We can’t rely solely on compulsory super to boost retirement savings

The Coalition’s decision, if elected, to defer for two years the increase of compulsory super contributions from 9 per cent to 12 per cent has received a mixed reaction. This election promise has attracted support from the small business sector for relieving cost pressures on employers, but has been widely criticised by the government and the superannuation industry.

The critics’ objection is that this decision will reduce the pool of superannuation assets by billions of dollars and adversely affect the retirement savings of ordinary Australians. The reality is, the impact of this short delay in increasing compulsory super will be small relative to that of government rule changes and a string of poor investment returns since the advent of the global financial crisis.

For younger people particularly, the attractions of super are greatly diminished by poor investment returns and the money being untouchable until age 60 or later retirement. Speculation that the minimum age should be raised to 62 or even 67, the new age pension eligibility age being phased in, adds to this uncertainty.

Even at older ages, the relative advantages of contributing to super compared with paying off a mortgage are far less compelling than they were when super fund returns were consistently much higher than they are today. Even at today’s much lower interest rates, the after-tax return from paying off a home mortgage is about 5 per cent a year.

While this year’s super fund returns will be more than three times this amount, over the past six years, the returns from paying off a mortgage have been comparable or even better than investing in super. More importantly, the savings achieved from paying off a mortgage cannot fall in value as happened with super funds during the global financial crisis. Given a choice, many Australians would willingly trade in their compulsory super contributions for a wage increase.

The superannuation industry and the government are missing the point that voluntary superannuation contributions are just as important as compulsory super in achieving adequate retirement incomes. The future of super would be very bleak indeed if the government were to rely solely on compulsory payments to boost savings for retirement.

There would not be sufficient voluntary contributions by the self-employed and workers with inadequate past compulsory contributions who need to make additional salary sacrifice contributions to achieve an adequate retirement income over the next 30-plus years.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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