One of the glaring problems with the system is that it is largely a one-size-fits-all approach to policy. While this helps to create a degree of simplicity for the system, it is not conducive to maximising the system’s potential.
A new framework
In our pre-budget submission, the Institute has argued strongly that superannuation policy should be based on a demographic framework. What do we mean by this? The argument we put forward is that people go through various stages of engagement with superannuation throughout their lifetime, based on their needs and wants. The impact of policy therefore will differ depending on where people are in their engagement with superannuation. For retirement policy to work it must match policy to those various stages.
A clear example of policy failure in this regard was the superannuation co-contribution scheme. The policy’s desired outcome was laudable – to raise the superannuation savings of the poor, particularly the young, by the Government matching contributions from individuals on low income. But the scheme failed to achieve its desired outcome. If anything, the one group that was able to leverage the program most effectively were wealthy Australians, who could make contributions on behalf of family members under the threshold through various income-splitting structures. This was never the intended outcome.
Why did the policy fail to achieve its intended outcome? Simple. It failed to appreciate people’s needs and wants at various stages of their life. The young, no matter their financial situation, tend to be focused on the present, tend to spend more than they earn and have a low interest in saving. This should not be looked down upon by policy-makers but accepted as the natural situation. What this meant for the policy was that few of the intended target (low- to middle-income earners) had any discretionary money to put into superannuation, even if matched by the Government. Those who did, say, by living at home and saving some expenses, tended to spend any discretionary money elsewhere. This is hardly surprising and policy makers should have realised this before they developed the program.
The Government’s superannuation contribution for low-income earners is a more effective policy because it does not expect this category, and particularly the young, to be able to contribute to their superannuation. It is a better fit for that demographic than the co-contributions policy. It also addresses the most glaring problem with the taxation of superannuation, that being that those who derive the most tax savings are the wealthy while the poor receive little to no tax benefit.
What is demographic-based superannuation policy?
So when we talk of demographics what are we talking about? In general we are talking about separating people into various groups defined by issues such as age, sex, and income. While we are all individuals with our own nuances, for policy purposes it can be more effective to group like people together and look at them as that group rather than individually (which would be impossible for policy-making) or group the whole country as one.
From an age perspective there are four main age groups that we have identified: those under 40 and in the workforce, those in their 40s to 50s in the workforce, those over 50 and in the workforce and those who are retired. We will focus on just two of those demographics.
Super policy for under 40s
Those aged under 40 could be further separated into the under 30 group and those aged between 30 and 40. Those in the under 30 group tend to be focused on the ‘here and now’, spend all their discretionary money and make few if any investment decisions. We may know individuals who fall out of this basic assumption but as a group it is generally representative. While those between 30 and 40 may be more aware of the need to save for retirement, even if they do have discretionary money available, for most there are more pressing financial needs such as paying off a mortgage and raising a family.
While there are distinct differences between the two groups, from a retirement savings policy point of view they can be lumped together. They have little if any financial capability to make voluntary contributions to superannuation and even where they do, they tend to have other financial priorities. Therefore creating policies that encourage them to make voluntary contributions will be ineffective and potentially counter-productive.
In fact we advocate that rather than force this group to make additional payments to superannuation by increasing the compulsory SG contribution from nine per cent to 12 per cent, they should have the choice to forgo the additional compulsory superannuation and instead to be able to retain that money as take-home pay. This would ensure that their current financial needs are not undermined by the government policy of forcing them to make greater payments into superannuation.
If the Government wants to encourage this group to increase their superannuation saving, it could amend the taxation of superannuation for those under 40 by not taxing the contributions made on the first $37,000 of income they earn. This would increase their superannuation savings without impacting their current living standards. Any income lost by the Government through higher tax offsets would be made up in the long run by reduced government spending on pensions for these people.
