Why superannuation is bad

Why is a privatised retirement system that enriches the wealthy so popular with the left?

Epistemic status: I’m fairly comfortable with my argument below, but it’s certainly an area where I could learn more, so I’m very open to counter-argument or just other views or resources to consider.

---

It is time for a blog post about how superannuation is bad. 

Superannuation is bad because it individualises risk, making your chances of a decent retirement depend more on your unique life circumstances and when you happen to retire. It is also a massive tax concession for the wealthy that allows them to accrue savings with minimal tax and then hand them on across generations. And it reduces wages! A better solution would look more like a good pension and particular support for renters.

Super individualises risk

A key function of a good retirement system is to socialise risk. Everyone chips in to the system and knows they’ll get a decent standard of living as an outcome when they retire. Some people chip in more. Some people might chip in less, not only due to lower wages, but maybe due to an injury, having children, or pausing work to care for an aged parent. A retirement system should smooth out these fluctuations so that people get a decent standard of retirement regardless. Sure, people who earn more through their life can afford to have a better retirement – but, for example, we could create a system whereby woman who pause work to have children don’t have a worse retirement decades later. 

This is not how super works! Rather than smoothing out variations, super works the other way, so that the woman who stops working for a baby faces a compounding gap, and the worker on a lower income gets further and further behind the investment banker. 

This failure to socialise risk also applies to the timing of individual retirements. Someone who happens to retire at the wrong time during the Global Financial Crisis might see their retirement savings plunge virtually overnight. This is not a fault of theirs, it’s an arbitrary quirk of timing when each individual is personally exposed to fluctuations in the share market. Yes, a savvier person might reduce their risk exposure as they approach retirement, gradually shifting out of stocks and into bonds, but if our retirement system asks that of each individual I think maybe there is a better way of doing things.

Recently the government legislated to pay superannuation on paid parental leave. This is in response to the fact that the superannuation system serves women very poorly. But the change is a token shift that will make little difference. 

Super is a massive tax concession for the rich

Super is also way better for rich people. It’s, like, super unfair.

So to start with, contributions to super are taxed at 15%. This is regardless of your income tax rate. This means that someone earning up to $45k basically gets no tax benefit for contributing to super. Someone earning $240k would pay 45% tax on their marginal income, but they pay only 15% tax on super contributions, effectively getting a sweet 30% subsidy that is larger than that available to lower-income people! 

But that’s not all!

In addition to the superannuation guarantee contributions, you can make voluntary contributions which are also lightly taxed. In total, this is up to a cap of $30,000 which applies to voluntary and employer contributions. So let’s say you earn $150k and your employer superannuation is about $16,500 – you could throw in another $13,500 and get the same tax benefit.

Technically this is also true of people on lower incomes. In reality, for incomes below $45,000 it’s not worth it because there is negligible tax benefit. Moreover, making voluntary contributions to super means taking cash you have now and locking it away for decades. This is not going to be a practical option for someone who needs that money now to live: in reality, voluntary contributions are most available to those who have spare money and a good degree of financial security. 

Overall, the tax design of superannuation is most advantageous for financially-secure people on high incomes. This is the same group that is least in need of a bunch of extra cash in retirement. 

Super means lower wages

Perhaps these issues would be OK if super was ‘bonus’ money paid to workers to go towards their retirement. However, in practice, superannuation means lower wages. 

This makes sense. An employer values work at a certain amount and is willing to pay up to that amount for someone to do that work. If the employer also has to pay superannuation, they will aim to pay the same total amount by reducing the wage portion. If I’m paying a contractor $500, it’s all the same to me whether I pay them $450 in salary and $50 in super, or just $500 in salary. 

Of course, the real picture is a bit more nuanced and I would hesitate to claim that if we abolished superannuation then wage incomes would rise overnight: of course, employers would try to claw back as much as they could in profit, or they might reduce prices. A whole lot of things could happen. But there’s plenty of evidence that, over time, increases to superannuation payments mean lower wage rises for affected workers. See Grattan and the ANU Crawford School.

I also feel obliged to point out that some people have said that superannuation increases don’t necessarily reduce wages because the employer can potentially increase prices. It is perhaps worth noting that higher prices are, in fact, a bad outcome, and particularly bad for lower-income people, as has been abundantly clear of late! 

The politics of superannuation

Superannuation occupies a curious place in the political landscape.

The Australian Labor Party loves superannuation. Partly this is because they created the policy so they love it and don’t want to hear anything bad about it. It’s also because there is a bunch of industry superannuation funds which create sinecures for union officials and others in the broader labor movement – I don’t fully understand the ins and outs, but it’s clear that Labor loves industry super funds and the feeling is mutual. 

(And to be clear: industry super funds are better than retail funds! They generally have lower fees and offer better returns. I’m down on the whole superannuation industry but I’m less down on industry super.)

You then get the Coalition who, generally, don’t like super. I guess this is because they perceive, accurately, that the superannuation industry is Labor-affiliated, so they want to weaken it. So things like allowing withdrawals from super during covid, and mooting the idea of withdrawing from super to buy property — these all line up with the Coalition’s agenda to diminish super.

At the same time, the Coalition loves ways for rich people to avoid paying tax, and super is great for this. So they end up being quite keen on the tax-dodge part of super, for example being critical of Labor’s proposal to increase taxation for people with huge super balances. 

Then you have the superannuation industry itself, which is obviously its own biggest fan, and is constantly trying to make people worried about their retirement and feel like they need huge super balances to get by. 

What should we have instead?

We currently have a system where a portion of wages is taken from workers, invested, and then given back to them in retirement. We could have a system like this, but all the money is put in a big, single bucket, and maybe the amount you get back in retirement corresponds only weakly, or not at all, to what you put in through your working life. There would be many benefits to this, not just better socialisation of risk, but also much lower overheads, and less need for people to be a financial planning expert in order to make the right decisions for themselves: the government could just do it! 

This would be quite a bit like Australia’s Future Fund, which is a bunch of money set aside to cover, primarily, pension liabilities for public sector employees. 

Superannuation is silly

In short, superannuation is a regressive scheme that has some inverted political affiliations: I think some people probably get tricked into liking it because the Coalition doesn’t like it and Labor does. But it is a bad system!