Demographic Change and Superannuation

Demographic Change and Superannuation

By Mallory Watters

For the past few decades, within the political and economic spheres the topical issue of national savings, and the aging population has been looming large as a major issue ^[1]. The core issue is the age demographic change that was identified in the 1960s as the Total Fertility Rate (TFR) began to decline^[2]. This led to the acknowledgment that future government revenues were going to be insufficient to meet the demands of future retirees in terms of the aged pension. As a result of this, in 1992, the Keating government brought in the superannuation guarantee. This meant that all employers had to contribute 3% (now 9.5%) of their employees income into a superannuation account. This reform was in addition to continuing arguments that Australia’s current three-pillar retirement income system simply isn’t going to be enough to adequately deal with an aging population.  However the defined contribution superannuation system is a tax advantage scheme as 15% tax rate is  regressive and therefor favouring the high-income earners. This is because individuals within this tax bracket are more likely to receive higher earnings from investing any money in their superannuation accounts, yet it is taxed the same 15% as lower income tax brackets. Within James Eyers Sydney Morning Herald (SMH) article, AMP chief executive, Craig Meller states, “saving 9.5 per cent of your earnings is not enough” as “freedom in retirement is a pipedream, so the draw on the public purse will only increase as we inch closer to the demographic reality”^[3]. Although, some ideologies state that there is a possible social demographic dividend from an aging population as the decline in the fertility rate need not imply an increase on resource costs associated with an increasing ADR (Age Dependency Ratio) as the true effects of raising a child are more expensive than the cost of a retiree^[4]. There are also controversial arguments, such as that of Brian Toohey, in his Australian Financial Review (AFR) article “Nothing Super About Compulsory Payments”^[5], which states that superannuation hasn’t contributed to the national savings ratio and that it restricts consumption and therefore is slowing the economy.

Throughout Eyers article, AMP chief, Craig Meller emphasises the need to increase the employer superannuation contribution to buffer the current unsustainable amount of retirees claiming full aged pensions^[6]. Craig Meller, being one of the greatest benefices from this process.  An increase in the current superannuation contribution rate of 9.5 per cent to 12 per cent, as Meller suggests, would allow increase contributions and therefor a higher amount of money to a retiree and therefor cover retirement income risk. However, longevity risk remains a problematic issue as savers and retirees are fully exposed to market risks and there is very little regulation around where the money should be invested and virtually no regulation of fees. However, as government seeks to minimise its contribution to funding retirees (via pensions)^[7], it’s contribution to minimising social risk and longevity is reducing and therefor there is a growing need to find alterative ways to fund retirement incomes, the biggest one of which is superannuation.  If we were to scrap compulsory superannuation contributions, as suggested in Toohey’s AFR article as he believes, “cutting compulsory superannuation contributions could boost demands by tens of billions of dollars by increasing take-home pay”^[8], individuals would then to have to be financially disciplined to save for their retirement income and there is significant doubt as to whether that would occur.  Superannuation is an enforced discipline where individuals do not have a choice.