Superannuation is something most Aussies don’t think about until retirement. But most have heard of the so-called compulsory rate. This is the rate employers are entitled to pay on top of your salary. The compulsory rate is currently 9.5%. It’s changed by only 0.5% since the system began in 1992.
But there are growing calls to raise the 9.5% guarantee to 12%. These appeals are coming from the super industry itself. It wants the government to lift the rate as soon as possible.
The Coalition government plans on doing exactly that. But they’re in no rush to raise the compulsory rate just yet.
This issue is a political minefield. Which is why governments are so reluctant to make changes.
The previous Labor government initially set a 2019 timetable to lift guarantee rates. The Coalition government pushed that back to 2025. The Abbot government cited budgetary pressures as the reason for the delay.
Not much has changed since the introduction of super. The system, when it was designed, allowed for a compulsory rate rise of up to 15%. That’s hasn’t happened. And it’ll be another decade before any changes are made.
You might be asking yourself, why does any of this concern me? After all, your super contributions have remained similar for decades. Does it matter if they make changes now? Putting it bluntly; it matters a great deal.
The further that changes get pushed back, the more it affects your retirement. To show you how, I want to refer you to a recent report. It was put together by financial consultants at Rice Warner.
They calculated the government’s delay could cost you $20,000 in retirement savings. That’s $20,000 less over the span of just six years. Stretch that out over a 45 year working life. Now we’re talking about a $140,000 hole. That makes a big difference to your savings, and your comfort in retirement.
It’s even more important considering the rising cost of living. And it matters to young and old workers alike. Even if you’re approaching retirement, those sums could make a big difference to your retirement.
Why is the super guarantee so important now?
The changes to compulsory rates are essential to increasing your super funds. That much is clear.
But there’s a key reason why the super industry wants changes as soon as possible. And it revolves around recent changes to the age pension test.
The recent Federal Budget increased the assets test limit for full pensions. These changes targeted couples owning assets worth more than $375,000. Those above this threshold will lose access to some of their pension from 1 January 2017. It’s estimated a couple would need $130,000 in savings on top of their super. That’s what’s needed to make up the shortfall from age pension losses.
As you can imagine, these changes are harmful to retirees.
To illustrate this, let’s use the example of a couple entering retirement at 65.
Current estimates suggest our couple would need a super balance of $640,000. They’d need that if they expect to live a ‘comfortable’ retirement. That’s a big increase over previous estimates of $510,000.
Meanwhile, individuals may need as much as $510,000 to live out a retirement in comfort. That’s up from previous estimates of $430,000.
These figures are rising for two reasons. The first is that the cost of living is rising. The second is the previously mentioned changes to the age pension test.
Both of these factors leave retirees needing extra savings to fund their retirement.
That’s why the super industry wants the compulsory rate lifted to 12%. That’d leave retirees with enough savings to fund comfortable retirements.
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What is a comfortable retirement?
Measuring ‘comfort’ is no easy task. What’s comfortable for one retiree, might be a drastic lifestyle change for another. Yet that hasn’t stopped the Association of Super Funds of Australia (ASFA). They’ve made some calculations for what qualifies as comfortable living.
ASFA says couples that own their own home need $58,784 a year to qualify as ‘comfortable’. That leaves couples with $500 per week to spend on food and leisure.
But not every couple will see $58,784 in annual income. Fewer still will own their own homes heading into retirement.
That’s why ASFA’s calculated a more ‘modest’ retirement. Under these criteria, a couple might need $34,051 a year to live modestly. That’d leave couples with $270 to spend on food and leisure per week.
Single retirees have it tougher arguably.
ASFA estimates a single person would need $42,861 to live a comfortable retirement. That figure falls to $23,662 under a modest retirement.
Rising age pension tests and the problem with super
The biggest fear among super experts is that age pension eligibility will rise in the future. That could add to the rising cost of living. Especially as Aussies live longer lives.
The net effect of these factors could be that most super balances become inadequate. People would need more savings, not less, to live out comfortable, or even modest, retirements.
Pauline Vamos, ASFA’s chief executive, explains:
‘If there are further increases to the eligibility age for the age pension beyond what is already legislated, or a lower indexation factor is applied to future increases in the pension rate, then those retirement savings targets will necessarily increase further.
‘While some individuals with relatively low retirement savings will receive a small increase in their age pension after 1 January 2017, others will receive a lower age pension, or none at all, until they run down their superannuation. As a result, many individuals and couples will require higher levels of private savings for a comfortable standard of living in retirement’.
One solution is that people make larger voluntary contributions to super. The benefit of this is twofold.
On the one hand, voluntary contributions are tax advantaged. At the same time, you’d increase your super balance over time through interest.
But not everyone is keen on making voluntary contributions. After all, the cost of living is rising for those still working too. You still have to pay the bills and buy goods. A 20 year old isn’t likely to prioritise retirement savings over spending today.
But, one way or another, the compulsory rate will rise. It just depends on how much political will there is to lift the super guarantee.
And there’ll be as much resistance as there is support for it. Budgetary issues aside, it could anger employers. Raising compulsory rates by 3% leaves employers shorthanded.
Employers may need to raise wages to attract workers. That might sound like a good thing. But it could put them off hiring altogether.
Finally, there’s the issue of self-interest. The super industry wants changes to compulsory rates because it benefits it. Higher compulsory rates mean higher industry fees. And we always have to take such factors into account. There’s no doubt such concerns influence the industry’s pleas.
The compulsory rate is likely to rise at some point over the next 15 years. The best solution, if you’re worried about your savings, is simple. All you need is to set more of your savings aside. Or you could increase your super contributions. The decision is yours. For the moment.
We’ll be waiting some time yet before it gets taken out of your hands.
Contributor, The Daily Reckoning
PS: It’s obvious that the superannuation industry is rife with abuse. And it’s not just government policies. In fact, you’re more likely to be a victim of hidden fees. They eat away at your retirement fund.
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