Friday, August 08, 2008

The super-man is wrong: 9 per cent is plenty

We don't need to lock away 15 per cent of our lifetime income in superannuation, and the arguments of Paul Keating to support the change are disturbing.

In the book on his economic reforms launched this week, Unfinished Business, Keating says it would turbo-charge the funds management industry.

"The Australian superannuation savings pool is now fourth in the world; in not too many years, it will be number two," he tells the author David Love.

"With such a massive pool of savings, even at 9% we would go to something like 3 trillion dollars. With movement to 12 and then to 15, the whole thing will accelerate. With a vat of funds that large, you will find the institutions coming here."

Great for them. But for us?...

It is true that many of us who are presently working will retire without enough super. The Australian Association of Superannuation Funds says the average account in 2006 was just $69,000 for men and only $35,500 for women.

But that's because we have spent only a portion of our working lives putting in 9%. By the middle of this century almost everyone who retires will have spent his or her entire working life putting in 9%.

And guess what? They'll be embarrassingly well off.

According to calculations by the Parliamentary Library, right now an Australian on $50,000 can expect to take home $39,140 after tax. After a lifetime of compulsory 9% super, that person's post-retirement post-tax income would jump to $50,013. That's right. Nine per cent super would buy them a pay hike on retirement.

It is in the middle of our working lives when we are trying to buy a house and educate our children that we really need our income. We don't need as much when we retire.

Institutionalising a pay rise on retirement would be cruel, and Superannuation Minister Nick Sherry knows this. He is right to focus on pensions.

Many of us will retire short of money. Our children and their children's children will not.


Peter Martin,
Tuesday Column: Please, please, don't put it into super, Canberra Times, February 26, 2008

Richard Denniss,
The Crisis of Cash or Crisis of Confidence - the Cost of Ageing in Australia, Australian Journal of Political Economy, July 16, 2007

Association of Superannuation Funds of Australia,
How much do you need
to spend to have a comfortable standard of living in retirement?,

Association of Superannuation Funds of Australia, Retirement savings update, February 2008

Association of Superannuation Funds of Australia, Are retirement savings on track? June 2007

NATSEM, Superannuation – the right balance? Post June 2007, CPA Australia, February 2008

Peter Martin, UNFINISHED BUSINESS - Paul Keating's interrupted revolution, Canberra Times, August 02, 2008


WT said...

Or maybe the Super Funds will crash due to management incompetence more commonly referred to as 'market forces' and we'll all be left with nothing,

Matt Kunkel said...

What will be the real value of $50 013 in 2050 and how will it compare to minimum wage?

Peter said...

Matt, Presumably by then people will be earning more than $50,000 and so will get a greater annual payout than $50,013.

Anyone who wants more, is of course entitled to save more.

The discussion is about whether they should be compelled to.


Anonymous said...

I guess this is what to expect when you get librarians to do financial calculations. If you assume a normal profile of earnings, 40 years in the work force, 15% tax on contributions, 12% tax on earnings which is typical of super funds, 1% fees, 6.5% real returns before fees (typical of the last 100 years), then a person whose only savings are the 9% super will have 35% of their peak income available to draw. This is based on the fact that if you draw more than 3% you have a big chance of exhausting your money. I would be interested to see the librarians' calculations - I suspect they are assuming 10% plus investment returns which is unrealistic after taxes, fees and inflation.

Email tej at if you want to see my spreadsheet.

EconoMan said...

Matt and Peter:

The $50,013 is almost certainly in real terms in today's dollars. And it either assumes zero real wage growth, or an average of 50K over the 40 years.

Guesstimating on the real rate of growth of the minimum wage at 1% (which I think is pretty optimistic):

543.78*365.24/7*1.01^42 = $43,092

And remember, that is pre-tax. After tax it is $36K
The $50K is after tax, equivalent to approx $63500 in pre-tax dollars (based on current tax rates).

I don't know what Tej is trying to get at, but I'm with you Peter. For people who will have 40 years of super, 9% is enough, especially as many people can salary sacrifice more (or post-tax contribute with co-contribution for low earners).

For people closer to retirement, increasing the super rate is too late. And woefully bad targetting of the problem.

Cassie ST said...

Good point about the 9% over a lifetime of earning vs 9% for us BBs who only got into it in our later work life.

I'm no beancounter or economist, but what's wrong with the idea of increasing super contributions in line with inflation?

We do it for everythting else.

Oh, and a thought for the "tax system review".

All pensions/social security payments get increased to the poverty line, which co-incidentally, is also the tax free threshold.

So, if you're not earning up to the poverty line, the Govt tops up your income to the tax free threshold.

Like I said, I'm no bean counter or economist, and it's probably been suggested by someone else with all the pros and cons, and shot down by yet others, but haven't heard it discussed previously so ... {shrug}

Post a Comment