Not so Super

Superannuation oft lauded as the savior of the working man, is also touted the savior of our welfare state. No wonder it is called 'super'.

What could be better than a system that encourages personal investment for one's autumn years and eases the State's welfare burden to boot. Instead of relying on an ever more encumbered public purse, the working man could look forward to years of idle leisure basking in the glow of self reliance. Indeed Super was introduced with these two objectives in mind.

Like many reforms it has undergone significant tweaking since its inception in 1992 by a forward looking Keating government. Not surprisingly, when Australia is meeting economic headwinds, governments facing an 'entitled' electorate are once again looking closely at superannuation. Some argue that the taxation foregone on Super contributions does not fall equitably across the workforce and should be re-balanced ( see for example ANZ chief economist Warren Hogan says superannuation tax breaks for wealthy too generous). Others point out that the effective tax on super contributions is greater than marginal tax rates and any more 'tweaking' would only further undermine confidence in the system (see National Reform Summit: super tax changes need proper analysis).

I don't propose to tackle these arguments today.  My question is simply,"Is it working?"
Will their contributions to super over their working life free an average worker from relying on an aged pension and as a result will the burden on the state be reduced?

We have a problem..

The Government's recent National Commission of Audit looked at the trends in welfare expenditure to 2050. The graph below is taken from the report and summarizes the result.  

The proportion of those who by their age are eligible for the aged pension, who end up receiving the full aged pension decreases, but at the same time the number of persons receiving a part pension increases. The overall result is that the number of people who can live off their super does not change despite having paid upwards of 10% of their wage into super throughout their lives.

Mmm. Doesn't sound like Super is working like it was meant to.

But worse still; -

"The 2010 Inter-generational Report (Australian Government, 2010a) projected that expenditure on age-related pension payments would increase from around 2.7 per cent to around 3.9 per cent of GDP by 2050." (quote taken from National Commission of Audit)

So by 2050; -

• the same proportion of the workforce will be on pensions as there are today
• Government expenditure on pensions is expected to increase by over 40%

It seems our Super system is not meeting its two objectives. It is neither increasing the number of workers living on their own savings, nor is the burden on the state being reduced.

The unexpected conclusion is unavoidable, our super is not working as intended.

Tweaking is definitely required. However I will look at that topic another day.