Tuesday, 26 November 2019

The Superannuation Fail

In the 1980's the Australian Government had a look at future financing as it understood that age demographics were changing. To put it another way, people were living longer and that would have a longer affect on both tax revenue and upon expenditure. But the biggest problem was the size of the baby boomer population.

When old age pensions were introduced in Australia in 1909, every pensioner was outnumbered by 5 workers. That ratio is now heading towards 1 retiree for every 2 workers. To pay for that in 1992 the Australian Government introduced compulsory Superannuation. Superannuation was once only available to senior executives, it was a payment, normally 10%, of a man's salary that was invested and was only available upon his retirement. So that not only did they get a salary but they got a large lump sum payment upon retirement.

So if a worker for example has a salary of $50,000 then around $5,000 dollars is paid into that workers superannuation. That money is on top of their salary.

The Association of Superannuation Funds of Australia announced in July that the average person was way behind in what they should have in their superannuation. To comfortably retire a single person should have at least $545,000 and a couple $640,000.

Currently the average man aged 30-34 has $35,768 and the average women has $30,129, the industry advice is to have by 34, $93,000.

The average man aged 45-49 has $99,305 and the average women in that age bracket has $65,796. The industry says that they should have $257,000.

Why is the average person so far behind?

1) The system is complex
A person can put in up to an additional $1000 a year into their superannuation without any issue. It is possible to put in more money but if it is considered excessive then it is taxed at a rate of 31.5%. That is just one example, it gets much more complex.

2) Money in superannuation is 'dead' money
 Superannuation is, except in very rare circumstances, not available until a person retires. Therefore people have little attachment or engagement with it. It's very important once you retire but until then it may as well not exist as it cannot help you.

3) The system was designed for an economy with Full Employment.
Today we not only don't have full employment but we have the gig economy. Mass unemployment, mass underemployment, university education and immigration. Anyone who has experienced unemployment, or underemployment or who is university educated, or who is an immigrant cannot get the full benefit of superannuation. The system was designed for a person to be employed from 18-retirement. Today that is rare.

Superannuation is a good idea, I think it is good policy. But today even the good ideas are failing.

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