Is super a saviour or a scam?

Australians diligently saving for retirement could be falling into a ‘retirement trap’.

Research has revealed how Australians with superannuation balances between $350,000 and $600,000 could actually be worse off under tightened pension rules.  

The analysis, from fund provider BetaShares, decried the tightened taper rates that progressively degrade Age Pension benefits based on a retiree’s wealth. It was labelled by senior investment specialist Roger Cohen as a ‘heavy tax’ on today’s retirees.

“Common wisdom tells us that accumulating more savings through our working lives should result in higher income in our retirement years,” Dr Cohen said.

“However, our analysis shows that, for certain people, under the current system, accumulating more money can actually produce the reverse.”

According to Leith van Onselen what was not mentioned was when, from January 2017, the assets test reduced the pension by $3 a fortnight for every extra $1000 in assets, up from $1.50 before the changes, the new rates simply restored what Peter Costello halved in 2006.

“Costello’s halving of the taper rate to $1.50 led to the ridiculous situation whereby retiree homeowning couples with $1.15 million in financial assets, and homeowning singles with $775,000 of financial assets, could still qualify for the part Aged Pension along with the Pensioner Concession Card,” wrote Mr van Onselen for MacroBusiness.

“Accordingly, welfare was being lavished on a significant number of wealthy retirees – an unsustainable and inequitable situation given the rapid ageing of the population and the projected diminishing number of workers available to support retirees.”

Mr van Onselen also believes that we are conveniently ignoring the fact that Australia’s super system is stopping the Age Pension base rate from being lifted.

And he’s not the only one who thinks the super system is failing retirees.

In fact, some experts say it’s a straight up rort.

Superannuation concessions cost the federal budget around $43 billion a year and only benefit the already wealthy.

Analysis by Sydney University economist Dr Cameron Murray also found that the Age Pension is over 20 times more efficient at delivering reliable retirement incomes, reports The Australian.

The super sector employs some 55,000 workers and costs fund members around $36 billion a year in fees. Compare that to fewer than 7000 staff and $1.7 billion in administration costs for the Age Pension, which, says Dr Murray, provides greater levels of annual retirement income.

His research, titled Scrap Superannuation, suggests that the economy would be better off if the super system was scrapped.

“Scrapping the super system would massively improve Australia’s economic performance – it’s costly and inefficient, unnecessary and incredibly unfair,” he said.

He estimated that compulsory super costs the equivalent of two per cent of GDP – around $40 billion per annum – and, so far, does little to offset Age Pension dependence.

“Instead of channelling incomes through asset markets, decreasing demand and soaking up a workforce the size of the military on an accounting exercise, the 28 million superannuation account holders could spend up to an additional $20,000 per year,” he said.

“That is $530 billion per year, or about 23 per cent of GDP, that will be made available. Most people will not spend the maximum from their super account, but there is no doubting the stimulatory effect of this change for the real economy – something that is sorely needed as wages reach nearly a decade of stagnation.”

He went on to say that super funds last year paid out just over $40.1 billion in returns to 1.4 million retirees, while the Age Pension paid out $45 billion to 2.5 million retirees.

“Super does not fulfil the requirement of a retirement income system; it’s better thought of as a growth-sapping, resource-wasting, tax-advantaged asset purchase scheme for high income earners, that may ultimately have little effect on reducing reliance on the age pension system,” said Dr Murray.

“People spend twice as much each year managing their super as they do on electricity,” he added.

Dr Murray says the industry has survived only because of ‘myths’ generated by the funds themselves.

“Otherwise intelligent people have been convinced that taking poor people’s money, to make them even poorer, and giving it to expensive investment managers is a great solution,” he said.

In short, super tax breaks and inefficiency cost the government more to manage super than it saves in pension payments, leaving fewer funds available to lift the Age Pension.

As Mr van Onselen says: “If the superannuation system was abolished, the Age Pension could be lifted significantly without creating any net costs to the budget.

“It would also make the retirement system more equitable and efficient, since higher-income earners would no longer receive the bulk of taxpayers’ support and overall administration costs would be significantly lowered.”

The government’s retirement income review is expected to deliver its final report in June/July.

Do you think super is a rort? Are you satisfied that your retirement savings will see you through retirement? Do you wish you could qualify for the Age Pension instead of funding your own retirement?

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Related articles:
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Stricter means test a tax on retirees
Tax changes for older workers

Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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