Drawbacks to compulsory super
Last week's speculation that the federal government was planning to freeze the compulsory super contribution permanently at 9.5 per cent of salary was just that – speculation. Given that existing legislation freezes the compulsory employer contribution at this level until July 1, 2021, more than two elections away, this possibility is irrelevant to current financial plans.
Of much more relevance are continuing rumours about a reduction in the generosity of ongoing super tax deductions. While content to leave their own super arrangements – including open-ended defined benefit funds and a compulsory employer contribution of 15.4 per cent of salary – all unchanged, Treasury officials are targeting private-sector super for large savings.
These are early days in the tax reform debate, but except for older taxpayers close to retirement age or those owning their homes outright and with surplus personal assets, investing in super is now a high-risk strategy. Following the 1999 changes freezing all money in super until reaching the mandatory retirement age, all super contributions now face the possibility of adverse future taxation changes.
In this important respect, the 9.5 per cent freeze on compulsory super contributions until July 1, 2021, provides some flexibility for wage earners to concentrate on other savings options, including reducing their home mortgage or purchasing a home. Super industry claims that workers lose out from not receiving a higher compulsory employer super contribution are just self-serving lobbying.
If, for example, the higher compulsory super contributions come at the cost of receiving a lower wage, employees can definitely lose out. This is especially so for workers with mortgage and family commitments facing cost of living pressures.
Even with tax benefits from directing money into super, the returns from paying more tax and having additional money to reduce the mortgage can be much higher. Having money tied up untouchable in super until age 60 is little comfort for people facing unemployment or reduced family income in times such as the present, when job shedding is prevalent.
Apparently, the plan behind increasing the level of compulsory super contributions is to reduce the future demand on the age pension. However, with the assets test after January 1, 2017, reducing age pension entitlement by 7.8 per cent of assets above a basic free area, the goal of all future retirees will be to maximise their investment in the asset test-exempt family home.
To the extent that compulsory super contributions slow down or frustrate achieving home ownership, the ultimate outcome will be for super lump sums to pay off housing and other debts. Instead of helping reduce future age pension outlays, compulsory super could well increase demands on the federal budget, because of the housing affordability issues.