The ugly truth of super
The ugly truth of super
You may have seen plenty of Royal Commission-related talk recently about how retirees have been let down by Australia’s super industry, but perhaps it’s time to consider whether the system was ever intended to support them.
When Paul Keating rolled out the superannuation guarantee (SG) in 1992, it was envisioned as supporting the average person retiring at 55, with a life expectancy of 75. We’ve discussed before how the industry is now trying to redesign member options so as to address rising life expectancies – and the fact that it’s a very lucky person who’s retiring at 55 these days – but how can a system truly realise the vision of a population entirely independent of Age Pension entitlements and other forms of social security if this was never its intended purpose?
After all, another key difference between 1992 and today is …
We’re in a low-return environment
With the days of double-digit returns in the rear-view mirror for the foreseeable future, and interest rates remaining at historically low levels, it’s becoming increasingly difficult to grow one’s super savings without taking on higher levels of risk than before. Couple this with the fact that the SG – originally meant to rise to 12% – is frozen at 9% until 2021, and won’t reach 12% until 2025, there will likely be many Australians falling short of retirement expectations.
Contract work is on the rise
The “gig economy” – the proliferation of short-term contract roles – is becoming a prominent component to the Australian workforce. As the Association of Superannuation Funds of Australia (ASFA) chief executive, Martin Fahy, noted in a recent speech, there are about three million Australians with “some form of independent work arrangement.”
Given that this share of the workforce is set to increase, how can the “employer-employee relationship at the heart of our occupational pension system,” as Fahy put it, accommodate this? One solution offered was the expansion of the compulsory system, but one does wonder how this would address the complex management arrangements of large multinational contractors like Uber.
A short-term focus in the public
While the very nature of super fund investments is geared towards long-term outcomes, much of the literature and coverage of the industry focuses on short-term competitive performance figures. Assessing the viability of a particular retirement investment based on whether it’s the top-performer in any given year obfuscates the actual purpose of superannuation savings – namely, to fund one’s post-retirement needs over many years.
The drawdown challenge
Adjacent to this, there’s the problem of whether many of the current retirement income products offered by super funds actually do what they say on the tin. If that sounds trite, consider that Challenger’s retirement income chair, Jeremy Cooper, recently wrote that “the industry standard is that accumulation-style products [products designed for investment growth in pre-retiree savings] are presented to retirees as retirement income streams.”
“This is effectively our current default retirement product,” he added.
Cooper supports Treasury’s proposal to add a Retirement Income Covenant, requiring super trustees to develop specific retirement income strategies, into superannuation law. While the proposal has been controversial in some circles, Cooper believes “it has the potential to send a strong normative signal about what is expected of trustees in the retirement phase.”
It’s not the case that superannuation isn’t “working,” per se. Of course it is – coming back to Fahy, he noted that by 2050 the industry will have reduced the reliance on the full or part Age Pension to less than 50% by 2050, and 30% of those already over-65 are completely self-funded.
But the reality is that the system – and the way we talk about it – is going to need some significant changes to address the needs of a growing population of retirees.
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