While on an international comparison basis Australia has a highly advanced retirement savings system, it’s far from perfect and one of its biggest failings is the issue of longevity versus adequacy.  In a world with a slower growth future, adequacy of superannuation fund capital is going to be even more dependent upon contribution levels.

While the revised mining tax legislation has an increase in Superannuation Guarantee contributions embedded in the incentives to make it more palatable to the electorate, it still only gets contributions up to 12% of salary. Five minutes and a spreadsheet with some sensible assumptions for fund returns and salary and livings expenses growth will reveal that 12% of salary falls short of maintaining a reasonable standard of living.

In the 2009, in the ‘OECD 34’ economies, the average pension contributions was 19.6% of gross salary which was split between employees at 8.4% and 11.2% for employers.  While the calculation excludes Australia, as we only have private pensions (superannuation) it nevertheless highlights the way in which Australia’s retirement income system sits adrift of similar, advanced, economies. Employer contributions in Spain and Italy are noteworthy with both sitting at north of 23%.

While the governments of Spain and Italy have made a diabolical mess of their respective balance sheets, they do seem to have done the numbers on retirement savings contributions. That said, with recently announced austerity measures – including cut-backs in pensions – driving people to the streets in protest there, there is clearly a strong case for the Australian system of non-government management of retirement savings.

On the right of politics, the conservatives argue a case for the individual and when it comes to superannuation contributions, they cite the responsibility of the individual to contribute to their own retirement savings. On the left, it’s a case of seeking more and more from the employer.

Predictably, employer groups cry foul every time there is mention of increasing SG and unions fire back with counter-claims.

If for a moment we assumed the conservatives were correct to place an increased emphasis on the individual making voluntary contributions to their own superannuation, we then need to look at the question of capacity.  Does the typical individual Australian employee have the financial capacity to make personal contributions to their retirement savings?  Given the overall level of household indebtedness in this country, it’s reasonable to suggest that such capacity might be strained at best. While in a post-GFC world more Australians are saving and/or reducing debt we’re still a long way from have household debt ratios on to a more sustainable plain.

On the other hand, if we assumed those on the left of Australian politics are right to place much greater emphasis on compulsory employer contributions then we would have to ask the questions of equity and balance.

The disappointing thing about superannuation and politics is that there has been legislation in place which combined contributions from both employers and employees – on a compulsory basis. The compulsory employer contribution obligation was (and remains) defined under Superannuation Guarantee laws however a requirement for individuals to contribute their own super fund was passed through parliament in the first half of the 1990s. The legislation starting date was set down for 1998 with a 3% of salary obligation on employees.  With the election of conservative government in 1996, that legislation was jettisoned.  Had it been put into effect total superannuation compulsory contributions would now be at 12% (9% + 3%) of salary heading to 15% with the latest SG increase announcement.

It’s ironic that it was the lefties who saw a need for the individual to contribute to their own retirement saving and passed laws to that effect.  Likely it was the compulsory nature of that legislation which the conservatives would have detested most and pushing them to purge it once in power.

In an ideal world – and perhaps that ideal will be closer with much greater attention to financial literacy in schooling in the future – all Australians would realise the vital need to also put money aside for their retirement.  In an ideal world governments, left or right, would not have to legislate to make such saving compulsory.  In an ideal world, ‘idealism’ would be set aside when drafting public policy that has such a critical impact on the financial security of current and future generations.

Both sides of politics tend to hug the middle ground of trying to keep the business sector happy while acknowledging the need for increased savings to protect workers in their retirement years.  With an acute sensitivity to push-back by business groups on announcements of proposed policy, what might otherwise be just what the economy of the future needs becomes a victim of the politics of the day.  Similarly, predictably and rightly so, business will always protest to protect their shareholders interests in regard higher SG contributions and social welfare groups will protest to protect the disadvantaged if compulsory employee contributions were to be on the agenda again.

In the current environment, most Australians don’t have so much spare change that they can all step forward and make voluntary savings to superannuation.  In the real world, even when the kids have left the nest and the mortgage is much lower, Australians won’t all conscientiously decide to bung the newly found income surpluses in the super fund.  It just won’t happen – at least not in sufficient numbers to justify taking a policy gamble and leaving it up to the individual.

It’s time to bring on compulsory employee contributions ‘Mark II’ which would see an SG like gradual increase in contributions by employees over several years. The time is right – for almost thirty years Australians have been drip-fed a ‘water torture’ of the reality of an ageing population and restricted age pension eligibility in the future. This is not news for Australians and people won’t be shocked or alarmed at such an announcement.

Politicians need to become more ‘ambidextrous’ in the way they assess retirement savings policy initiatives and reflect on previous ‘sky is falling’ legislation opposition.  Witness the GST! Witness Capital Gains Tax! Witness the decision to lift SG to 9% by 1% p.a. over 6 years! Et al!
(Yes – I know – how naive of me!)———–

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