Government should back off

Print This Post A A A

While the Federal Government is on the warpath over entitlements, it’s not clear from longer-term numbers if the figures justify some of the rhetoric. Indeed, in the superannuation policy area, the government appears set on an ideological line, which contrasts with long-term needs.

There’s not enough

This has been highlighted recently, not by partisan players, but by David Gruen, the Treasury’s top superannuation official and a key policy advisor. In a speech, Gruen said super costs and fees were too high and that there needed to be more emphasis on providing retirement income rather than just the accumulation of savings in super accounts. The challenge was underlined by a report from Deloittes, which highlighted the huge potential gap between super savings and the capital needed to fund retirement income for average workers.

If investment returns remain constrained in the immediate future, retirement savings can only be boosted by higher contributions and/or lower fees. But the Abbott government appears determined to water down the provisions of the Future of Financial Advice reforms to favour the banks and other big institutions – after earlier imposing a temporary freeze on the increase in compulsory SG contributions. Both policy moves favour the business and financial sector at the expense of superannuation fund members.

After all, the bank-dominated financial sector is already doing quite well from super. Treasury and the Reserve Bank in their submission to the Financial System inquiry said total super fees of super were three times those in the UK and, at more than $20 billion a year, represent more than 1% of GDP.

Reducing this by a few tenths of 1% of GDP “would be a significant and worthwhile reform” and “significant reductions in superannuation fees would have widespread benefits for society as a whole,” Gruen said.

The recent Senate report on the CBA and ASIC has re-ignited debate about financial advice, but those hoping for a tougher stance to protect individual investors in superannuation need to factor in Coalition politicians’ historical aversion to super.

The ideologues

Some of this is ideological; compulsion (as in the SG contributions) doesn’t sit well with many Liberals and there is a view that the super system is a love child of the unions. However, over a quarter of a century, the compulsory system has grown to $1.8 trillion and is too large to ignore – as is the $500 billion of self-managed funds in the hands of fiercely independent entrepreneurs.

Superannuation is now too important to be a pawn in an ideological game. Nor should it be treated with benign neglect or treated as a convenient honey pot to finance infrastructure spending or to underwrite the growth of financial institutions.

David Gruen emphasised that the key focus of superannuation should be on providing retirement income “rather than primarily on wealth accumulation.” But for a quarter of a century, successive governments have neglected the word “pensions” and despite calls from the industry, the question of creating income products for Australians’ retirement always seems to remain a matter for the next inquiry.

And the debate has been hobbled by advocates at both extremes. At one end, some in the super industry have excessive faith in annuities as a solution. Others want to force people away from lump sums and have part of their savings compulsorily converted into income. Both ignore the fact that it will take a few more decades before the majority of retirees have enough saved for such policies to work. At the other extreme, critics argue that, even after decades of super savings, most retirees still rely on the age pension.

The evidence

However, the recent Melbourne Institute report Household, Income and Labour Dynamics in Australia (or HILDA) scotched a few long-standing views. For instance, the Treasurer’s allegations of welfare dependency don’t entirely stack up: the HILDA report showed people’s share of income from government benefits fell from 24.4% to 21.3% over the decade to 2013.

And reliance on the age pension may be waning: HILDA showed the percentage of people on the government pensions showed a perceptible fall over the last decade – from 80.9% to 77.9%. Among those over 65, income not from the age pension rose from 32.2% to 40.2% and for those 65 to 70, the share of non-pension income is now more than half total income. In other words, the combination of a rise in super income and later retirement (for men it has risen from 59.8 years to 62.6 years over the decade) have begun to reduce dependence on the age pension.

It’s a slow movement – as are most demographic trends – but it is moving in the desired direction. Imagine how it might improve with a little more sensible encouragement from government policy.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition

View More Articles