Top ten problems with our super system, and how to fix them

My motivation for producing a list of the top ten problems with our super system was the federal government’s announcement of yet another review of the system, and the appointment of an advisory panel with no consumer representation or Self Managed Superannuation Fund (SMSF) trustee representation.

The superannuation system looks after more than $1 trillion in savings on behalf of millions of Australians who are not directly represented in this review.

Before I highlight the problems with Australia’s super system, a constructive approach is to first explain what is good about it.

The good bits about super

Apart from its complexity, Australia’s Retirement Incomes Policy (RIP) is an innovative and cohesive policy that provides a safety net for those in need, and incentives for those seeking to take responsibility for their financial future. RIP has four limbs that collectively provide a sound base for Australians’ retirement savings:

• Age pension. The Federal Government provides a basic age pension, which is a safety net for those unable to fully provide for themselves in retirement. Note that 80 per cent of retirees receive a part or full age pension.
• Superannuation guarantee (SG). SG stands for compulsory super contributions made by employers on behalf of employees. Even when an Australian is showing no interest in super, he or she has a super account accumulating retirement savings. Australian employers have contributed the maximum 9 per cent SG contribution only since July 1, 2002, meaning many Australians will need to kick in voluntary contributions to accumulate a decent nest egg.
• Tax concessions for voluntary super savings. The government provides tax incentives to encourage you to make voluntary super savings, and to take an income stream in retirement.
• Co-contribution scheme. The government puts extra tax-free money in your super account, known as a co-contribution, if you make after-tax super contributions and your income is below a certain threshold.

The government’s decision to leave the running of the broader super system to the private sector, notwithstanding the compulsory nature of SG contributions, means that Australians can choose the type of fund they want to use for their retirement savings. Unfortunately, due to the compulsory nature of superannuation, not many Australians have taken advantage of this.

Super’s major flaw

The major flaw with Australia’s super system is that for the system to have the best chance of working properly you need to possess ALL of the following characteristics:

• you’re male;
• you work continuously for 35 years;
• you never change jobs;
• you make voluntary super contributions regularly throughout your working life, rather than playing catch-up after you’ve educated your kids and nearly paid off your mortgage;
• you know a lot about super, tax management and investing;
• you pay more than 15 cents in the dollar tax on your personal income;
• you haven’t divorced;
• you haven’t suffered illness;
• you haven’t relied on a financial adviser who receives commissions for putting you in a super fund that charges high fees; and
• you believe the super rules aren’t going to change too much in the future, and they in fact don’t change too much.

If the bullet list above doesn’t reflect your circumstances, or your beliefs, then the superannuation system is unlikely to meet your needs, unless you take a very active interest in your retirement savings.

The top ten - big and small

No system is perfect, and most universal policies, including superannuation policies, are designed to help the most people, most of the time, but our super system was designed around a working life of 35 years, and for individuals who pay more than 15 cents in the dollar income tax. Significantly, our compulsory super system and super tax incentives totally ignore the fact that parents (mainly women) take time off work to rear children.

As a starting point, I have created a list of the top ten problems with our super system.

1. It’s all too hard: complexity and constant change

Complexity and constant changes to super rules leads to a lack of confidence by the Australian public, and often unjust outcomes for individuals who have relied on rules that were in place years before.