The Government’s 12% super proposal has been sidelined by the recent focus on the carbon tax, but the fact is, our super is likely to have a much bigger impact on personal living standards in the future than any carbon tax or emissions trading system.
Opponents of the move to increase the Superannuation Guarantee from 9% to 12% claim that taking 3% from our wages will lead to a drop in living standards. We don’t believe this to be true and in any case, the real decline in living standards will come much later – as our incomes drop when we hit retirement – unless we raise the SG rate now.
Looking closely at the numbers, it’s clear that Australia’s world-class retirement savings system is in danger of failing us unless we take action.
According to the latest OECD research, an Australian worker who earns the average wage throughout their career would have a net replacement rate in retirement of 58.9% for men and 56.9% for women, based on an SG contribution of 9% for the duration of their working life.
Put simply, after more than 40 years in the full-time workforce, retirees can look forward to a net income - after allowing for tax and the age pension- that is little more than half their net income before retirement.
This is not good enough for a retirement savings system that continues to be held up as one of the best in the world. In fact, the net replacement rate for an average income earner across the 34 OECD countries is 68.8 per cent; more than ten per cent higher than the Australian figures.
These figures also assume that individuals will work full-time for more than 40 years, but we know that’s not the case for many Australians – particularly women - who take career breaks due to family commitments, educational opportunities or unemployment. Increasing the SG to 12% is even more important for these people if they are to have a reasonable standard of living in retirement.
Experience shows us that compulsory saving is one of the most effective ways to save for retirement. That’s because, despite our best intentions, the majority of us simply don’t make voluntary contributions. Changing the level of compulsory super bridges that gap between intention and action.
It’s important to note, however, that an increase of 3% to the SG doesn’t simply translate to 3% more income at retirement: it translates to 40% more income from super for most retirees!
How is that possible? Because a 12% SG rate will help us get better value from our existing funds and it demonstrates the power of compounding investment returns.
Most Australians pay a fixed administration cost for each superannuation account they hold, and also pay premiums for cost-effective life and disability insurance, expressed as a fixed dollar amount per week.
So while the superannuation contribution will increase, the fixed costs should not, meaning we would get much more for our administration dollars. Taken together, these factors will mean a move from 9% to 12% is likely to increase Australians’ retirement income from super by more than 40%.
The argument about reduced living standards due to a higher SG rate simply doesn’t stack up, based on both logic and experience. While wages will be marginally affected, the suggested transition - between now and 2019 - is much more gradual than when the SG was previously raised from 3% to 9%. Indeed, the average wage grew by 1.4% per annum in real terms from 1992 to 2002, despite the SG increase, and a similar outcome can be expected in the next few years.
Increasing the level of Australia’s compulsory superannuation will not only improve the living standards of future Australian retirees, it will boost the long term sustainability of our economy.
More money in super means there are more funds available for a range of investments within Australia, as well as providing the economy with greater protection from external shocks.
In short, increasing the SG is a win for future retirees, a win for future government budgets as our population ages and a win for the Australian economy. Let’s just do it!
This article was published in the Sydney Morning Herald and The Age on Friday 19th August, 2011.
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