Should our super system look more like Singapore?

Last week's blog post, How high is high income?, generated more comments than any other. The response (and the responses to earlier posts on retirement savings) show that there is a genuine interest in reform of the super system - to improve it, not just tax it.

One of the reasons mandatory superannuation was established in Australia was to increase Australians' rate of savings. But one of the major forms of savings - paying off the mortgage - is off limits.

Some retirees pay off their mortgage with their lump sum benefit on retirement. How much more would they have had on retirement if they were able to choose where best to place their savings? Imagine if they could have directed savings into their mortgage, saving compounding interest all those years?

With the recent focus of Stronger Super on fees and expenses, it is surprising this has not even been discussed. Permitting us to hold at least part of our mortgage in our super would not only provide higher returns and a larger pot on retirement, but also reduce our living expenses. Not to mention provide the banks with some competition in the mortgage market.

One argument against will be diversification; nobody wants to lose both their house and pension if the market goes south. But, as we allow super funds to borrow to buy investment properties, we've potentially got more of a diversification problem under the present system.

While our home mortgages are not included in the super pot, for many years Australia has permitted some risk or insurance benefits such as short term disability and life insurance, as part of super. The insurance is usually organised on a group basis, and the super fund will pay the premiums on the members' behalf. By way of comparison, other countries such as Singapore take the inclusion of benefits a step further and also include mortgage payments, homeownership opportunities and healthcare.

Like Australia, Singapore has a mandatory contribution system. The Central Provident Fund (CPF) of Singapore mandates a total contribution between 11% and 35.5% of each member's salary depending on age. Employees pay up to 20% of salary, with employers paying the balance.

The goal in Singapore is for each member to have sufficient savings to fund retirement, a paid off property upon retirement and sufficient savings to meet medical needs in old age.

Singapore's CPF uses three basic accounts (or sub-accounts) where the member allocates a certain percentage of contributions to those accounts. Broadly, they are used for home ownership, investments and healthcare.

In Singapore the ordinary account - often used for homeownership - is frequently used to make either a lump sum payment off a mortgage, the 5% required down payment on a property or to service monthly mortgage obligations. This account also permits members to buy insurance such as life insurance. Members are not required to buy a house and may transfer balances to their investment account if they prefer to rent or already own a house.

This has resulted in a home ownership rate in Singapore of 87.2%, compared to 69% in Australia.

Another interesting factor in Singapore is that, as each person gets older, they contribute less to the account used for housing, more to the account used for investments (until age 45 when it declines) and more to the account used for medical expenses and insurance. The total contributions also decline with age - members under age 35 contribute 20% of salary and those over 65 contribute 5%. The employer makes up the balance and contributes between 6% and 15.5%.

The way the contributors and accounts are structured in Singapore reflects the lifecycle of most with an emphasis on homeownership at the beginning of one's career and, later in life, an emphasis on an ongoing accumulation of an investment account (until age 55) and medical insurance and expenses.

One advantage of the Singaporean system is that the member has one super and real estate pot to contribute to. Most locals don't have to engage in the debate of - should I buy a property to live in right away or should I accumulate funds first?

As noted above, super funds are allowed to invest in real estate - just not a member's actual home. Other jurisdictions, such as Canada, permit a small amount of restricted super money to be taken out to assist first time homebuyers.

Of course, when a jump in compulsory contributions from 9% to 12% is controversial, it's unlikely we're going to see 35% contributions any time soon. Even if this effectively includes a mortgage payment and despite the possible long term advantages and extra benefits.

The Australian super system isn't perfect and we should be debating changes which bring structural benefits. It would certainly be a change from discussion about increasing taxes and reducing concessions.

Clearly there would need to be limits, to prevent our super savings become one gigantic residential property play. But imagine if our present negative gearing system was replaced with super rules which assist everyone to own their own home, rather than subsidising those simply punting on property prices.