Retirement Rort: The economic case against Australia’s superannuation orthodoxy
Everyone who studies the superannuation system closely learns its flaws. Here's why it is time to move on from "super is good, let's improve it" to "super is fundamentally flawed, let's scrap it"
Our perception of the problem of poverty in Australia is flawed.
We don’t have an old-age poverty problem. We solved that with the age pension.
We don’t have an unaffordable age pension problem. We solved that via the tax system.
The logic behind Australia’s tax-advantaged compulsory-savings superannuation scheme rests on this flawed perception. This means that superannuation, as a system for providing retirement incomes and preventing old-age poverty, is also fundamentally flawed.
It is not fundamentally good but poorly implemented. It is fundamentally flawed.
As a background, downloadable below is a 2020 report I wrote outlining some major problems with superannuation. This is where I first publicly said that having a superannuation system is worse for most people over their lifetime than not having it, and hence we should scrap the system to make more Australians better off.
To unwind the system, current superannuation payments could be required to be deposited into a worker’s regular bank account so they can spend or save as they choose. From existing super balances, a maximum withdrawal of, say, $15,000 per year can be allowed over a transition period of five years, then after that, all remaining super funds will retain their asset portfolios and be converted into non-tax-advantaged investment funds.
Please note that my anti-superannuation stance is not based on emotion.
Initially, my emotions led me to feel that superannuation must be good because it tickled my sacrifice impulse. Saving feels good. Super requires saving. Therefore, super is good.
It took a lot of hard logic to overcome that impulse and accept that superannuation as a system does the opposite of what we think it does, and it was misconceived from the start.
Superannuation makes economic life worse, not better, for these reasons.
Super doesn’t de-risk ageing. There is no risk-pooling. What you save is what you get.
Super doesn’t smooth lifetime incomes. It isn’t something extra above your counterfactual wage income. Superannuation simply makes you poorer when you are young and poor and richer when you are old and rich.
Super soaks up a huge amount of economic resources. Much of Australia’s top talent is diverted into this unnecessary industry. It also games the rules at the margins to cost us extra billions (like unpaid super, insurance, bundling advice, incurring duplicated fees from multiple accounts, etc)
Super reduces overall investment incentives in the economy. It does this by reducing household spending and hence reducing demand, the opposite of what we need for growth to support more non-workers in the population.
Super encourages early retirement and less labour force participation. Because you can withdraw super only if you stop working at age 60, there is a huge incentive to do so. This increases the non-working population in that age group.
Let’s address each in turn.
Scrapping superannuation is not far-fetched. Other far-fetched ideas of mine have become policy platforms.
When I wrote Game of Mates (now republished as Rigged) I explained how town planning rules are used to provide billions in windfall gains to favoured property owners and that this value should be priced. No one was talking about this at the time, but since then, Victoria has adopted their Windfall Gains Tax to do just that.
In The Great Housing Hijack, I argued that if the housing market is delivering outcomes that don’t work for everyone, we can improve outcomes by creating more non-market housing options with a major public housing developer. This is now the platform of the Greens (with Labor considering) and is also part of Canadian policy debates.
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For some more background on retirement systems, I have removed the paywall on this FET article from last year about the idea of PENSION BONDS. Check it out.
1. Super doesn’t de-risk ageing
Because superannuation comes only from your own personal income, it doesn’t insure you against many of the negative outcomes that often generate poverty in retirement.
If you become disabled during your working life, but live to old age, superannuation doesn’t help you. You will likely rely on a disability pension and then the age pension.
Insurance that de-risks ageing requires pooling risk with others who will work and contribute to the system, but themselves don’t use the system.
The age pension does this.
We all contribute premiums in the form of taxes, which scale by income and wealth. Those who live a long time with no other retirement income source get a payout, while those who earn too much, have too much wealth, or die before retirement age, pay their premiums but never get a payout. For reference, about 17% of males die before age pension age 65.
Just like we don’t need a special savings account to pay for car repairs when we have car insurance, we don’t need a special account to pay for retirement income when we have retirement income insurance in the form of the age pension.
Sure, you can argue about the size of pension payments, the tax concessions to pensioners, the qualifying age, or other such things. But the system really does work to insure against old age poverty.1
This lack of insurance function in the superannuation system is why analysts at Grattan have recently proposed that superannuation funds offer fixed-income products that last the lifetime of the fund holder so that they don’t “outlive” their savings. The Treasury is also considering such issues.
Super is not de-risking ageing, even though many assume it does.
The age pension system does a good job of keeping people out of poverty in old age—so much so that age pensioner households report some of the least financial stress out of all households.
For example, the data plotted below shows the share of each household type, sorted by a household’s main source of income, roughly every five years from 1993 to 2017. Age pensioner households have low poverty relative to many other households, especially those relying on working age pensions, such as disability pensions and welfare allowances. It is working-age households, especially renters relying on welfare in some form, who face much higher poverty than age pensioners.2
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