Last night, a professor from an Australian university told 7.30 that Australians will need to contribute 18% of their income to superannuation to retire independently.
Does it make sense?
The Current Situation
The current superannuation guarantee rate is 9.5% of your wage and is legislated to reach 12% by 2025. Generally, if you are over the age of 18 and paid more than $450 or more (before tax) in a month, you are entitled to super contributions.
The chart below shows the forecast rates up to 2025.
Source: industrysuper.com
Currently, Australians may also salary sacrifice and make their own contributions to boost their super. This can have advantages with regards to tax, but we won’t get into that here.
The Claim
The claim made last night was that Australians who want to retire independently of government assistance (e.g. the pension) need to contribute 18% of their income to superannuation from the beginning of their working life.
Why This Doesn’t Make Sense
The claim made assumes that superannuation is the only form of retirement savings that a person has. This is simply not the case. A 2016 report by the Grattan Institute found that superannuation typically only makes up around 15% of the wealth of most households.
The report found that even excluding property, households typically have just as much wealth outside of superannuation as they do in it. This applies even for the 25-34- and 35-44-year age groups, where most workers have had compulsory super for their entire working lives.
The report suggests that most people are not actually relying on superannuation alone to provide a comfortable and independent retirement.
Negative Impacts Of Increased Super Contributions
There are several issues that could arise through increased super contributions, partially depending on where the contributions come from.
If extra super contributions are legislated and made compulsory, they will need to be paid for by real businesses.
The cost that this would place on small businesses would likely be unsustainable and could possibly lead to lower levels of employment. An employer who is struggling to pay 9.5% contributions could not possibly increase those payments to 18%.
An increase in super could also possibly lead to a reduction in wage growth. As super contributions increase, employers are paying more and more in super and can afford to pay less and less in real wages. In other words, higher super contributions would likely be funded by lower wages.
If employees make the extra contributions themselves, they are sacrificing income now to pay for their future lifestyle. This scenario, or the low-wage growth scenario mentioned above, would both lead to lower living standards for workers today.
Both of these scenarios seem unnecessary given that under the current super policy, most workers can already expect a retirement income of more than 70% of their pre-retirement income.
Summary
There are certainly situations when increasing super contributions can be beneficial, but a rate of 18% has serious implications for living standards and the economy, not to mention the power it would give super funds in financial markets if they were to double their assets.
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Disclaimer: Max is not an expert in superannuation. This is just his opinion.
