No. 177

SUPERANNUATION: NOT ENOUGH TO DO THE JOB

Super science and why nobody knows what it shows

Stone the crows! As if science was not enough to keep it busy, CSIRO is getting in on the super slushie – the $1.6 trillion (yes trillion) we have socked away for our old ages.[i] The national science agency announced on Wednesday it was establishing a new research centre in cooperation with Monash University to, “provide new risk-informed investment opportunities for individuals, the community and the economy.”[ii] Good-oh, as anybody wondering whom to trust with their super knows, impartial information is a rare as understandable advice.

But while CSIRO will look at the maths of risk and return, investment and income streams, it strikes the Crows that no one knows whether the assumption underpinning this enormous accumulation of cash is correct – that people will use super as its father Paul Keating intended, to fund retirements, rather than rely on an ever more stretched state to pay them pensions.[iii]

The Crows are not sticking their beaks into the issue of whether a 9 per cent levy is high enough to meet people’s retirement needs from 60 to 80 and whether it should go to 15 per cent to support their frail old age. [iv]

What does have the Crows in a flap is whether people will actually use their super as Mr Keating assumed they would and should. And it seems nobody knows.

Not that there aren’t plenty of opinions that they aren’t. Baby boomer belters regularly explain that this benighted generation rorts the welfare system and that concessional taxes on super is another aspect of their infamy. The acute Mike Steketee makes a strong case that preferential tax treatment of superannuation is a burden on the young and low paid, all the more unjust because there is no requirement to use the benefit as intended.[v]

Brian Toohey has frothed for years at the state supported extravagance of older affluent Australians, that people can receive $1m a year in tax free super and still qualify for Pharmaceutical Benefits Scheme subsidies is one of his favourites.[vi]

Steketee ignores the obvious issue – that super comes out of earnings and that individuals are entitled to do whatever they choose with their own money. And while Toohey is right to argue that the taxpaying poor should not have to subsidise the pill popping old and rich there are not that many million dollar welfare recipients.

Even so, knowing what people spend their super on is important now and will become essential over the coming decades – as the number of people aged between 65 and 84 doubles by mid century and the 85 plus age group quadruples to 1.8m.[vii]

Some suspect the superannuated old are going to spend their money on high living and then rely on the feds to fund the groceries and chemist bills. Simon Kelly’s recent report for CPA is scary stuff, showing how the baby boomers do not have anywhere near enough super to pay their way in retirement, certainly not enough to meet their inflated expectations. Indeed, it seems some see super as a way to pay off their debts when they retire rather than as an income-generating asset to hold.

According to Kelly, compulsory super contributions have created an expectation gap among boomers:

The knowledge that households have a “nest egg” coming in retirement appears to have made people more comfortable with debt and the annual superannuation statements along with rising house prices and household incomes have made people feel wealthier. This wealth effect is producing higher expectations for living standards in retirement. The superannuation nest egg being built from SG contributions is not keeping pace with the raised expectations and the need to service debt in retirement.

Seems scary? Well cop this; “the verdict is that accumulated superannuation savings minus household debt equals zero.”[viii]

Funnily enough, the aged lobby and super funds responded quick smart to Kelly’s report, sending deplore-a-grams about its accuracy.[ix] The CPA also suggested that using data from the bottom of the market in 2010 might have skewed the debt to financial assets rating.[x]

But even if the way super is spent is not an alarming example of the law of unintended consequences, the grim truth is that the people who are going to use their super first do not have enough of it. According to AMP, in December 2011 a modest retirement income of $52k requires a super balance of $675,000.[xi] According to APRA, the average 60 year old has $83,000 in super, equally alarming a 50 year old has $54,000 – even if they work to 70 it seems unlikely that they will salt away another $600,000.[xii]

As the industry argues, “for the foreseeable future, most individuals will rely on a mixture of private savings, principally superannuation, and the government-provided age pension for their income in retirement. Private savings provide a supplement to the age pension but also have the effect of reducing the reliance on social security.” [xiii]

The key word is supplement. And if you think retired people with any amount of super will accept missing out on any health funding and increased cash whenever the pension goes up, welcome. Is this your first visit to Australia?

 

ENDNOTES


[i] Association of Superannuation Funds of Australia, “Superannuation statistics, August 2013,” @ http://goo.gl/z9eWVE nd, recovered on August 31

[ii] CSIRO, “CSIRO-Monash Superannuation research cluster,” August 28 @ http://goo.gl/t2Fxm6 recovered on August 31

[iii] Paul Keating, “The story of modern superannuation,” October 31 2007 @ Paul Keating, “Official Website,” http://goo.gl/PQbYvH recovered on August 31

[iv] Glenda Korporaal, “Keating’s call to hit raise levy hits right note on retirement debate,” The Australian, November 29 2012

[v] Mike Steketee, “Unfair, inefficient and expensive: what went wrong with Australia’s superannuation system,” Inside Story, February 2013 @ http://goo.gl/w6vsKU recovered on August 31

[vi] Brian Toohey, “Self-reliance still a distant goal as budget trims at the edges,” Australian Financial Review, May 15

[vii] Treasury, Australia to 2050; the 2010 intergenerational report http://goo.gl/sKhJON recovered on August 31

[viii] Simon Kelly, “Twenty years of the superannuation guarantee: the verdict,” 6, CPA Australia, August 2013 @ http://goo.gl/aHF8pi recovered on August 31

[ix] Duncan Hughes, “Superannuation savings squandered,” Australian Financial Review, August 24, Geoff Winestock, “Superannuation funds slam CPA as ‘flawed,” Australian Financial Review, August 28

[x] Geoff Winestock, “Super found to boost savings for low, middle-income earners,” Australian Financial Review, August 27

[xi] AMP, “How much is enough,” December 2011 @ http://goo.gl/c7Zy73 recovered on August 31

[xii] Challenger Retirement Income Research, “How much super do Australians really have,” April 2012 @ http://goo.gl/2OJ7Nv recovered on August 31

[xiii] ASFA, “The equity of government assistance for retirement income in Australia,” ASFA research paper, September 2012 @ http://www.superannuation.asn.au/policy/reports recovered on August 31

'2012