Is Australia saving too much for retirement?

When Paul Keating addressed federal parliament the day after Australia’s compulsory superannuation system was born in June 1992, the message was simple.

“For the first time … ordinary Australians will be able to build a decent nest egg for their retirement,” said the then-prime minister.

“People now on average weekly earnings will be able to retire on an income twice the old-age pension ... with the passage of the legislation last night, a decent level of superannuation provision becomes the right and expectation of every Australian employee.”

Super has since become a financial behemoth. Australians’ collective tally of $4.8 trillion is the world’s fourth-biggest pool of private retirement savings, and it could rise to second place during the next decade.

But as voters grapple with a housing affordability crisis and the worst cost of living crunch in living memory, Keating’s vision for superannuation is increasingly contested.

The sheer scale of the super pile has made it an irresistible political target.

At the past two federal elections the Coalition has proposed using super to address the housing crisis; it promised home buyers would be allowed to withdraw a portion of their superannuation and put it towards a home deposit.

Shadow housing minister Andrew Bragg, trenchant critic of compulsory superannuation, has indicated the Coalition is again considering policy options to allow early access to super, including using it as collateral for a mortgage.

One Nation leader Pauline Hanson wants to use super to ease cost of living pressures. Last month she announced a One Nation government would allow renters and home borrowers to withdraw up to one-quarter of their regular superannuation contributions for up to three years.

“One Nation wants to give people some breathing room,” Hanson said.

For Labor, Australia’s superannuation system has become an article of faith. It claims One Nation and the Coalition would destroy the universal character of the scheme.

Treasurer Jim Chalmers has even framed the next election as, in part, “a referendum on super”.

So Labor, the Coalition and One Nation are now locked in three-way political combat over the direction of retirement savings policy.

Dr Ben Spies-Butcher, chief executive of the Centre for Future Work, said current economic challenges, such as housing affordability and cost-of-living pressures, have focused public attention on super in the hope it might provide some solutions.

“Super has a long history of playing a bigger macroeconomic role. It makes sense to consider how it might now. But I think that is less about its size and more about ensuring it can be more easily put to public purposes to address new economic problems.”

One Nation’s proposal met with fierce criticism, especially from big super funds. Analysis by the Super Members Council, a peak body, found a median full-time worker withdrawing 3 per cent of their contributions for three years would be $25,000 poorer by retirement.

“Turning super into an ATM is a reckless idea that would make battling Australians poorer,” the council’s chief executive Misha Schubert said.

Additional modelling by the Super Members Council, released on Friday, drew attention to budget cost of One Nation’s plan – it showed today’s 20-year-olds would each pay an additional $3,700 in income tax over their lifetime if the policy became law, mostly due to paying higher aged-pension costs for people who withdrew their retirement savings.

The annual hit to the budget would be about $750 million in the 2030s and rise to around $4.5bn annually by the 2070s, according to the modelling.

But Hanson’s proposal has also focused attention on the level of the superannuation guarantee, the minimum percentage of an employee’s earnings that employers are legally required to pay into a superannuation fund.

Compulsory contributions started out at 3 per cent of an employee’s ordinary time earnings back in 1992 but have risen gradually, reaching 12 per cent in July last year. There are no further increases scheduled under current legislation.

Some question whether 12 per cent of income is an appropriate level for compulsory contributions, including several independent think tanks.

A new study by the e61 Institute found that with contributions set at 12 per cent, people will on average, have more cash income per year in their retirement than they did during their working life.

“We think it’s a little bit odd to compel people to save so much that they have more income in retirement than they did during their working lives,” says e61 economist and study co-author Jack Buckley.

The superannuation system was set up to solve a problem of “undersaving” for retirement, but the study suggests it may have now “created an oversaving one”.

As lifespans increase, this is exacerbated by uncertainty about how long people will need to fund their retirement.

Faced with this “longevity risk”, people have an incentive to save more than they need to avoid running out of resources towards the end of their life.

This is linked to another contentious outcome of Australia’s compulsory retirement savings system: a growing share of Australians are dying with a large superannuation balance.

“What was designed as a system to support people in their retirement is slowly turning in part into an inheritance scheme,” says e61.

A federal government retirement income review published in 2020 found that one in every five dollars paid out by the superannuation system was an inheritance, and it predicted that would rise to one in every three dollars by 2059.

That review, chaired by former Treasury official Mike Callaghan, also found a 9.5 per cent superannuation guarantee (the level when the report was published) would allow most people a comfortable retirement. It also estimated that incomes during working life would be 2 per cent higher in the longer run with the guarantee set at 9.5 per cent compared to 12 per cent, although superannuation balances would be lower.

The Grattan Institute, another well credentialled think tank, has also argued the 9.5 per cent contribution level is adequate.

However, independent economist, Saul Eslake, argues there are good reasons to set the super guarantee at 12 per cent.

He says models that find 9.5 per cent an adequate level for the superannuation guarantee normally assume workers have 40 unbroken years of full-time work.

“That proposition is not true, especially for the majority of women who typically take time out of the workforce to care for children or the elderly,” he said.

Super funds also argue that idealised assumptions about long full-time work histories underestimate the necessity of a 12 per cent superannuation guarantee for the majority of workers who face career interruptions.

Analysis by the Super Members Council in 2021 found that only 24 per cent of women and 39 per cent of men had 40 unbroken work years because careers are shortened by caring responsibilities, periods of unemployment and poor health.

Jo Kowalczyk, CEO of Women in Super, said Australia’s superannuation system is still shaped around a model of uninterrupted, full-time paid work that has never suited the reality of most women’s lives.

“The question is not whether 12 per cent is too much. For many women, the more important question is whether 12 per cent of a very low or interrupted income can ever be enough,” she said.

“This is not the time to wind back gains that have been made. It is the time to be creative and bold about retirement adequacy – and about how we value the unpaid care work that is still overwhelmingly performed by women.”

Compulsory superannuation was introduced to help people save for retirement. But it was also a strategy to take pressure off the federal budget as the population ages, especially spending on the aged pension.

The federal government’s Intergenerational Report, released last month, showed expenditure on the pension is projected to fall – from its current level of 2.3 per cent of GDP to 1.8 per cent of GDP in 2065–66 despite the ageing population.

“Because of super, no other developed country will do a better job than Australia at taking pressure off the pension system, while boosting retirement incomes at the same time,” said Chalmers.

But spending on the pension is only part of the story.

Separate Treasury projections predict the annual cost of generous superannuation tax concessions, which disproportionately benefit those with high-incomes, will exceed spending on the age pension by the 2040s.

So while spending on the pension is contained, the cost of super tax breaks continue to rise.

Eslake says “oversaving” for retirement could be tackled, and the system made fairer, with changes to the way super is taxed.

“The fact that some people have more income in retirement than when they were working could be addressed by making superannuation tax concessions less generous for high-income earners,” he said.

Keating’s 1992 vision for compulsory superannuation might have sounded straightforward but as the system matures it faces some complex challenges.

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