If you had the choice to get money in the pocket now versus putting that cash into superannuation, what would you choose?
It is a live question with the Australian Federal Government flying a lot of kites suggesting this might be the answer to the issue of what they will do with the legislated rises in the super guarantee.
It is an interesting proposal because it blunts the many attacks on any backtracking on the proposed super rises, which are set to add at the rate of 0.5% of salary every year to take the super guarantee from the current 9.5% to 12% by 2025.
If people are free to make a choice about whether that money is taken in the pay packet or in their superannuation account, it is much harder hard to criticise such a personal choice.
It is also in line with the very popular plan to allow up to $20,000 to be withdrawn from super during the COVID-19 in that it allows individuals to make choices about funding their own retirement.
The popularity of those emergency payments which saw nearly three million people withdraw a total of $36 billion suggests there are many who will be happy to take the cash now rather than saving for a future retirement.
It was demonstrably a bad short and long-term financial idea for many of those people to withdraw that cash but that did little to dent the popularity of the scheme.
So, if the choice does arise, what are the benefits and downsides of the two options?
Taking the money now
The first and most obvious advantage of taking the money in your pay is that it improves your current living standards. One of the biggest disadvantages – and also a great advantage – of using super is that the money is locked away until retirement.
That maximises returns for retirement by making withdrawals very difficult but also reduces financial flexibility because this major source of savings is locked away.
Another advantage is that families can use a variety of resources to fund their retirement. For example, a family might plan to sell or reverse mortgage their house to fund retirement, with a smaller super account used as a supplement to that strategy and possibly the age pension.
Other savings such as shares, cash deposits or investment properties can also be used to fund retirement and retain flexibility in the run up to retirement. Having extra take home pay allows such non-super savings strategies to be better funded.
Research by the Grattan Institute showed that many Australians already use a variety of strategies to fund their retirement apart from super.
Investment costs and insurance within superannuation have been found by several reviews to be high, particularly compared to investing as an individual without using a fund manager.
These costs – particularly in a super fund with poor investment returns – have the capacity to reduce long term returns substantially.
Putting it in superannuation
For many workers, the compulsory savings within superannuation is their best chance to build up a nest egg that will allow a comfortable retirement.
While many people start with good intentions of setting aside savings, even the best laid plans can be brought down by circumstances.
Urgent car repairs, medical costs or various life events have a habit of leading to a raid of savings. The compulsion within super and the inability to make withdrawals except for extreme circumstances mean that it is a strong savings plan for retirement.
Super has significant tax advantages, particularly for those on higher incomes.
A tax of 15% is taken out of super contributions and the same tax rate is used for earnings but after retirement and above the age of 60, private pension income from super is tax free.
This means that every dollar saved in super can be multiplied many times over before it is drawn down, making it a highly tax effective vehicle for saving for retirement. That effect is multiplied because the initial deposit into superannuation is higher because the tax withdrawn is much lower than most personal tax rates.
It has been estimated that money in super is worth at least 12.5% more to begin with due to tax but as much as 27%, depending on individual tax rates.
One of the many reasons for superannuation is to take pressure off the age pension by reducing the number of people claiming that pension.
While there is plenty of debate around whether the costs of the super tax breaks are reclaimed by saved pension payments, there is little doubt that the cost of the age pension is set to balloon due to the retiring baby boomer population bump.
Will those rises come through?
So, there you have it, the main attractions and negatives for the government’s mooted plan to allow super increases to instead be taken as a pay rise.
Of course, we are yet to see any detail on the proposal but the fear for many might be whether the planned super rises simply disappear at a time when wages growth has been very low.
With the popularity of the super withdrawal scheme, it appears many Australian are attracted by the idea of a bird in the hand in the form of cash rather than the three birds in the bush approach of superannuation.
That can lead to a less well funded retirement but if people have made that choice for themselves, personal responsibility may well trump the inherent compulsion within the superannuation system.