Introductory comments by Michael Rice, who appeared at The Summit 2019 on 'The Great Debate - Should the Superannuation Guarantee move to 12 per cent?' panel discussion.
By Michael Rice
I refer you to a Paper written by my colleague Nathan Bonarius and myself, which we presented to the Actuaries Summit a few months ago. Our topic was What is the Right level of superannuation guarantee? (click here to read the paper).
Benefits of the SG system
The SG system is revered outside Australia and it has generated several positive outcomes, including:
Growth of Australia’s capital markets
Superannuation assets are already over 150% of GDP and are expected to peak at about 190% in the 2040’s. This pool has been useful in providing capital for infrastructure and venture capital. As the system matures, super funds will invest greater amounts outside Australia, so we will export capital.
Australian superannuation has delivered strong real returns over several decades – at levels far higher than in any other country.
In a world where those with capital earn strong real returns, we experience growing inequality (gloomily described by Thomas Piketty). The SG system backed by a strong allocation to equity-style investments means that most Australians share in the economy’s growth and this moderates the global trend of inequality.
Higher benefits from forced savings
This has led to higher living standards in retirement. Earnings within superannuation are much higher than those which would be achieved on voluntary savings. Individuals save less efficiently as they would typically not invest as aggressively as professional trustees who can leverage their scale and are better at balancing the risk of negative returns against the long-term nature of the investment.
Reduced cost to taxpayers
The Age Pension was about 2.9% of GDP in 2002 at the time of the first Treasury IGR Report
It is now about 2.6% of GDP and it could fall to close to 2% by the end of the Century.
What is The Right Level?
Our conclusion was that the optimum level of SG should lie in the range of 10% to 15% of salaries. There should only be one level of SG across all income from personal exertion, and this does mean you need to be careful to adjust for those at the bottom 20% and the top 20% of income or wealth distributions. These adjustments can be made through the tax and transfer
The precise level is a function of the means-testing on the Age Pension and the tax concessions in the system.
The current level at 9.5% is really 8.1% after tax on contributions. And this can be reduced to about 7.4% when we take off the cost of life insurance, which is a separate benefit of our system. At this level, median income earners would rely on the Age Pension for most of their retirement income.
If we want a system where 40% to 50% of the population are self-sufficient in retirement, maybe 35/40% receive some Age Pension and 15/20% rely almost entirely on the Age Pension, then we would move to 12% or more of salary.
So, a higher SG provides even greater benefits than those I listed earlier, and it makes more of us self-sufficient in retirement, at a lower cost to taxpayer.
Michael Rice is the Executive Director of Rice Warner
Michael specialises in providing strategic advice to the superannuation industry. He founded the firm in December 1987 and was the Chief Executive Officer until March 2019, when he stepped down to focus on key client work and public policy.
Michael leads Rice Warner’s public policy work, which includes submissions to government inquiries and research. He has undertaken pioneering research into Age Pension dependency and trends. He has a keen interest in the integration of social security and superannuation, as well as measuring the adequacy of retirement incomes.