A better use for our super savings?

I am going to play it safe this post and head back to some food for thought on retirement savings.

Recently, I was talking with someone who mentioned the failure of the New Zealand voluntary super system to increase the national savings rate. The most likely explanation being that people were using it as an alternative form of savings rather than increasing their overall savings.

This lead us into a discussion about whether Australians (despite our system being compulsory) might have done a similar thing and to an idea I have had in the past: Should we allow people to withdraw a lump sum from their super in order to reduce their personal debt?

Since the introduction of compulsory super, Australians (as a whole) have managed to build up $1.3 trillion in superannuation balances. However, at the same time, we have also managed to build up household debt by something like $1 trillion (it is tough to find the exact number as most of these statistics are disclosed as percentages).

This means (holistically speaking) that, on the one hand, we are paying 1-2% in fees to have our money managed and, on the other, 1-2% margins borrowing to replace it. Assuming we are losing, on average, 3% in the middle, we could be paying away something in the order of $30 billion to the finance industry simply because we don't have the national equivalent of an offset account.

At the recent Eureka Congress, Paul Keating suggested super funds should be required to hold a % of assets in residential mortgages. Doing this via the banking system (it wasn't clear if he was suggesting this or not) would completely entrench this loss. Rather than paying away 3% to end up investing in a portfolio of assets, we would be paying 3% for our money to go around in a circle - borrowing at 7% from the banks and investing at 4% (net) in the banks, with no chance of upside.

The make-up of our superannuation and borrower populations are not identical. Some people might have a lot of super, with no borrowings, and others the opposite. So we wouldn't save $30 billion.

But it seems that there is still a very large financial gain to be made (at least for superannuation investors) by allowing super to be used to pay down debt. There would be flow-on benefits as well - for instance, it would further strengthen the balance sheets of the Australian banks.

The main negative with this proposal is that the debt repayment would need to be permanent for our net national savings to remain unaffected. Any measures would require a mechanism to enforce this. It also wouldn't be good for the sharemarket for a while (except those looking to buy), nor the money management industry.

But as we look for ways to reduce investors exposure to the finance industry, restructure superannuation and strengthen our banking system, this might be an avenue worth exploring.