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Shorten’s Super 12

In two recent speeches, Bill Shorten, Australia’s self professed minister for ‘national savings’ , has shown he is deadly serious about getting compulsory superannuation (gross) contributions(SG) up to 12% from their current 9% level.

Firstly, at last weeks OECD Pensions Supervisors’ conference in Sydney, he said the ‘Government is passionately committed to seeing the SG increased again to 12 percent - to improve the adequacy of our retirement savings pool. Delivering this for 8.4 million hardworking Australians is my Number 1 priority in this new job of mine’. He showed in his address a clear understanding of lengthening life expectancies and the importance of superannuation through the whole lifecycle.

In case you missed this, he was beating the drum again today in Brisbane at the Australian Services Union conference where he said ‘In my ministerial portfolio, we need to be prepared to fight for an increase in compulsory superannuation from 9 to 12 percent’ …... ‘But what we all need to be fully seized of – in this room, in the city, this state, this country – is that 12 percent is by no means guaranteed’. You get the impression here that he’s not only worried about the support needed from cross benches but also perhaps other cabinet priorities getting in the way.

Whilst Australia’s superannuation system is lauded as one of the world’s best, it still falls short in two departments - adequacy of retirement savings rates and lack of conversion of lumps sums into retirement income. On the adequacy front, what’s often forgotten is that 15% tax comes out of the SG (plus operating expenses). If we allow for operating expenses (which according to APRA June 2009 statistics are 12.5% of Employer Contributions) we have a total of 27.5% to deduct from the 9% before we get to what is saved for retirement. So the 9% rate is really only a net 6.5% being saved for retirement (9%x.725).

If we assume there’s no extra operating expense to collect Bill’s extra 3%, achieving the 12% compulsory contribution rate will lift the net amount saved for retirement to 9.1% (an increase of 39% over the current net 6.5%).

Considering the 9% was brought in gradually from 3% over the 10 years 1992 to 2002, it would have been at 12% by 2007 if the progression hadn’t been stooped dead at 9% in 2002. An abrupt catch up is well overdue if super is ever to make a worthwhile contribution to securing retirement income. Then the next equally urgent challenge is to have compulsory conversion of super into income (or deferred income) in the retirement phase. Unless the savings rate is already adequate, it will be an impossible ask of politicians to sell compulsory income conversion.

Posted Tuesday, 9 November 2010

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