The Royal Commission into Misconduct in financial services in Australia turned its attention to superannuation funds in recent months. It’s fair to say that time in the witness box was uncomfortable for many.
This Commission should mark the end of the gloating. For years, you will have heard self-serving nonsense about how Australia has the best retirement income system in the world, about how it is the envy of other countries, about how it was won as a right for ordinary Australians after a long and bitter industrial campaign. This gloating ought to stop as the Commission has exposed publicly the many failings of the system. The gloating has been, in the main, perpetuated by insiders – some policy analysts, some academics, fund managers, industry associations, some service providers and politicians, especially former PM Keating and former union boss Kelty.
As far as managing money goes, the Australian system has been good. Investment portfolios are diverse, accessible and low cost. That is it’s one true good quality. As far as delivering retirement incomes, reducing pressure on the age pension, increasing national savings and weeding out unethical practices goes, the system has been miserably bad.
The most obviously desirable, necessary and easily implemented change is to remove the compulsion of the Superannuation Guarantee. Make the decision as to contribute or not contribute one that the employee can make based on their own circumstances and preferences. That would immediately concentrate the minds of the fund owners and operators – they would have to earn and keep the trust of investors, rather than rely on the force of law to guarantee that revenue stream.
Australian Actuary 
David, the SG commenced at 3% in 1992 and gradually increased to 6% from 1 July 1996 and 9% from 1 July 2002. The SG contribution rate is scheduled to increase to 12% by 1 July 2025. The simple calculations I made for my book “Slow and Steady: 100 wealth building strategies for all ages” suggest that a 12% contribution rate is not quite enough to secure a similar standard of living in retirement as the retiree had during their working life – but it is close, you only need an additional 1% or 2%, at least on my earnings assumptions of CPI plus 5%. The ultimate contribution rate suggested by Paul Keating was 15%, which is not inconsistent with my calculations.
My point is that the full impact of the SG on retirement incomes will only come after it has been in place for a full working lifetime, say 35 to 40 years. We shouldn’t judge its success in supplementing/replacing the Age Pension at a point in time when the average SG contribution rate over the last 40 years (including the 14 years 1978-1992 when it didn’t exist) has been, by my calculations, a touch over 5%. If, as Grattan suggests, something like a 9% contribution rate is sufficient to fund satisfactory retirements, the system can start to be regarded as mature in about 20 years; if 12% or more is required, the system will not be fully mature for at least 40 years.
Within these sorts of timeframes I would also be expecting major progress in the format of benefit provision, with much greater emphasis than today on longevity protection. That process has already commenced with the retirement covenant but will take some time.
I think the point that is generally missing in most discussion about the SG and its ‘right’ level is that there is no single solution that works over a wide range of pre-retirement income levels.