Australians have been making compulsory superannuation contributions under the Superannuation Guarantee (SG) scheme since 1992. After two decades, Australians now have $1.5 trillion dollars in retirement savings in superannuation funds. By any standard, this is a significant amount – it represents almost the annual Gross Domestic Product (GDP) of Australia ($1.47 trillion) or more than the value of all equities on the Australian stock market ($1.2 trillion). But a recent research report by Certified Practicing Accountant Australia (CPAA)  suggests that the SG scheme is not achieving its goal of  encouraging more financial self-sufficiency in retirement and, 21 years after its introduction, has fostered a false confidence that has people spending nest-eggs prematurely while shrugging off debt dangers.The low taxes on super contributions have led Australians to pour $1.6 trillion into the system, it says, but those savings are almost equally offset by an equivalent amount of debt.

Household Debt Rises in Line with super funds

Household debt rises in line with super funds1

The CPA study conflicts with the ­federal Treasury’s claim that compulsory superannuation is “a key ­structural driver of Australia’s national saving rate’’.

The findings are expected to inflame debate about how people save for their retirement, the scale of tax breaks and whether retirees should be able to receive their entire lump sum or be forced to convert some, or all, into an income stream.

Seniors’ associations and retail and industry super funds attacked the findings as inaccurate, misleading and an insult to baby boomers who spent a lifetime paying taxes, raising families and saving for retirement.

In other words, compulsory superannuation has facilitated a higher standard of living prior to retirement, rather than when retirement is reached.

Wealth Effect

The “wealth effect” is an economic term that refers to an increase in spending that accompanies an increase in wealth. Alternatively, if wealth goes down, spending will decrease. However, households do not differentiate between real or perceived changes in wealth.

The report, Twenty Years of the Superannuation Guarantee: the Verdict, examines savings and expenditure over a generation rather than focusing only on super contributions. Mr Malley said that unlike with earlier generations, who paid off their debt in the lead-up to retirement, the expectation of a nest-egg “appears to make them [boomers] more comfortable with debt”.

The research is based on 10 years of data detailing the spending and savings habits of more than 8000 people around the nation and modelling bySimon Kelly, formerly a principal research fellow at the National Centre for Social and Economic Modelling.

The Keating Labor government introduced compulsory superannuation in 1992, and it has since become a financial bonanza for the funds management industry, which generated fee income of $16.1 billion in 2011.

The major parties have agreed to increase the super guarantee levy from 9 per cent to 12 per cent in stages and on a moratorium on changes to allow recent reforms to be bedded down, although the Coalition will increase the rate more slowly.

David Whiteley, chief executive of Industry Super Network, which represents industry funds, said to “say the system has failed is epic overreach and irresponsible” and described the research as flawed and “myopic”.

John Brogden, Financial Services Council chief executive, said to claim superannuation was responsible for “high levels of household debt is absurd”.

Mr Malley of CPA Australia said: “Lump-sum superannuation benefits are being treated as a windfall and being used to pay for the lifestyle that is being lived now instead of being put aside to provide income in retirement.”


Michael O’Neill, National Seniors Australia chief executive, said baby boomers were being “demonised’’ and the report failed to provide evidence of people using super to pay off debts.

“There isn’t evidence showing that once a household retires, they use their super lump sum payment to pay down debt. Instead, it is highly likely many continue working because they have a debt or higher debt,” he said.

“Australians have effectively offset all of the superannuation saved with increased levels of debt and the result is nothing has been saved during 20 years of compulsory contributions.”

The forced saving nature of the SG scheme combined with the default fund being a balanced account has produced some clear winners and some losers. The fund managers and the Australian share market are clear winners. In 2011, the average overall fee of 1.2 per cent by superannuation fund managers produced income of $16.1 billion. As superannuation balances continue to grow under the SG, so will the associated fees. Superannuation funds are the major underwriters of the Australian Stock Exchange, having $536 billion in equities or 45 per cent of the total capitalisation of the ASX, and around $28 billion of the $71 billion in received contributions being invested into equities each year.


“Without change, there is a real possibility that superannuation savings will be inadequate for retirement, expectations will be crushed, and the age pension will be put under considerable strain,” said Alex Malley, the chief executive of CPA Australia, which sponsored the research and represents accountants. “The system, therefore, will have failed.”

The Superannuation Guarantee scheme has markedly increased retirement savings held in superannuation. The greater accumulated superannuation has allowed households to become more accepting of risk and debt in the knowledge that a payout is coming on retirement. The increased debt has allowed households to enjoy a higher standard of living during their working lives than their actual income could support. This higher standard of living has produced increased expectations for retirement. Against these expectations is the reality that they cannot pay for the higher expectations, as the superannuation is required to repay debt. The perceived increase in wealth from SG contributions, growing superannuation balances and rising house prices have persuaded people to use debt to fund a higher current living standard. This was not an objective when Australia’s retirement savings policy was developed. It is now twenty years after the SG was introduced, and superannuation savings minus household debt effectively equals zero.

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