Hedge Clippings | Friday, 27 November 2020

Australia's Superannuation System - Maybe not so "super" after all?

Regular readers of Hedge Clippings would know that we're big fans of Australia's compulsory superannuation system. In fact, it is admired around the world. However, that doesn't mean it's perfect by any means.

How do we know that? Well for a start, if it were perfect the government wouldn't have had to commission a Retirement Income Review to take a look at it. And again, if it were perfect the resulting report wouldn't have had to run to 650 odd pages, and it wouldn't have taken the government 5 months or so to "review the Review".

Bear in mind the Review itself was only produced on the recommendation of the Productivity Commission in its own report, "Superannuation: Assessing Efficiency and Competitiveness".

Put it all together, and that's a lot of paper. Thank goodness it's all online, so we don't contribute to global deforestation when reading (skimming?) through it. But we digress...

The Treasurer in his media statement (not surprisingly) leads with the statement that "the Australian retirement income system is effective, sound and its costs are broadly sustainable". It goes on to mention three over-arching observations about the system, the first of which is positive: "the system, being the Age Pension, compulsory superannuation and voluntary savings, continue to provide effective support to Australian retirees and are sustainable in the long term", while only then mentioning that "there is a need to improve understanding" and then "the system would benefit from a clear objective..."

Did we mention it was a media release and therefore no doubt written by a spin doctor? The government is going to use this to argue that the SGL doesn't need to - or should not for the time being - increase above the current 9.5%, partly due to the effects of COVID putting excessive stress on wages and other parts of the system.

That's not really our current gripe, which is that the super system is far too complex. The Treasurer notes that reducing fees and improving returns will lead to an extra $17.9 billion in the system over the next 10 years. Admittedly we have not done the maths, but simplifying the complexity such that the average person can understand it without needing an accountant or tax agent to unravel or explain it might also lead to considerable savings.

Next, back to the SGL of 9.5% - or 12% or whatever. This is essentially a "flat tax" levied at the same rate, irrespective of income. So a wage earner on $50,000 pa "pays" the same percentage rate as someone on $500,000. Like it or not, the wage earner is probably still going to end up on the pension on retirement and may not even own their own home, while the person on $500,000 will have accumulated significant assets, both in super and elsewhere, and have no doubt paid off the mortgage on a substantial home.

Having done so, the affluent don't spend their super or their other assets. They sensibly do everything they can to preserve their hard-earned wealth, which doesn't help the economy much. Meanwhile, the $50,000 wage earner would spend the 9.5% over their working life, tipping it back into the economy.

There are other examples of where or how the government could increase spending - HECS for example. Instead of graduates paying interest to the government on their student loans, why not forgive their debt? As young people they'd have more in their pockets, and as young(er) people they'd spend it at the time they need it - buying a house, shopping at 100 year old Gerry Harvey's stores, and starting a family for example.

This all may seem far-fetched, but consider this: The government has kept the economy from completely tanking during COVID by (correctly in our view) showering the working population with helicopter money, and permitting the early withdrawal of super, all - or most of which - has made its way back into the system. Except from the wealthy or retirees, who have probably used it to shore up their savings - or to make up for the reduction in dividends from the likes of Westpac.

We could go on, as there are many, many aspects of the super system which could - and hopefully will - be introduced following the government's "careful consideration" of the Review, including allowing a portion of one's super to be used as a deposit by first home-owners, but time and space doesn't permit.

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