The number of Australians aged 65 or older increased from 8% in 1970-71 to 13% in 2001-02, and the federal government’s 2015 Intergenerational Report forecasts this to almost double over the next 40 years, to 25%. The government expects that by 2042, there will be only 2.5 people of working age supporting each person over 65.
These demographic shifts are already shaking up plans for retirement. Future septuagenarians will be expected to work (at least in some capacity). Voluntary super contributions (money you add above what your employer is mandated to pay) are becoming the norm, and topping up super with a government pension is no longer a sure thing.
Following the ascension of Prime Minister Malcolm Turnbull to the Lodge, it seems to be only a matter of time before the government makes changes to super concessions.
This might not be a bad thing. Crikey recently conducted its inaugural Beyond Work survey, supported by industry super fund Media Super, and we asked readers to identify the core problems with superannuation and to propose solutions. Your responses showed you think there is work to do. Here, we delve into the insights you shared as we tackle one of the biggest issues we face for our future.
Survey facts: who took part?
Please note: percentages throughout this article are rounded off to the closest whole number.
Super history in Australia
While superannuation feels like an entrenched aspect of working life, it hasn’t always been.
When the six states formed the Commonwealth of Australia in 1901, they were granted powers to legislate for old age and disability. Seven years later, the pension was paid to men aged 65, and from 1910, to women from age 60. However, in 1901, life expectancy for Australians was 55.2 years for men and 58.8 years for women. Essentially, you had to exceed life expectancy before you could qualify for support.
As life expectancy increased, the age pension was needed to sustain a life beyond working years for most people.
1. Super conflicts
According to Christine St Anne’s book A Super History: How Australia’s $1 trillion+ Superannuation Industry Was Made, the battle for superannuation – as a retirement fund to complement the static age pension – started on the waterfront in the early to mid-1950s, and over subsequent decades various trade unions fought for super concessions.
In 1972, an Australian Bureau of Statistics (ABS) survey found that only 32% of workers were covered by superannuation – of which only 15% were women. St Anne says it was “chiefly the domain of men in senior jobs”. In response, Gough Whitlam’s government launched an ultimately doomed attempt to introduce a national contributory earnings-related superannuation scheme.
3. Late 1970s
Very few workers in the late 1970s and 1980s had any kind of super, says Gerard Noonan, former editor of The Australian Financial Review (AFR) and current chair of industry fund Media Super.
He recalls that of the 20 journalists in the AFR Melbourne bureau at the time, only one had set anything aside for retirement: “There were men and women there aged between 17 and 65 – meaning some of them were on the cusp of retirement without a cracker.”
4. Late 1983
The fights for super were eventually coordinated by the Australian Council of Trade Unions (ACTU), and when the Hawke Labor government came to power in 1983, the focus became trade-offs between wage increases and super contributions.
Instead of increasing wages by 3%, the unions collectively agreed to divert 3% into the retirement system, which employers would pay into approved funds and receive a 3% tax break for doing so.
The system, which became known as the “prices and income accord”, was a hit with many workers. “It had the great advantage of being non-inflationary; because the ‘wage increase’ was tied up for 30-40 years in a super fund and prices didn’t rise to compensate for increased wages,” says Noonan.
5. Late 1980s
Others weren’t so easily persuaded as to the merits of a superannuation system. In 1985, then-opposition leader John Howard decried these early forms of superannuation as a “Chicago racket” and said that the superannuation deal “represents all that is rotten with industrial relations in Australia”.
In the late 1980s there were fears the system would topple without intervention. In 1988, a 15% tax was applied to employer super contributions as well as 15% on earnings made by the super fund. In 1992, the 3% employer contribution was legislated, an amount that has crept to the current 9.5% mark and is set to rise to 12% in 2025-26.
The end result is, according Noonan, “a retirement income system which is pretty much the envy of the world”, the result of “one really good idea, and a lot of fighting for ordinary people to enjoy greater dignity in retirement”. Currently, around 23 million Australians have more than $2 trillion tipped into super, and the figure is set to top $5 trillion by 2025.
In fact, Australia has the world’s fourth-biggest pool of superannuation savings, behind only the US, UK and Japan.
It sounds good in theory, but is it going to be enough?
How are you tackling super?
What does the standard superannuation portfolio look like for Crikey readers? When employees start a new job, their employer often opens super accounts for them. But when people change jobs, names and addresses, they can lose track of their accounts — and fees for multiple account can eat away at their nest eggs.
The majority (61%) of respondents to the Beyond Work survey reported they had a single super account, while 3% of respondents said they had no account at all. Crikey readers are more actively involved in managing their accounts than the average working Australian.
When changing jobs:
- 51% of people said they opted to stick with the same super fund
- 17% opened an employer account
- 32% had a combination of the two.
- 64% said they’ve consistently rolled over super accounts,
- leaving 36% who had failed to do so.
Sacrificing now for later
Employees are allowed to make voluntary contributions to their superannuation funds above what their employers are obliged to put in for them. Currently, you’re allowed to tip in an extra $150,000 of after-tax money annually at no extra cost (because you’ve already paid tax on it). However, contributions above that limit incur a higher tax rate of 46.5%. Pre-tax money – salary sacrifice arrangements – have a much lower cap of $30,000 per annum for those aged below 50, and $35,000 per annum for ages 50+.
- 48% of respondents said they made voluntary contributions towards their super
- 32% responded “no”
- 20% said the question was not applicable to their situation
When it comes to risk appetite, we’re a cautious bunch:
- 62% stick with a medium-risk profile
- 21% opt for a safer-risk portfolio
- 14% are prepared to accept higher risks with the potential for higher returns
However, while people can choose their super funds, and often their investment options within their super funds, many are not too keen to delve into the details. According to the Australian government’s Stronger Super website, of the approximately 12 million Australians’ with a super fund, about 80% choose the “default” fund chosen by their employer.
Wage equity would be a start.
– Survey participant
What do you really care about?
What really matters to you about your super fund? Some 40% of readers state that investment performance is the factor most important to them, and 34% said this would convince them to change funds. But 28% said belonging to a not-for-profit or industry super fund was closest to their hearts, and 10% would change funds for this reason.
Ethical investments were deemed the most important factor to 10% of respondents, and for 16%, principled investment choices would drive them to make the switch.
Those less happy with their super services primarily focused on fees. About 12% of respondents said concerns about fees mattered most, while 14% said fees would force them to change funds. “I pay for services I don’t need or use such as financial planning,” said one. Another said: “There is no transparency or accountability for the fees charged.”
Others indicated dissatisfaction with communication surrounding their accounts, despite most funds sending investment and balance breakdowns annually. Several respondents said something similar to this comment: “I have no idea how they invest my money.”
Options such as financial advice services, access to help and communication and education were important to few than 2% of respondents.
Tobacco? Coal mining? Forestry?
According to the Beyond Work survey results, 42% of respondents aren’t aware of the businesses their super funds are investing in; however, for 72% this is a topic they care about.
The things that get you fired up
People who are on the “default” option might find that they’re inadvertently investing in industries they would rather not support. For example, only a couple of years ago, staff at the Peter MacCallum Cancer Centre in Melbourne, were shocked to discover some of their super was flowing to tobacco companies. Thanks to rallying by some passionate staff, this has since changed.
Tobacco was the most common concern for Crikey readers. Fossil fuels, alcohol, mining and gambling companies were also frequently mentioned as no-go zones.
Other industries that readers felt strongly about include “weapons manufacturers”, “animal exploitation”, “child labour”, “Japanese whaling” and “nuclear energy”.
Several company names were mentioned in responses – but it probably comes as no surprise to Crikey readers that several people weren’t happy to send their money to “anything associated with Murdoch”.
Weapons, tobacco, News Ltd, fossil fuels, companies supporting conservative politics.- Survey participant
Would you DIY your super?
Many people opt against a managed fund and instead brave the DIY world with a self-managed super fund (SMSF).
Usually the members of SMSFs are the trustees of the fund (in other words, they run it themselves for their own benefit). They are responsible for complying with super and tax laws.
Some 17% of respondents said that they operate a SMSF, while of those who currently don’t, 29% said they would consider doing so. The rationale for this is nearly universal: “flexibility and control”.
“I know what is best for me, and [I want] the ability to unhinge my future from those that have no interest in mine,” said one respondent, while another said: “Can use our insights. Can set up lifestyle. Can ‘own the risk’.”
Others cite the lack of fees and charges as a benefit, while many said the ability to invest in property through an SMSF is a major drawcard.
I can make my own ethical investment decisions.- Survey participant
Control within your fund
An interesting development within some managed funds is that there are now some opportunities for people to take some control of their investment choices.
For example, Media Super has a Direct Investment option.
This platform essentially offers an eligible member the ability to select exactly which stocks in the ASX300 they would like their super invested in, even shaping a portfolio around their ethical views, preferences for specific industries as well as some exchange-traded funds and term deposits,” says Noonan. “The control and flexibility is there for our members if they want it, though 75%-80% of member funds remain in the Balanced (MySuper) default option.”
Is the current system broken?
Despite widespread recognition that Australia’s superannuation scheme is an important tool to fund retirement, 67% of respondents said they don’t think the system works as well as it could.
The most commonly cited reason for dissatisfaction is tax concessions that favour the rich. “Taxation concessions for high-income earners is reducing the fairness of the system,” said one respondent.
Employer super contributions up to $25,000 are taxed at a flat rate of 15% across the board. This is particularly attractive to people in higher income brackets who, if they took the money as income, would be taxed at rates of up to 45%.
It’s predominantly this concession that fires up Crikey readers, as one respondent puts it: “It is heavily biased toward looking after the inherently wealthy part of the population.” Or as another commented: “Most concessions go to those who don’t need them.”
Some Crikey readers freely admit they take advantage of the existing concessions: “Too many tax concessions for people like me, who earn in the top 3% of income.”
Despite the concessions favouring those with higher incomes (or perhaps because of it?), former prime minister Tony Abbott ruled out any changes. However, commentary by Treasurer Scott Morrison suggests reform could be back on the table.
Noonan says fixing this wealth imbalance needs to be a priority for our new PM. “There are ridiculous tax breaks offered to high-income earners who park millions of dollars in tax-free super accounts,” he says. “The rules need to change to stop richer citizens taking unfair advantage of poorer employees. Are you listening, Prime Minister Turnbull?”
Meanwhile, those at the lower end of the scale, and the people most likely to require the age pension in later life, have taken a financial hit to their super. Until 2014, the Low Income Superannuation Contribution deposited an extra $500 into the accounts of people earning less than $37,000 per year. It might not sound like a lot, but with compound interest it would leave lower income earners with around $40,000 extra in retirement. The Abbott government dumped it – it was primarily to be funded through income received through the mining tax.
This leads to one of the key concerns with the current system – will you have enough? Superannuation and the way it relates to the age pension and taxation is complex, and many Australians aren’t sure exactly how it affects them. “It’s a barbecue stopper – no one quite knows what to say or if they have enough,” said one respondent.
Many respondents were critical of the government’s delay of increases to compulsory employer contributions, in favour of employers. The rate was initially planned to increase to 12% by 2015-16, but now won’t tip that mark until 2025-26. Meanwhile,
- 68% of respondents viewed the increase of this rate to 9.5% in 2014-15 favourably
- 21% weren’t so keen on it
- 11% didn’t know that it had changed.
Most people don’t understand how it works; retirement income [is] now dependent on stock exchange performance, which is as scientific as darts. – Survey participant
The great imbalance: what should be done?
There’s a big flaw that we can freely point out in the current system: women typically retire with considerably less in the bank than men. This super imbalance primarily stems from broken work patterns from having children and the gender pay gap; and 75% of readers said they were concerned as a result, 8% were not aware of it, while 17% were aware but not concerned by it.
What’s the solution? “Make it easier for mothers to work – affordable and good-quality childcare so mothers don’t have to spend so much time out of employment in order to meet the needs of their kids,” said one respondent.
Others suggested a higher employer contribution rate for women and a broader shift in the approach to gender equality, particularly recognition of skills in home making.
Noonan says there is a simple solution: “Pay super into the accounts of women during periods when they spend time away from the workforce.”
Are you going to be OK?
The Intergenerational Report released last year by former Treasurer Joe Hockey contained some hefty predictions in regards to the economic impact of future demographic changes – though it attracted quite a few detractors, including the man employed to sell it, Dr Karl Kruszelnicki.
Regardless of the political bias some ascribed to it, the overarching trends were undeniable: Australians are living longer than ever before, and we need to find a way to fund the retirement of an ageing population. Australians are also comparatively less likely to be able to draw upon an age pension to help fund their retirement.
Government social expenditure tripled in Australia between 1980 and 2013, and the age pension is the largest slice of government welfare payment. But as Crikey highlighted in 2014, we spend a lot less on our pensions than other countries do. Australia spent 3.5% of GDP in 2013 on the age pension, in comparison to fellow OECD countries Italy at 15%, France 14% and the UK 6%.
Superannuation will remain an integral part of funding retirement for the foreseeable future. But how much do you actually need?
Currently, the Association of Superannuation Funds of Australia (ASFA) estimates that a couple with “modest” retirement standards (meaning only able to afford basic activities) would need to fund annual living costs of $34,051, or $58,784 for a “comfortable” lifestyle that supports a broad range of leisure activities. Singles will require an average of $23,662 for a “modest” retirement or $42,861 for a “comfortable” one.
As a lump sum figure, estimates are that a couple will need $640,000 and singles will need $545,000 for a “comfortable” lifestyle, assuming they will receive a partial age pension, according to ASFA. A “modest” lifestyle is predominantly supported by the pension, so a couple only require $35,000 and a single $50,000. These calculations are based on people retiring at the age of 65 and living to the current average age of about 85.
By 2025, Australians will need to be at least 60 years old before they can access their super. Meanwhile the pension age is set to increase to 67 by 2023. It’s no wonder that a majority of survey respondents intend to retire in their 60s – 28% between 60 and 64 and 36% between 65 and 69. A further 20% believe that they’ll be working into their 70s. Some though are more than happy to keep working – one respondent simply said “Why retire? I enjoy my job.”
Caravans or cruising: what do you actually want to do?
Tap into a Retirement Income Simulator to estimate the income you will have in retirement, including the age pension
The clear priority of respondents for saving superannuation was to have enough to live comfortably, with health and wellbeing not far behind. Readers hope to afford additional luxuries and fund domestic and international travel. To do this they tipped they would need at least $1.5 to $2 million.
Some specifically stated that they want “enough not to feel helpless”, “enough to give to various charities” or “enough to campaign effectively against current rorts enjoyed by the wealthy”.
It’s no wonder then that a slight majority (54%) of respondents said they didn’t expect superannuation to be their only form of income in retirement. While many people mentioned the pension, shares and rental payments as potential sources for income, others expected to work part-time to help top up their savings.
Currently, only 35% of respondents say they’ve saved up at least $500,000 or more in superannuation assets, despite most of the respondents being over 45 years old.
The good news is that the Australian system makes people save from the day they start to work.
“Generally it is working as it should, inasmuch as the objective is to make people compulsorily save for their retirement, and it is doing that,” said one respondent. Another said: “As long as the system does not undergo undue political meddling, the next generation of Australians should have a reliable source of post-work income.”
Whatever changes are ahead, it is clear that to enjoy the idyllic comfortable lifestyle we all dream we’re going to have when we get our proverbial “gold watches”, we need to save up more super.
Written by: Jacob Robinson and Melinda Oliver