Hot on the heels of this morning’s blog , a jingoistic piece on the resurgence of the UK as a pension power, here is a blog by Robin Powell that explains rather better than I , the frailties of Australia’s much vaunted Super system. Thanks To Robin, you can read the original here.

Australia’s retirement income system is internationally recognised as one of the world’s best, but in recent months it has become a battlefield between those who are seeking to extend the system and those seeking to fundamentally transform it.

‘Superannuation’ is a defined contribution retirement savings scheme introduced in 1992 by the then Labor government. Together with the government means-tested age pension and private savings, it forms the third pillar of the retirement income system.

Under superannuation, employers pay part of each worker’s salary into a super fund of their choice. These payments, currently set at 9.5% of income, are concessionally taxed but cannot be withdrawn until retirement age.

Credit where it’s due

By some measures, the system has been hugely successful. At $US2.1 trillion, Australia now has the fourth largest private pension pool in the world, after the US, the UK and Japan. This sum represents 150% of GDP in a country of just 25 million people.

The compounding growth in super in turn has created a large and thriving financial services industry, built around super funds, banks, asset managers, consultants, wealth distribution platforms, and financial advisory networks.

The current plan, already enshrined in legislation, is to increase the monthly superannuation contribution of each employee to 12% in half percentage point increments by 2025.

Second thoughts

But the current Conservative government is having second thoughts. A succession of inquiries has questioned the wisdom of workers stashing even more money away for retirement at a time when wages growth has been stagnant.

Last November, a government-commissioned retirement income review found that while the current system is effective, further increases in super payments would result in lower wages growth and affect living standards in people’s working lives.

Powerful vested interests

The 600-page report, by a former Treasury official, also noted that a number of vested interests have grown increasingly powerful through superannuation, drawn by the $AU30 billion fees siphoned out of the system each year.

As well, the generous tax incentives offered under superannuation go overwhelmingly to the already wealthy. This is seen as defeating the original intent of super, which was to take the pressure off the means-tested government age pension.

The review found the cost of these tax concessions will grow as a proportion of GDP in the coming years to the point that by 2050 it will exceed that of the age pension.

Dying rich

The review also found that many Australians are reluctant to draw down their superannuation balances in retirement, preferring to live off the income generated by their savings and preserving the principal as a bequest.

“Most people die with the bulk of the wealth they had at retirement intact,” the report says. “It appears they see superannuation as mainly about accumulating capital and living off the return on this capital, rather than as an asset they can draw down to support their standard of living in retirement.”

Added to the challenges is that retirement becomes much more difficult if you don’t already own your own home. And that has become a huge challenge for younger generations in Australia, priced out of booming housing markets in the major cities.

Concession for young workers?

Against that background, a group of rebel government backbenchers has been campaigning for young workers to be allowed to draw down from their superannuation accounts in order to find a deposit for a home.

A precedent for this was set last year, when the government granted relief for people suffering several financial duress due to the disruption caused by COVID-19 to withdraw up to $10,000 from their super accounts. As of the end of 2020, nearly three million Australians had taken a total of $36 billion from their retirement savings.

The architect of superannuation, former Prime Minister Paul Keating, has been vocal in opposing shifting the scheme away from retirement savings, seeing it as an attempt by ideological zealots to undermine the principle of universality in super.

Room for improvement

Still, for all the political push and shove, there is a broad consensus that the system could be improved by increasing transparency, lowering costs, reducing tax concessions for the well-off and having a legislated goal for super.

From July 1, 2021, new reforms will be introduced aimed at improving the efficiency of the system, reducing fees and holding super funds to account for underperformance.

Also being introduced are single default accounts so that when workers change jobs or industries, their super goes with them. This intended to stop the current situation where many workers have multiple accounts, each extracting fees.

From mid-2022, super funds will also be required to offer comprehensive income products for retirement which focus on the neglected drawdown phase.

Australia’s system remains highly rated. It ranks fourth overall in Mercer’s Global Pension Index of 39 international retirement systems. But it is not perfect. And change, in one form of another, appears inevitable.


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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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  1. Eugen N says:

    I think the problem pension systems have is that not all people are equal. Some people earn more than others and even if they have the same savings rate, they save more in Pounds or Dollars than the others. As a result high earning people end up with higher retirement provisions, getting more tax relief etc.

    Whatever system you put in place, the end result is the same. High earning people have more disposable income and will save more! Nothing you can do about this.

    If Australians are starting to moan about the effect a high saving rate could have on workers wages, pensions should not be first to blame. Yes, when savings rates increase (especially due to interest rates decreasing), spending could decrease. This was accentuated by coronavirus.

    To increase wages, you need to increase productivity. This could lead to some people having to retire early (especially the ones with good provisions), but people who manage to increase their productivity will end up paid better. Another option is to export to countries which still have higher expenditures, mainly due to increase in demography.

    Because if Australian population does not increase, it is clear that for a food producer in Australia, it will be hard to produce more food, so with increases in productivity some food/agriculture workers will either need to be made redundant (and try to find work in other sectors), or retire.

    This is basic economics. You need to be able to compete, if not you are out of the job!

  2. Tim Simpson says:

    Hello Henry,
    ‘Dying rich’
    While not being capable of comparing the technical points between Australia and UK pension policies [just a ‘punter’] I fully share their view that it is ideal to die with your capital intact.
    In my case [aged 75] I would not be surprised if I will see both the rise and demise of the
    UK National Health and Social Care system, The Government makes no secret that they have their eyes fixed on citizens savings etc. Nevertheless it is a natural wish for parents to see their offspring provided for without needing to go ‘off-shore’ etc.
    Kind regards,
    Tim Simpson

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