The Federal Government's plan to increase compulsory superannuation contributions from 9% to 12% is economically dubious and morally questionable. Superannuation is one of the sacred cows of Australian politics. Both major parties — and indeed all minor parties fall over each other to lavish praise on the scheme. And there are some good reasons for this. We only need to look to the fiscal crisis which currently besets Europe — and has been exacerbated by absurdly generous government-funded pension schemes — to see the value in citizens providing for their own retirement.
If superannuation means that future Australian governments will have to pay fewer people aged pensions, then many will argue it was a valuable reform.
But it is far from clear that this will actually be the case. We simply do not know — as superannuation is actually a radical policy experiment which will take decades to assess its success or failure. But many experts are already predicting that for many people, superannuation will not be sufficient to sustain them in their retirement, and they will have to continue to rely on some level of government assistance to survive.
The government's response to these predictions has been to legislate an increase in the mandatory contribution from 9% of employees' wages to 12%. There are many problems with this approach.
But firstly let's deal with the biggest furphy in this debate: that workers will not pay for the cost of this increase. This is blatant political spin that does not withstand any serious economic analysis. Employees will ultimately pay this cost no matter how it is implemented.
Increasing the amount employers must pay for their employees' superannuation can only have one of two effects: reduced employment or reduced wages. A higher compulsory superannuation contribution makes an employee more expensive for a business to take on. They can overcome this with lower wages, or by employing fewer staff. Even assuming the business has strong market power and can pass this increased cost on to its customers hardly seems any more comforting, because consumers will simply pick up the tab.
The performance of Australian super funds over the past few decades does not suggest that superannuation is the best form of investment for most Australians. Even before the Global Financial Crisis, most funds' annual returns rarely exceeded the market average. And as economist and Sydney Morning Herald journalist Peter Martin has pointed out, anyone who has a mortgage (with an annual interest rate of approximately 7%) would be far better off financially if they were allowed to pay it off instead of being forced to park it in a fund they will not be able to access until they are 65.
For people who work part time, or are casually employed in a variety of jobs, superannuation can be a major hassle with little obvious benefits. For example, by my 24th birthday, I had acquired four different super funds, picked up at the variety of casual jobs I held while studying at university. It was hardly worth my while to go through the effort of choosing my own super fund making each employer pay into it, because the annual payments rarely exceeded a few hundred dollars. And what little they did actually accumulate was often substantially reduced by management fees.
It also seems absurd to take a large chunk of a young person's meagre salary when they are trying to cover the costs of study, rent and food, for them to spend in 40 years' time when they are likely to be far wealthier and to have accumulated assets like a home.
Perhaps this system makes sense for some people. But there's no doubt that for many others it is not the best investment they could make. What if I decided that the best financial investment I could make in my future is to enrol in a Masters degree to increase my earning capacity? The money locked away in my super fund could pay for that. But instead I might have to take out a high-interest personal loan to cover my tuition fees.
An inflexible, one-size-fits-all system that presumes that government knows best about the individual financial situations of every Australian is guaranteed to not work for many people. That was bad enough when we were forced to lock away 9% of our income. Increasing it to 12% (and some advocates suggest they won't stop there) makes it even less so.
A radical alternative could be to allow Australians to opt-out of superannuation. Instead of forcing them to save for their retirement through super, we could trust those who think they can make better investments for themselves to do so. To ensure this doesn't result in a higher burden for the pension in the future, they would also have to opt out of receiving that too. In exchange, they could be rewarded with lower tax rates on their investments. This system would still leave anyone who was content with superannuation under that system, but would provide freedom — and entrust personal responsibility — with those who choose it.
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