Our compulsory superannuation system underpins what ASFA considers the core objective of the Australian superannuation system – to provide an adequate income to ensure all Australians achieve a comfortable standard of living in retirement, supplementing or substituting the Age Pension.
Along with voluntary savings (including those inside super) and the Age Pension, compulsory super is a key pillar of our broader retirement income system.
And it’s working. Australia’s retirement income system is independently ranked as one of the best globally, in terms of sustainability, adequacy and integrity.
Following are the key benefits of Australia’s compulsory superannuation system:
1. Compulsory super counter-acts peoples’ biases to under-save for retirement
Conventional economic theory tells us that rational individuals should save enough during their working life to support their lifestyle in retirement. On the other hand, empirical studies undertaken by behavioural economists tell us the opposite – that the majority of us would under-save if it wasn’t for compulsory superannuation.
The majority of us would under-save if it wasn’t for compulsory superannuation.
There are two principal reasons.
People tend to procrastinate when it comes to saving for retirement. The urge for instant gratification from consuming now can lead us to avoid taking action to save, even when we know this is at odds with our long-term best interests.
Loss aversion, on the other hand, affects our saving behaviour because an increase in saving means a cut in potential consumption of the same magnitude. To the degree that we feel losses more than gains, we will tend to under-save.
Compulsory superannuation counteracts our natural bias towards under-saving. Because of compulsory superannuation, ASFA estimates that Australian households have $500 billion in savings they would not otherwise have.
Because of compulsory superannuation, ASFA estimates that Australian households have $500 billion in savings they would not otherwise have.
2. Compulsory super boosts the wealth of Australian households
For most Australian households, superannuation is their most valuable asset, after the family home. As the compulsory system matures – that is, as workers who are covered by the compulsory system receive contributions at higher rates for longer periods of time – super will tend to become an even larger share of the wealth of Australian households .
For a typical Australian worker, the compulsory system provides for the accumulation of retirement savings over a long working life, due to ongoing contributions but also from investment returns.
In this regard, superannuation funds make investments, on behalf of their members, with the aim of optimising long-term investment returns. The nature of superannuation as a long-term savings vehicle, facilitates a long-term approach to investing.
A long-term focus is particularly important during times of market volatility. History has shown that while markets are volatile, they do tend to recover over time. With respect to the COVID-19 crisis, the benchmark ASX S&P200 index fell by 37 per cent over four weeks from mid-February 2020. The ASX suffered similar sized falls in the second half of 2008 – where it fell by 33 per cent over the two months from mid-September. However, over the longer-term (since 1992), the index has increased by an average of 6 per cent per annum.
3. Compulsory super improves the diversification of household assets
Compulsory superannuation has unambiguously improved the asset diversification of Australian household’s balance sheets – particularly for lower income households. This has improved the prospects for higher risk-adjusted, long-term returns.
Prior to the introduction of compulsory superannuation, most households kept the vast majority of their wealth in real estate, specifically the family home. Only the wealthiest 10 per cent of households had any significant financial assets outside of superannuation. By 2017-18, super assets had become a much larger component of household gross wealth, particularly for low to middle-income households.
Through superannuation, Australians have gained exposure to assets that many would otherwise not have, or if they did, it would be at much higher prices. This includes unlisted infrastructure and property assets, as well as investments in private equity and venture capital firms.
Households now have a broader asset base outside of the family home. Exposure to equities, bonds and commercial property is now shared more evenly across Australians of different wealth levels than before compulsory superannuation.
Super has also contributed to a reduction in Australian investors’ home bias. By investing a significant minority of assets overseas, funds provide geographic diversification and, given the concentration of the Australian economy and listed equity market in the financial and mining industries, industrial diversification.
4. Compulsory super leads to higher standards of living in retirement
The operation of Australia’s compulsory superannuation system means that members, in general, have much higher retirement savings than would be the case in the absence of the compulsory system.
For most current retirees, income from superannuation supplements or substitutes Age Pension payments. On its own, the Age Pension supports only a very basic standard of living in retirement. Australians living on the full Age Pension face serious financial pressure, even without unexpected expenses.
For workers on low incomes, compulsory superannuation allows people to accumulate superannuation balances that make a material difference to their standard of living in retirement.
That said, not all people who earn low incomes today will do so in the future. The compulsory superannuation system means that people will continue to accumulate savings for their retirement regardless of their circumstances and income – whether their income is relatively high or relatively low. For individuals, ongoing saving via superannuation during periods when income is relatively low can have a very favourable material effect on their retirement outcomes.
Compulsory superannuation also enables people to achieve a higher, more comfortable standard of living in retirement – such as the ASFA Comfortable Retirement Standard benchmark.
As the compulsory system matures, a larger proportion of retirees will reach the ASFA Comfortable (currently around $44,200 per year for a single person and around $62,400 per year for a couple). The good news is that as the system matures, a larger proportion of retirees will reach the ASFA Comfortable Retirement Standard. ASFA estimates that around 50 per cent of retirees will have an income at or above this standard by 2050.
5. Compulsory super improves the sustainability of the Age Pension
Notwithstanding Australia’s ageing population, the compulsory system will help contain Age Pension expenditure and take pressure off future Federal Government budgets.
As the compulsory system matures, the proportion of retirees eligible for either a full or part Age Pension is expected to decline. This means that government spending on the Age Pension will be relatively stable and at comparatively low levels over coming decades.
This is in stark contrast to many other OECD countries.
For Australia, we project that expenditure on the Age Pension will fall from 2.9 per cent of GDP today to 2.6 per cent in 2054-2055, assuming the Super Guarantee (SG) rate is increased to 12 per cent. Across the OECD, expenditure on public pensions averages 8.8 per cent of GDP and is projected to increase to 9.4 per cent by 2050.
The cost to government of supporting Australia’s retirement income system will remain more affordable than for most other OECD countries.
The cost to government of supporting Australia’s retirement income system will remain more affordable than for most other OECD countries.
Government assistance for retirement income is not only fiscally sustainable but also more equitable than in other countries. In Australia, the various measures limiting the tax advantage accruing to upper income earners have been very effective in bringing about, in effect, flat taxation rates for superannuation.
6. Compulsory super provides broad economic benefits
Compulsory super has led to higher levels of national saving. Our saving rate has increased since the 1990s thanks in part to superannuation, while the average saving rate for other OECD countries has declined.
Higher national saving supports higher fixed capital investment in the Australian economy and reduces Australia’s net external financing requirements – which is reflected in a smaller current account deficit.
Ongoing fixed capital investment over time builds the economy’s capital stock, which supports higher levels of GDP and results in higher levels of aggregate labour productivity. Ultimately, this leads to higher wages for workers and higher living standards for Australians.
7. Superannuation funds invest in asset classes crucial to Australia’s long-term productivity performance
Superannuation offers access to investments like infrastructure, private equity and venture capital as well as other unlisted assets, which are not otherwise readily available to most retail investors. This not only improves portfolio diversification, but supports real investments that are key sources of national productivity growth.
Australian super funds are estimated to have invested over 6 per cent of their assets in infrastructure compared with 1 per cent for pension funds globally. Superannuation funds currently have investments of up to $71 billion in domestic infrastructure. Ongoing infrastructure investment will help tackle Australia’s significant infrastructure needs in road, rail, energy, and water.
Superannuation funds currently have investments of up to $71 billion in domestic infrastructure.
Venture capital and private equity also play an important role in providing capital for business growth, including for start-up businesses developing new technology or products. Super funds are the largest single group of investors in venture capital and private equity in Australia. Of total commitments to private equity and venture capital of $26.7 billion, superannuation funds account for $8.1 billion.
An enviable system, but there is always room for improvement
Compulsory superannuation benefits our economy and individual Australians beyond just higher retirement incomes. It takes pressure off the Federal Government’s coffers by reducing the cost of the Age Pension, and therefore making it more sustainable. For the macroeconomy, we have a higher level of national saving because of compulsory superannuation, and investments made by funds in infrastructure are a big source of productivity growth.
However, the system is not perfect. Currently about 95 per cent of employees and 80 per cent of the broader Australian workforce is covered. However, to enhance super’s long-term integrity, ASFA advocates extending the compulsory system to workers not presently covered, such as the self-employed and some low-income earners. If the compulsory system is not extended to these workers, they will have lower or no superannuation contributions, and therefore lower balances at retirement and a lower standard of living.
Another challenge is the gap between retirement outcomes for men and women. Male workers who enter the workforce today and earn median wages throughout their career are expected to reach a balance at retirement consistent with the ASFA Comfortable Retirement Standard (currently $545,000), whereas female workers who earn median (female) wages will end up with around $100,000 less.
Increasing the SG rate from 9.5 per cent to 12 per cent will improve retirement outcomes for all Australians and help workers in the middle-income cohorts reach the Comfortable Retirement Standard by the time of retirement, which many currently do not. Increasing the rate will also help underpin the long-term sustainability of Australia’s Age Pension as our population ages.
