Wouldn’t it be fabulous if all Australians reached retirement with a saving pool sufficiently large that it gave them complete financial security?
By that, it means retirees having the financial independence to live off those accumulated savings and never having to draw on the age pension.
For individuals, it would be liberating.
The benefits to the Federal Government’s budget would be fantastic. Without having to pay a pension to huge numbers of older Australians, the government could cut taxes and fund world-class education and health care.
In 2020-21, the government is scheduled to spend nearly $54 billion on the age pension. This is around 10 per cent of all government spending. It is a huge item in the budget now and, absent a rise in superannuation savings for the bulk of most Australians, it will keep rising for decades to come.
Funding the pension requires non-pensioners to pay tax year in and year out or for the money to be borrowed and added to government debt.
As the population ages and a higher proportion of the population move away from paid work and paying income tax and moves towards receive the government pension, the burden on those tax payers increases.
One of the core objectives of Australia’s compulsory superannuation scheme is to have as many people as possible financially self-reliant in retirement and not dependent on a government pension.
On current framing, in 2025 every worker will have 12 per cent of their income paid into their superannuation fund.
While there are many assumptions in making calculations over a long period of time, for someone aged 20 years starting paid employment in 2025, 12 per cent would almost certainly provide them with a pool of savings for a comfortable retirement in 40 or 45 years time.
Watch out for the anti-supers
The government is giving consideration to freezing superannuation contributions at the current 9.5 per cent.
It would be a mistake to do this as it would set back the end goal of minimising the number of people drawing the age pension. Many on middle and low workers would simply not accumulate enough to retire without some draw on the pension.
Sure, the effect would be relatively small in the next few years but the power of compounding savings investment returns over many decades, would mean that the average worker today would be more likely to rely on the pension when they retire.
Too much super?
Some of those suggesting a freeze to superannuation contributions note that some have used the generous tax concessions on contributions and the income earned in the superannuation fund to build massive savings, which on any measure are over and above the amounts needed for a comfortable retirement.
Rather than being an issue for the level of superannuation for those on middle to low incomes, it is a legitimate problem that can be addressed through the tax system.
There seems little point undermining superannuation for the bulk of workers to target a few well off individuals.
If a few high income earners have ‘too much’ superannuation savings, the government could change the tax rules, including through the imposition of a progressive tax on their superannuation balance and income returns.
It is not difficult to change the tax rules that would very quickly end the rorting of the scheme.
Superannuation has other benefits for the economy.
It provides a pool of savings that delivers investment funds within the Australian economy and capital markets.
Those tasked with managing the funds in superannuation will invest in a diverse range of assets and instruments that maximise the returns for a given amount of risk.
The money in superannuation is invested in government and corporate bonds, domestic shares, venture capital, infrastructure, property and alternative assets to name a few.
Your superannuation is increasingly invested overseas giving investors expose to a range of global markets that everyday savers could rarely access.
For example, you, via your superannuation fund, could well own shares in Apple, Google and AstraZeneca, among thousands of other opportunities around the globe.
So large is the pool of superannuation savings that Australians are now collecting more in the form of dividend and interest income than we are paying to foreigners who own our companies and bonds.
This has been an important part of Australia running a current account surplus for the first time in many decades.
The pension as a safety net
Of course, even with the best superannuation framework, not everyone will be able to reach retirement with an adequate amount of superannuation savings.
For those folk, the age pension should always be there as a solid and sufficient safety net.
For the rest of us, the superannuation system should allow us to accumulate sufficient superannuation throughout our working lives so we can retire with sufficient level of retirement savings to enjoy our free time with financial security.