Compulsory savings scheme a super idea that ripens with age

THERE are three pillars to Australia's retirement income system: the social security age pension, the compulsory superannuation guarantee and voluntary savings.

It is widely accepted that the age pension isn't the best way for people to fund their lifestyle in retirement and it certainly doesn't facilitate "financial freedom".

The third plank, voluntary savings, is important but the desire to consume today rather than save for tomorrow means that the savings accounts of most Australians are far from overflowing, although we have recently seen a big increase in household savings after the global financial crisis.

This leaves us with the superannuation guarantee (SG), the creation of which was a visionary response to inflationary pressures and a far-sighted way of facing the ageing of our population.

When great reforms are introduced, it can often take decades for their true value to be recognised. Twenty years on, the benefits of the SG are clear. We have accumulated a national savings pool of about $1.4 trillion.

We have more Australians saving for their retirement, which will reduce the burden on public finances and help deliver adequate post-retirement replacement income when the compulsory system matures.

Our superannuation system was also critical in helping Australia avoid the worst of the GFC. When debt markets dried up, it helped Australian companies raise equity through direct and indirect investments.

The super industry makes up about 45 per cent of Australia's finance industry the largest industry in the country, responsible for 10 per cent of GDP and thousands of jobs.

Superannuation is also a core source of funding for nation-building infrastructure and private equity projects. Super's role in this is likely to become even more important in the future to support Australia's growth.

In what can now be seen as a pivotal reform at both the micro and macro-economic levels, the SG has been ground-breaking in its contribution to the Australian economy and, most importantly, as it matures, to the retirement outcomes of many hard-working Australians.

But there is still a lot more to do before we can claim victory. Australia still has a significant savings gap. Research commissioned by the Financial Services Council in 2010 from Rice Warner Actuaries estimated that there was a deficit of some $897 billion as at June 30, 2009, and that figure is quickly moving towards $1 trillion.

ASFA, Australia's peak superannuation body, estimates that a retired couple now need about $55,000 a year for a comfortable retirement being defined as one in which they can have some fun as well as pay the bills and $31,000 for a modest retirement, one with only basic activities.

If you extrapolate this out to how much capital a couple need to live a comfortable life in retirement, it equates to about $510,000.

Given that the average superannuation accumulation balance for people aged 55-64 was about $142,000 in 2007, it's obvious we still have a way to go.

If the economic environment remains sluggish, the case for an increase to the SG becomes even more compelling. As people watch their superannuation balances contract, fear sets in and the need for a compulsion-based system comes to the fore to ensure superannuation continues to grow and members can benefit from the recovery when markets come back.

Unfortunately, despite its proven success, the same arguments that were used against the introduction of the SG in the early 1990s are being rolled out again today. The main objections are that employers can't afford it, it will cut employees' take-home pay and that we should let Australians choose how to spend their wages rather than force them to save through compulsion.

Importantly, the proposed increase in the SG will be phased in over six years, thereby reducing the impact on take-home wages.

An Allen Consulting Group report on superannuation, commissioned by ASFA, argues there will be no long-term effect on employers. It argues that they will either pass on the costs in the form of price rises or through wages growth and any short-term costs will be offset by the gradual phasing in of the rise and simultaneous reductions to the company tax rate and accelerated depreciation provisions for small businesses.

The increase in the SG simply must be supported it's just good policy.

Steve Tucker is group executive, MLC and NAB Wealth.