Of the many policy debates in Federal Parliament in 2011, one which gathered support from both major parties was the proposal to lift the superannuation guarantee employer contribution from 9 to 12 per cent. Not surprisingly, this was wholeheartedly endorsed by the superannuation industry. However, superannuation contributions impose large burdens on young adults at a time when they can least afford them. With this proposed increase, it is time that the policy was amended to improve the match between retirement saving and costs across the life course.
More superannuation, it is argued, will increase intergenerational equity, relieve fiscal stress on governments and compensate for the myopia suffered by individuals when saving for their future retirement. Even though the superannuation guarantee is paid by employers, it is generally agreed by analysts that the cost of the employer contribution ultimately falls on wage earners via reductions in wage increases. This means that, while superannuation saving addresses one important issue of lifecycle resource transfer (low incomes in retirement), it exacerbates another. Uniform rates of contribution increase the financial stresses faced by families during the household formation stage of life.
The mis-match between superannuation contribution patterns and financial stress across the life course is illustrated in the figure below.
The red line shows the percentage of households where people report being not able to pay utility bills on time over the previous year (people were interviewed across the 2009-10 financial year). These results are grouped by the age of the highest income earner in the household (using the ABS ‘household reference person’ gives very similar results). This measure of financial stress is highest for those aged under 45, then declines steeply, even past retirement. Measures of financial stress such as this are an imprecise indicator. They might reflect changes in resources relative to needs over the life course, but could also reflect other factors such as improvements in financial management skills, increases in aversion to the risk of utility disconnection, or more modest consumption preferences due to the lower income of one’s own age cohort.
A more direct measure is the ‘saving rate’ shown as a blue line in the figure. This is the excess of disposable income over expenditure (as a percentage of disposable income). This is imprecise because of measurement error in both income and expenditure and also because it omits key components of wealth accumulation such as capital gains. Nonetheless, it is a useful indicator of how saving capacity varies across the lifecycle. (The saving amount shown here is in addition to that due to existing employer super contributions and home purchase). Those aged under 30 are high savers, but this drops dramatically when people reach their 30s and start taking time off work to care for children, purchase goods for children and purchase housing. This is despite the substantial cash and service transfers that governments make to people with children in their household. Using this saving measure, saving capacity only increases again once people reach their 50s. Even in retirement, it is not as low as in the 30s and 40s.
Now, most people paying attention to superannuation are probably aged above 50. For the average pre-retirement person aged over 50, a larger contribution to super probably makes sense (unless they have some other preferred form of saving). But younger families might start to pay attention when they find a reduced growth in their pay packet. Are the early adult years really the best time to be saving additional money for retirement – particularly when they are already saving via home purchase? How can we rescue the young from superannuation?
Within the current system, it is not practical to simply reduce the contribution rate for the young (or any other demographic group). Since employer contributions are effectively incorporated into wages, this would mean different wage rates for different employees. However, there are a range of secondary mechanisms that could be employed.
One that is often mentioned is to allow people to access superannuation balances for house purchase. This has been criticised as undermining the life course saving objective of superannuation, but can also be seen as a mechanism to redress a key flaw in the superannuation saving model. However, while this might make sense in the context of our current housing markets, housing is not the best means of saving for retirement. It is hard to liquidate and increases the amount of wealth passing to the next generation rather than being used for consumption in old age (see papers on my website).
If we don’t want to encourage housing investment, there are nonetheless other potential strategies. We could allow access to super for other life course-related expenditures such as childcare fees or to supplement paid parental leave. Finally, one could simply allow super funds to pay out some funds to people under certain ages. (In turn, decisions would have to made on whether and how to claw back the tax concessions associated with the initial super contributions).
The plan to increase the super guarantee to 12 per cent now makes the task of addressing these life course implications more important than ever.