14 Jan Superannuation system must not punish the young
James Paterson — The Australian Financial Review — 14 January 2019
Young Australians are poorly served by a superannuation system that shamefully favours the interests of providers over consumers. That’s why the Productivity Commission’s call for reform is so compelling.
Like many young people, I worked a series of casual jobs in my late teens and early 20s, and by the time I finished university I had four separate superannuation funds. As a result, I had four sets of life insurance, which was probably a bit excessive for a then unmarried, childless student.
The four sets of fees I paid for the privilege of having my compulsorily acquired savings managed were certainly excessive. By the time I got my first full-time job, the cost of fees and insurance had completely eroded two of the funds – not a great return on investment for six years of part-time work.
I’ve since consolidated my funds. But many Australians have not. As the Productivity Commission has revealed, there are 10 million unintended duplicate superannuation accounts, which are being eaten away by $690 million in unwarranted fees and $1.9 billion in unnecessary insurance every year. For me, and many workers, many of these duplicate accounts accrued because some industries and employers still dictate which superannuation fund their employees must use. This means that changing jobs – which young Australians frequently do – often requires the creation of a new fund.
This the result of an outdated and counterproductive decision to allow our industrial relations system to dictate Australia’s retirement income policy. Remarkably, this antiquated system is still defended by the likes of the ACTU and shadow treasurer Chris Bowen. But it’s an anachronism that has no place in a modern economy.
As the Productivity Commission argued, the Fair Work Commission is lacking in expertise and legitimacy – having been designed for a completely different task – and it should have no role in choosing default funds for workers.
People should be as free to choose their super fund as they are to choose which bank they use. But this isn’t just a matter of principle; it’s also causing real financial harm. Many of the default funds workers are being herded into are underperforming. This can result in the equivalent of a decade of lost earnings, or a retirement balance $500,000 lower than it otherwise would have been.
Perhaps the Productivity Commission’s most important recommendation is that the scheduled increase in compulsory super contributions (from 9.5 per cent of workers’ salaries to 12 per cent) be postponed until the entire system has been comprehensively reviewed.
Forcing workers to put more of their own money into a broken system is wrong. Rather than supporting people’s retirements, much of this money will be wasted in poor performing funds with excessive fees and inappropriate insurance products.
But even in a reformed superannuation system, the benefits of higher compulsory contributions are unclear – particularly for young people.
As Ken Henry identified in his 2010 review of the tax system, mandated higher super contributions come at the expense of workers’ take-home pay. In a time of concern about slow wages growth, this would be counterproductive.
For young people trying to pay off HECS debt and save a deposit for their first home, it would be especially unhelpful. Their immediate financial priorities are much more urgent than their retirement. So too will be their mortgage, school books, uniforms and fees when they get older and start a family – costs which they should be long since finished with by retirement. As the Grattan Institute has shown, most Australians will enjoy a reasonable retirement on current policy settings, and some will even enjoy a higher standard of living than while they are working.
Most people are poorest when they are young and richest at the end of their working lives. It doesn’t make much sense to increase the financial pressure on people when they are poorest in order to benefit their future, richer selves. Of course, there’s nothing stopping any worker who wishes from making extra contributions above the compulsory 9.5 per cent – in fact there are generous incentives to encourage them to do so. But it hardly seems necessary, or fair, to force everyone to.
Parliament must take up the challenge of reform laid out by the Productivity Commission for the benefit of all Australians. But in doing so, we must remember it is the young who are getting the rawest deal from our flawed superannuation system.
This article was originally published in The Australian Financial Review