Lifting the Superannuation Guarantee (SG) employer contribution from 9 to 12 per cent flies in the face of research which suggests financial stress is highest for those aged under 45.
This is the view of Bruce Bradbury, a senior research fellow in the Social Policy Research Centre at the University of New South Wales.
“Superannuation contributions impose large burdens on young adults at a time when they can least afford them,” Bradbury argues.
“With this proposed increase, it is time that the policy was amended to improve the match between retirement saving and costs across the life course.”
Financial planning and superannuation industry bodies welcomed the SG Bill’s passage through Federal Parliament in late November last year.
However, Bradbury warns that superannuation contributions impose large burdens on people in their 30s and 40s at a time when they can least afford them.
“More superannuation, it is argued, will increase intergenerational equity, relieve fiscal stress on governments and compensate for the myopia suffered by individuals when saving for their future retirement,” says Bradbury.
“Even though the superannuation guarantee is paid by employers, it is generally agreed by analysts that the cost of the employer contribution ultimately falls on wage earners via reductions in wage increases.
“This means that, while superannuation saving addresses one important issue of lifecycle resource transfer (low incomes in retirement), it exacerbates another.”
The data suggests that while those aged under 30 are high savers, this drops dramatically when people reach their 30s and start taking time off work to care for children, purchase goods for children and purchase housing.
Using this saving measure, saving capacity only increases again once people reach their 50s. Even in retirement, it is not as low as in the 30s and 40s.
“Most people paying attention to superannuation are probably aged above 50. For the average pre-retirement person aged over 50, a larger contribution to super probably makes sense, unless they have some other preferred form of saving,” says Bradbury.
“But younger families might start to pay attention when they find a reduced growth in their pay packet. Are the early adult years really the best time to be saving additional money for retirement – particularly when they are already saving via home purchase? How can we rescue the young from superannuation?”
While Bradbury concedes that it is not possible within the current system to simply reduce the contribution rate for young people (or any other demographic group), he believes there are a range of secondary mechanisms that could be employed.
“One that is often mentioned is to allow people to access superannuation balances for house purchase,” he says.
“This has been criticised as undermining the life course saving objective of superannuation, but can also be seen as a mechanism to redress a key flaw in the superannuation saving model.
“However, while this might make sense in the context of our current housing markets, housing is not the best means of saving for retirement.
“It is hard to liquidate and increases the amount of wealth passing to the next generation rather than being used for consumption in old age.
“If we don’t want to encourage housing investment, there are nonetheless other potential strategies. We could allow access to super for other life course-related expenditures such as childcare fees or to supplement paid parental leave.
“Finally, one could simply allow super funds to pay out some funds to people under certain ages.”
Or, the government could not tax contributions in super (15%) and leave the SG at 9%.
This age group does have significant financial stress, but the SG is not the cause. I’m in the middle of this group, and have found the biggest stress has been rising interest rates and the actual house purchase cost. Rate changes are aimed at reducing spending by all, but they really only create pressure on people with larger home loans and businesses with debts. We got caught with the large rate hikes of 2007, having bought in early 2006 when rates had been very steady for ages. Having a mechanism for dealing with inflation that targets those with most disposable income (early 20’s and older workers/retirees) would be far more effective at easing pressure on people when they have high mortgages, young families and often one parent working reduced hours. I was 20 in 1990 when interest rates were very high. I was working and still living at home, and higher rates just provided me with more disposable income. I expect the same will happen when I’m 60+. So higher rates give income to those spending and put pressure on those who aren’t – the reverse of what they are aimed to do.
Part of the problem is people often spend a high amount buying their family home. This can be partly addressed by reducing house prices. Winding back negative gearing would assist, and save Government revenue. Educating people to borrow so interest payments are under say 30% of disposable income even if one spouse were to stop work to look after children would result in less people being affected by mortgage stress. Possibly legislation could require a couple borrowing to be assed based on 100% of one wage but only 50% of the other’s, ensuring a buffer for when children come along and also helping to ease house prices. I know increased SG won’t mean my package will increase – I’ll end up with less net income. Its pretty marginal though and the increase is needed to help people have enough for retirement.
The value of compound interest in super funds is one that is not often considered. If young people can save more into super at a young age then time and compound interest will provide a solid foundation for possible lack of saving during the high cost years or lost earnings due to child raising