Saturday 25 November 2023

How superannuation was sold to Australians with a necessary lie

Superannuation is the system of private retirement savings introduced in Australia in 1992. It was sold as a 'reform' to provide more working Australians with private retirement savings to supplement (or replace) reliance on the Age Pension. Prior to this, private pensions were generally a 'perk' only available to white collar workers in some industries (for example my first job as a research scientist in the early 1980s had a 'defined benefit' plan that would have provided a fixed multiple (8.25x) my final average (last 3 years) salary upon reaching retirement age (65). The multiple was based on years of service. Of course the company decided to shift the risk of investment performance onto workers by changing the system to a defined contributions plan in the late 1980s (and incidentally removed the redundancy insurance feature) just before making most of the workforce redundant in the late 1990s)).

Initially introduced at a contribution rate (SGL) of 3%, it was part of a 'deal' finessed by the Labor government to replace part of wage increase with a legislated compulsory contribution into superannuation by Australian companies. This helped break the wage-price spiral that had entrenched high inflation in Australia in the 1970s (mostly due to the 1973/4 'oil shock').Introduction of the SGL and universal superannuation in 1992 helped 'break the back' of inflation -- bringing the rate down from a persistent 5%+ to around 2.5% (hence the current Australian 'target' band for inflation of 2%-3%). It was no coincidence that inflation targeting by the RBA was introduced in 1993.

Since its introduction the SGL rate has been increased by a series of Australian governments, with Labor generally being more in favour of pushing for increases in the SGL as part of their 'election promises' to appeal to their traditional base of 'working class' Australians (and low income workers), The conservation governments (Liberal and National Party coalition) have been less keen to increase the rate of SGL, based on their philosophy that decisions to save money for retirement should be left to the individual, rather than government legislation. The conservative government also views the SGL as a 'cost to business', although most of the cost of SGL is actually born by the employees via lower wage rises. However, Labor governments tended to 'bake in' future SGL rises by legislation covering a 'timetable' of future SGL increases -- which conservative governments usually had to promise to not rescind (or would cost them an election. Although this election promise was then often 'kept' by delaying the timing of the next SGL increase).

A side-benefit of superannuation for Labor governments was that their biggest support base (the Union movement - whose compulsory union dues often fed into Labor Party campaign coffers) used superannuation (especially 'Industry Super' funds) as a tool for propping up membership (which has started to flag since the de-industrialisation of Australia since the 1970s). The amount of Industry Fund monies pumped into advertising 'super' as some sort of Trade Union achievement was astounding (they even featured a retired Reserve Bank governor in one ad series).

There has been some debate regarding whether SGL increases actually came at the expense of wage rises. The initial belief was that any increase in the SGL rate would be offset by employers reducing the wage rises that would otherwise have occurred. And it was in fact 'sold' as an inflation fighting mechanism to swap a wage rise for universal SGL (via the Hawke government 'Accord'). But some researchers subsequently claimed that their analysis showed that the SGL increases had little or no effect on wage rises. However, the  government's Retirement Income Review recently provided a fairly definitive conclusion that between 70% and 100% of the increase in SGL has come at the cost to workers of reduced wage rises. So, no 'free lunch' - with increased compulsory retirement savings into superannuation coming at the expense of 'take home' pay (and also 'locked away' until 'preservation age' for good measure). The main sweetener used to sell this compulsory savings plan was that tax on savings inside super (15% during accumulation phase) is lower than the marginal tax rates for incomes above the 'tax free' threshold of $18,200 pa (although it isn't much of a benefit for those in the 19% tax bracket earning under $45K).

But the largely hidden reason for both Labor and Liberal governments being in favour of compulsory superannuation is that the Age Pension was going to become unaffordable over time, due to it being 'unfunded' (paid for out of current tax revenues and government debt) rather than supported (at least partially) by worker's contributions (as is the case with the US SS system, the UK NI scheme, etc). One feature of the Australian Age Pension system (since it was introduced in 1909) was that it was both Income and Assets tested (although there was a brief period when the Asset test was removed during the 60s and 70s).

The Asset test (the threshold over which the full Age Pension entitlement is removed and a part-pension may instead be available) has generally been around 7x the minimum wage (pa) since the mid 1980s:

Unfortunately, although the Asset test excludes the 'principle residence' it does include financial assets, including the superannuation account balance. Therefore, the growth in superannuation savings has directly reduced the number of Australian workers who can access the Age Pension at all, or reduced the amount of 'part pension' available for those with Assets above the Asset test threshold (but not so high as to totally eliminate Age Pension eligibility).

This reduction in eligibility for Age pension has been quite obvious, as is the rapid switch from full Age Pension entitlement to only being eligible for a part pension (and the average amount of part-pension rapidly declining due to the Asset Test and 'taper rate' as Super balances increase):

Indeed, the Australian government's own Retirement Income Review final report projected that the percentage of age eligible Australians having access to the full Age Pension would drop from over 40% to around 20% by 2060:

Overall, introduction of compulsory Superannuation and the increase in the SGL rate over time has

1. Helped transition Australia from entrenched inflation since the 1973 'oil shock' to the 2%-3% 'target band' via the 'Accord', but trading wage rises for superannuation savings.

2. Helped shift the burden for retirement income support from the government (unfunded) Age Pension to the self-funded (via SGL) Superannuation system. The fact that the SGL comes mostly (70%-100%) from lower wage rises is generally not publicized. In fact the Trade Unions generally spruik 'Industry Super' and compulsory superannuation as a 'good thing' for workers.

The way that the Age Pension Asset Test has resulted in growing superannuation balances rapidly restricting access to the Age Pension, and rapidly diminished the amount of partial Age Pension paid out to those still able to access some Age Pension is less well known.

Overall, the introduction of Superannuation in Australia was necessary (as the Age Pension system would have otherwise become unsustainable, requiring draconian cuts to Age Pension rates or much tighter eligibility rules, or significant increases in taxation revenue from a shrinking taxpyer vs retiree pool) but was sold by the Trade Union movement and both major political parties as a 'good thing'. But in reality it has simply shifted the burden for retirement funding directly onto workers -- and made such compulsory retirement savings law.

One 'loop hole' still remaining in the Superannuation and Age Pension system is that the principle residence is exempt from the Asset Test. So it is quite possible for those eligible for a partial Age Pension to increase their retirement income by taking a lump sum from superannuation and using it to 'upsize' their home. I expect that eventually this will be remedied by either a) using a carrot and stick approach to make moving superannuation into 'Pension Phase' upon retirement mandatory, and restricting the access to lump sum payments from pension phase superannuation (eg. the maximum 10% withdrawal rate applied to TRIS pension accounts could be applied to pension phase superannuation balances). or b) putting a 'cap' on the value of principal residence that is exempt from the Age Pension Asset Test (I wouldn't be surprised if the TBC ($1.9MM) or $3MM threshold for the newly introduced 30% tax rate on superannuation 'increase' (taxable income AND unrealized capital gains) eventually became the 'cap' on value of principle residence exempt from the Age Pension Asset Test).

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