By being forced to put even more into super, they’ll no longer pay income tax on that income; it will instead be taxed lightly at a flat 15 per cent rate.

Higher super contributions will not improve their retirement: the extra superannuation income will be largely offset by lower part-pension payments.

What’s more, the age pension is indexed to wages. If wages grow by less, pensions do too. So, Australians receiving the age pension should be the most fervent opponents of a lift from 9.5 to 12 per cent super contributions.

Do we need to strain the budget?

The government ought to oppose it as well. Diverting more of what would have been wages to lightly taxed super will strain its budget. Scrapping the proposed increase would save it an impressive $2 billion a year.

If the guarantee stays at 9.5 per cent, less money will flow into super funds. This is really why the superannuation lobby is miserable.

No wonder the rhetoric around this issue has become so nasty, with so little effort put into understanding whether more super is even necessary in the first place.