InvestSMART

Lifting guarantee simply a super idea

Without extra compulsory savings, retirees can expect lower living standards, writes David Knox.

Without extra compulsory savings, retirees can expect lower living standards, writes David Knox.

The government's 12 per cent super proposal has been sidelined by the recent focus on the carbon tax, but 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 per cent to 12 per cent claim that taking 3 per cent from 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 guarantee rate now.

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 per cent for men and 56.9 per cent for women, based on a superannuation guarantee contribution of 9 per cent 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. The net replacement rate for an average income earner across the 34 OECD countries is 68.8 per cent more than 10 per cent higher than the Australian figures.

These figures assume that individuals will work full-time for more than 40 years, but we know that's not the case for many people, particularly women.

Increasing the superannuation guarantee to 12 per cent is more important for these people if they are to have a reasonable standard of living in retirement.

Experience shows compulsory saving is one of the most effective ways to save for retirement. That's because, despite our best intentions, most 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 per cent to the guarantee doesn't translate to 3 per cent more income at retirement: it translates to 40 per cent more income from super for most retirees.

How is that possible? Because a 12 per cent guarantee rate will help us get better value from our existing funds and it demonstrates the power of compounding investment returns.

Most pay a fixed administration cost for each superannuation account they hold, and pay premiums for cost-effective life and disability insurance, expressed as a fixed dollar amount per week. So while the 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 per cent to 12 per cent is likely to increase retirement income from super by more than 40 per cent.

The argument about reduced living standards due to a higher guarantee rate doesn't stack up, based on logic and experience.

While wages will be marginally affected, the suggested transition - between now and 2019 - is much more gradual than when the guarantee was previously raised from 3 per cent to 9 per cent. The average wage grew by 1.4 per cent per annum in real terms from 1992 to 2002, despite the guarantee increase, and a similar outcome can be expected in the next few years.

Increasing the level of compulsory superannuation will improve the living standards of retirees and will boost the long-term sustainability of our economy.

More money in super means there are more funds for a range of investments, as well as providing the economy with greater protection from external shocks.

Increasing the superannuation guarantee is a win for future retirees, a win for future government budgets as our population ages and a win for the economy. Let's just do it.


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