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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Superannuation fund members with multiple employers who breach superannuation contribution caps are being unfairly penalised as a result of their employer’s need to comply with the law, therefore employees who can prove they are at risk of breaching the caps should be able to opt out of 9% SG contributions, according to a new SPAA submission to the Government’s economic adviser, Treasury.

“SPAA is a strong supporter of the 9% Super Guarantee, however, we have become increasingly concerned about its unintended consequences for some SMSF members,” said Andrea Slattery, CEO of SPAA. “For many superannuation fund members with multiple employers, it has resulted in punitive Australian Tax Office financial penalties because total mandated SG contributions exceed that employee’s annual concessional superannuation cap.”

“SPAA believes it is unfair and unjust for super fund members to suffer penalties simply because their employer makes compulsory super contributions for them according to the law.”

Under the law which applies across the superannuation system, a member’s employer is obliged to contribute 9% of an employee’s salary to a complying super fund. Under rules that apply until 1 July 2012
for members over the age of 50, a $50,000 cap applies to concessional contributions made by, or on behalf of a member of a super fund for a financial year.

An employer’s SG obligation has no regard to salary and wages paid by other employers.

“We have proposed a commonsense solution where members can “opt out” of 9% SG contributions where there’s a clear risk that concessional superannuation caps would be breached in the financial
year,” Mrs Slattery said.

Specifically, SPAA proposes that employees likely to be affected be allowed to elect in writing to their employer that they not be liable for the SG contributions. The election would be accompanied by evidence
showing the employee’s concessional cap would be exceeded if the SG contribution was made. This election would be made for each financial year and would remain in force for the entire financial year
unless revoked by the employee.

Ms Slattery says for many employees, breaching the caps is simply the result of having multiple employers through contract style work, for example in the information technology, mining and medical
professions where these arrangements are standard commercial practice. In these instances, a person may contract to a number of contractors and be classified as an employee for SG purposes.
Another group are employed as executive or non-executive director, where it is quite common to hold several directorships and to therefore receive remuneration from a number of unrelated sources.

Concessional contributions which exceed the cap are subject to excess contributions tax at the rate of 31.5%. Excess concessional contributions are then counted against the member’s non-concessional
contributions cap and may be taxed at an additional rate of 46.5% if the excess concessional contributions as well as the member’s non-concessional contributions, exceed the member’s nonconcessional
cap. This could result in tax of about 93%.

“The 9% superannuation guarantee is mandated by government and employers must comply,” Ms Slattery said. “Employees who breach caps due to their employer’s compliance with the law should not be
penalised for this.”

SPAA also believes misalignment of payment rules for concessional contributions for SG purposes and contribution reporting for excess contributions tax purposes is a major problem leading to excess
contributions tax. The Treasury submission outlines a solution where concessional contributions could be allocated to the year to which the SG obligation relates.

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The SG increase to 12% will also boost the average annual net retirement income for Australian workers by $1,795, taking the average annual net retirement income to $45,710.

AMP Financial Services Managing Director Craig Meller said the Federal Government’s decision to lift the SG to 12% will have a positive impact on the retirement savings for all Australians.

“Every Australian worker deserves a comfortable retirement and recent changes made by the Federal Government demonstrate its commitment to a robust and sustainable superannuation system for generations to come,” Mr Meller said.

However it’s the children of today’s workers, those yet to enter the workforce, who will reap the greatest benefits with their retirement adequacy expected to be around 75% of their income – 10% more than the current 65% benchmark.

Factoring in an increase to the SG to 12% the Index reveals 20 to 24 year olds will benefit the most and are projected to have an extra $107,535 in assets in today’s dollars when they retire, while a 30 to 34 year old will have on average $59,737 extra.

Other key findings from the AMP Retirement Adequacy Index for the six months to 31 December 2009 are:

• Strong market gains have seen average super balances increase 5.8% or $2,192 over the six months.
• A fall in voluntary contribution levels outweighed this gain with average contribution rates declining marginally to 12.4% of individual’s salaries.
• The fall in contributions among high income earners from 28.6% to 25.1% can be attributed to the reduction in concessional contribution caps to $25,000 per annum in the Federal Budget 2009.
• The fall in contributions among low income earners may be partly due to the suspension of the co-contribution program, coupled with broader economic uncertainty.

The AMP Retirement Adequacy Index used data for the six months to 31 December 2009 from 328,000 AMP corporate superannuation clients to predict retirement adequacy based on 65% of an individual’s pre-retirement income.

Economic forecaster, Access Economics, used this data to measure the implications of the current super data for future retirement incomes.

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