Turns out Paul Keating’s 1980s superannuation argument had legs
In a slowing economy, a counter-argument to the increase in compulsory super contributions is to leave it up to the individual. Many would still opt to save, but low-income earners, in particular, could decide they don’t want a higher retirement income at the cost of a lower standard of living while still working.
Right before the National Reform Summit Paul Keating recently attacked the then former opposition leader John Howard for failing to back his proposal to increase compulsory super contributions to 15 per cent of salaries back when Keating was Labour PM.
Had Howard maintained the Coalition’s philosophical principles after beating Keating in 1996, he would have abolished compulsory contributions. Now, however, they are due to rise from 9.5 per cent to 12 per cent.
Keating’s “reform” was actually a move away from the productivity reforms of the 1980s. Compulsory contributions diverted financial resources away from more efficient uses and boosted trading in existing assets instead of generating capital for productive new investment. The funds management industry was artificially expanded into the world’s fourth biggest in an economy that’s the 12th biggest – furthermore, a Reserve Bank of Australia study shows that super supplied almost none of the investment capital to expand the mining sector between 2003 and 2012.
Compulsory contributions can also be argued to hurt reform by increasing the “dead weight” losses by stopping individuals from allocating their income in line with their preferences. If allowed to choose, some people may spend more of their salary to bring up a family, pay off a mortgage, etc.
Annual compulsory and voluntary contributions to super exceed $125 billion. On a slowing economy, this compulsion has a significant impact on the potential demand of economy – especially given that wages aren’t rising as quickly as they used to.
Part-time workers who earn $16,000 a year would $33 a week better off (or $1716pa) if employers paid their compulsory contributions as normal take-home pay after tax, instead of into super.
Those on minimum wage of $35,160 a year would lift their disposable income by $53 a week. A salary of $70,000 would have $85 extra to spare, with further increases the higher the salary.
What do you think? Are compulsory contributions necessary, or should it be left to the individual to decide?
Related links:
What is a life-cycle super product? And do you need one?
How to calculate the bank balance you’ll need to retire
3 great ways to make money after you retire