Let’s have an informed debate about the impact of compulsary superannuation on debt and savings

The Association of Superannuation Funds of Australia (ASFA) has called for a more informed and balanced conversation around the impact of compulsory superannuation on household debt and savings. Australia is one of the few countries in the world that will be in a good position to support our aging population. This ability stems from our current system which is still maturing. But as it matures and as the economy and demographics change we must always look to future adjustment so the system remains sustainable.

ASFA CEO Pauline Vamos says the shared goal of all stakeholders must be ensuring we have a sustainable superannuation system that delivers adequate retirement income to all Australians.

A report recently released by CPA Australia has received media attention, in particular in regard to the claim that the benefits of increased superannuation balances are largely being dissipated through households borrowing more. After considering the report in detail, ASFA disputes this finding and in particular believes that more recent figures support three key conclusions:

1. Lump sum superannuation benefits are not being treated as a windfall or being used to pay for the lifestyle that is being lived now.
2. Household savings have risen with compulsory superannuation and the enforced savings have not been offset by similar or larger private borrowings.
3. The increase in superannuation wealth has not largely been driving the increase in borrowings by households.

It is vital that retirement incomes policy is based on sound research and long term policy considerations. Any conversations about the long term design of the super systems must also involve a broad cross-section of stakeholders and as such, as the peak body for super, the conversation is welcome. But the strength of any conversations is the based on the quality of the evidence that informs it so that myths do not continue.

3 MYTHS ABOUT HOUSEHOLD DEBT AND SAVINGS

MYTH 1: Lump sum superannuation benefits are being treated as a windfall and being used to pay for the lifestyle that’s being lived now

Contrary to the assertion in the CPA report, data from the latest HILDA survey, reported in the recent ASFA White Paper on the Super System, indicate that the great bulk of recent retirees keep their retirement savings primarily in superannuation and draw down an income stream. Those retirees that take their retirement savings out of the superannuation system are a minority. However, even for this minority there is no evidence that the superannuation savings are used primarily for immediate consumption purposes, such as an overseas trip.

There is no evidence that many retirees are using their super to pay off debt used to fund the purchase of boats, cars and overseas trips. Only a minority of households have debt around the time of retirement and they generally have assets outside of super which more than match that debt. For those households where the household head is aged 65 to 69 only around 18 per cent of such households have mortgage debt, often for relatively small amounts. Around 30 per cent of males aged 65 to 69 are still in the labour force which also assists in such debt being serviced.

At older ages where there is less labour force involvement the incidence of debt is lower. For instance, for households where the head is 70 plus, the percentage falls to six per cent. The behaviour of this age cohort could well be different or it could be explained by children being more likely to have moved out by then, reducing the recorded amount of debt per household.

A recent paper by a senior official of the Australian Treasury raises a number of major concerns with the CPA claims concerning debt and retirees and concludes that in terms of debt and financial assets the situation is improving for retirees, not getting worse.

MYTH 2: Household savings have not risen with compulsory superannuation as the enforced savings have been offset by similar if not larger private borrowings.

All academic and government research into the impact of compulsory superannuation on savings indicates that it has substantially lifted household savings. While there is some reduction in voluntary savings, especially by higher income earners, it is generally accepted that household savings increase in total by around 50% of the aggregate amount of compulsory savings flowing into superannuation.

The charts in the CPA paper clearly indicate that household savings was around 3 percentage points higher in 2012 compared to 1992, when compulsory superannuation was first introduced.

The figure for household savings would be even higher at the end of 2013 given the 15% plus investment returns that most superannuation accounts received in 2012-13. Recorded household savings were affected by low and negative investment returns in certain years over the last decade.

MYTH 3: The increase in superannuation wealth has largely driven the increase in borrowings by households

A number of factors have led to increased borrowings by Australian households with the increase in superannuation wealth one of the least likely factors leading to this increase. The CPA stand alone in their assertion regarding this.

Household borrowings in most Anglophone countries have increased over the period considered by the CPA report with private pensions and superannuation developments having nothing to do with those increases.

Analysis by the RBA and other respected analysts indicated that the primary drivers of increased household debt in Australia and elsewhere have been:

• Financial deregulation and financial product innovation have allowed households to borrow more, including redraws on residential mortgages.
• Increases in housing prices directly led to home purchasers needing to borrow more to enter the housing market and also have led through a wealth effect through existing home owners spending more.
• Negative gearing is used by a significant minority to build future wealth through capital gains.

For further information, please contact:
Ross Clare (02) 8079 0809