Has the Australian compulsory superannuation policy failed?

Twenty-one years ago, Labor Prime Minister Paul Keating introduced the policy of compulsory superannuation contributions under the Superannuation Guarantee (SG) scheme. Since this time SG has grown to over $1.5 trillion and is argued as one of the key drivers of Australia’s national saving rate.

A recent report by Certified Practicing Accountant Australia (CPA) has questioned the perceived success of this policy narrative. In fact, it goes so far as to suggest that the policy has failed, suggesting a ‘nest egg’ mentality has caused retirees to spend more before retirement, using their retirements savings to pay off accumulated debts instead of providing income in retirement years.

The CPA argument

Superannuation is the second largest asset for Australian households, behind the family home.  Over the last twenty-one years it has amassed an accumulated balance comparable to the size of the annual GDP. This is no small number. With nine out of ten employees receiving superannuation payments in 2010 the potential for self-sufficiency during retirement for the majority of the population would appear an achievable one. As Dr Martin Parkinson, Secretary to the Treasury, said ‘superannuation is more than a financial asset, it is a national institution. ‘

Projected Superannuation Assets as a percent of GDP:

Has the Australian compulsory superannuation policy failed1

In contrast to this rosy picture, the CPA has gathered data that suggests the SG has not been a success. The CPA argues that rather than seeing super as a means to fund post retirement years, it is being looked upon as a lucrative means to enable debt spending before retirement.

The report shows that household debt levels have kept pace with superannuation contributions over the last twenty years. The graph below demonstrates the growth of super contributions versus personal debt levels.

Has the Australian compulsory superannuation policy failed2

The report suggests that people have become more comfortable taking on debt to enable a higher standard of living now because of the possibility of a lump sum payout in the future. This means that rather than using super as an income stream for retirement as it was originally intended, people are using access to super after retirement as a means to pay off and service debt. The significance of this finding is that it removes the importance of the super savings so far. It indicates further that super has produced outcomes counter to the very intention of the policy, as more people will become dependent on the age pension.

The report suggests that a consequence of this higher standard of living in the present is that people have higher expectations for retirement, despite the fact that this standard of living is based on borrowing. What CPA are suggesting then is a problem with expectations versus reality. The expectation that living standards will be maintained after retirement, against the reality that if people use future savings to justify taking on current debt there will be no future savings to finance their self-sufficiency in retirement. Retirees will become dependent on government pension support. CPA indicates that this goes against the very objectives of the policy. Accordingly, they argue that changes should be made to the policy to ensure that the ‘nest egg’ effect ceases to encourage Australians to take on debt before retirement.

The conclusion reached by CPA is simple. They argue that to ensure self-sufficiency of retirees into the future there is a need for government policy to ensure that access to lump sum payments is limited. However this further enables government to determine how people spend their money, not only by diverting a portion of current wages into a locked account, but also access to that money into the future.

Industry Response

Needless to say, this report has caused a slight furor in the superannuation industry. The heads of both Industry Super Network David Whitely and the Financial Services Council John Brogden haved accused CPA of ‘monumentally overreaching’ in its claims.

Whitely questioned the methodology of the report, suggested that it was ‘flawed’ and offered a ‘myopic’ understanding of the Australian superannuation scheme. He stressed that the report ignores current evidence that indicates there has been increases in household debt across advanced economies, regardless of their retirement income systems.

Has the Australian compulsory superannuation policy failed3

They went on to say that the CPA failed to recognise that the increase in debt had funded the purchase of investment and residential properties that would help fund retirement saying that “To include housing debt but exclude related housing assets is poor accounting.”

Most significantly, Whitely and Brogden jointly argued that the CPA report contradicted an increasing trend for people not to take their superannuation as a lump sum but to retain it as an income stream.

They further suggested that the paper was wrong in claiming that total debt was rising faster than superannuation. They pointed to a Treasury paper that found in the six years leading up to 2010 median household debt for those aged 60 to 64 had grown 45 per cent while superannuation balances had jumped 115 per cent.

These comments are in perfect contradiction with the claims made by CPA. So, what is the answer?  Perhaps only time will tell.

If CPA’s findings are correct, dependence on government by retirees will increase rather than the expected decrease over time. Currently, half of Australians aged over 65 receive the full-rate pension. With an aging population Australia must remain abreast of the potential costs that will arise if superannuation is not functioning as intended. If nothing else this is reason enough to consider the findings of CPA with serious concern.


It is without question that the superannuation guarantee scheme introduced under the Keating government has significantly increased retirement savings held in superannuation. The point of contention here, is whether the increase in superannuation has provided an incentive for people to take on debt now with the knowledge that they can repay this debt with a lump sum payout after retirement. The CPA report has opened a conversation about the viability of the current structure of superannuation in Australia and whether there is need for change.

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