There is a massive battle going on over your superannuation but many people are totally unaware of it.
It is a battle being fought on a number of fronts but the main ones are:
- low income earners should be able to opt out of paying superannuation,
- planned and legislated rise in super payments from 9.5% to 12% in a number of steps by 2025 should be stopped or further delayed,
- current range of underperforming default super funds should remain a secret and nothing should be done to prevent their members from changing to better funds,
- employer underpayment into super funds.
All of these changes and more will be considered by the Morrison Government’s retirement income review which is slated to begin before the end of the year but already there has been a spirited debate and it is fairly clear the electorate are being softened up for some serious super changes.
So, let’s wade through the battleground and see who is saying what.
Low income earners should be able to opt out of super
He may only be a freshly appointed Senator but there is little doubt that Liberal Senator Andrew Bragg was speaking for many on his side of the political fence when he used his maiden speech to argue that superannuation should be made voluntary for low income workers.
A former internal auditor for accounting giant Ernst and Young, Senator Bragg said those earning less than $50,000 a year should be able to tick a box on their tax returns and have their super contributions returned as a tax refund.
Some modelling the Senator commissioned by Rice Warner Actuaries said this change would save the Federal Government $1.8 billion in the first year alone and would not disadvantage lower income workers because most of them would rely on the aged pension anyway in retirement and would appreciate the extra money now.
That may be so but much of the criticism of the proposal is that it risks creating two classes of retirees – particularly given that the age at which you can access the aged pension is still well above that of accessing super.
What is the low-income person going to live on if they are laid off at 55 and can’t get another job when the aged pension kicks in at 65 years and rising to 67?
Also, women in particular are over-represented in those earning less than $50,000 a year or less and they already suffer from lower overall superannuation balances than men due to breaks from the workforce and the gender pay gap.
So, there are some very real problems with allowing those on low incomes to opt out of the superannuation system, with those initial “savings” potentially coming back to haunt the Government in the form of higher welfare payments.
Delaying or scrapping the legislated rise in super payments from 9.5% to 12% by 2025
This has turned into a really contentious issue with former Prime Minister Paul Keating describing government MP’s who are pushing for a change as “monkeys’’ who are planning a “grand theft”.
He also said that delays in raising the super contribution had already cost workers around $100,000 each in retirement savings.
On the other side of the argument is the Grattan Institute which has boldly claimed that there is no case for raising the superannuation contributions from the current level and that workers would be better off if they were simply paid the extra contributions as salary.
The Grattan research also found that most retirees save money for retirement separately from their superannuation, which means the “adequacy’’ argument that is made to boost contributions to 12% is actually not accurate.
The problem with that analysis is that there is no guarantee that such substitute pay rises would actually happen even if the super contribution rises were scrapped, given that there is no mechanism to achieve that.
There would be no real barrier to employers simply using the lack of a superannuation increase as a way to keep their wages bill down.
While Prime Minister Scott Morrison has been trying to keep a lid on his backbenchers proposing policy changes, the coming retirement income review is seen by some in his own party as a chance to make some serious changes to retirement income policies.
Underperforming default funds still a big issue
One of the problems with the Hayne Royal Commission and the Productivity Commission review of superannuation is that both exposed plenty of problems within the superannuation system but so far, not a lot has been done to actually improve things.
There is no magic wand to be waved here – hard decisions have to be made and one of the hardest is what to do about the 29 underperforming default funds that were identified but not named?
One of the most dramatic issues in terms of forgone money is those default superannuation funds, which the Productivity Commission rightly pointed out could be costing some people $500,000 through investment underperformance alone.
Consumer group Choice has rightly pointed out that there is currently no way for members to work out if they are in one of those 29 underperforming funds, given they have not been identified.
The funds were not named because nobody wanted to cause a “run” on any large funds that could have caused even greater losses if it had been big enough.
However, in the interim workers have continued to be funnelled into default super funds that are serial underperformers.
That is a terrible state of affairs and hopefully something can be done to ensure that workers are no longer sent into poorly performing funds while still protecting those who are already in those funds.
What this situation shows is that workers need to focus some attention and become engaged with their superannuation fund and try to ensure they are in one that combines low fees with a solid investment performance.
That is not as easy as it sounds given that comparing funds can be difficult and is certainly not as easy as picking the fund with the highest performance in the past year but spending a bit of time at this stage can produce hundreds of thousands of extra money to retire on.
Superannuation underpayment also an issue
Another problem that can be helped by workers improving their superannuation engagement is underpayment and late payments into their super.
This is estimated to be a $5 billion issue and because employers have four months to pay into superannuation, it is a bit difficult to keep an eye on.
Even if employers are making super payments – which does not always happen – playing out the clock and delaying payments for months can cost workers extra earnings on their contributions.