Super savings benefits murky, study finds

One of the most stubborn beliefs in policy circles is that superannuation saves the government money in the long run.

One of the most stubborn beliefs in policy circles is that superannuation saves the government money in the long run. However convenient that might be for the sector, it’s wrong.

New analysis released yesterday as part of the Productivity Commission’s ongoing inquiry into the policy train wreck that has become compulsory super, finds that excessive fees and insurance premiums drain members’ retirement balances so much they add to age pension outlays “materially”.

“Balance erosion can be excessive and highly regressive — having a disproportionate impact on members with low incomes, intermittent labour force attachment or multiple accounts with insurance,” it said.

Courtesy of laws that require super funds to provide default (typically “opt-out”) life and disability insurance to members, about 12 million Australians have — most without the faintest idea — one or more insurance policies through their funds, typically paying about $300 a year.

For the sector, this has been a wonderful policy: annual premiums from such policies have swollen by 35 per cent over the three years alone to $9 billion, including $1.9bn in duplicate policies.

Those laws also require premiums which do “not inappropriately erode the retirement income of beneficiaries”. “Inappropriately” seems to be narrowly defined.

Members’ balances could be eroded by 14 per cent or $85,000, the commission found. For “disadvantaged members” the loss could be “over a quarter or $125,000”.

For a single person on low income, opt-out disability insurance costs the government about $3800 once all tax and social security effects are accounted for.

In the event the policy paid out, the income wouldn’t be large enough to reduce eligibility for the disability support pension.

Meanwhile, their expected age pension payments would increase by $3500 because they would more easily meet the means test.

“Age pension effects matter, especially for low and middle income individuals,” the commission said. It has broadly endorsed the Coalition government’s reforms. Kelly O’Dwyer, as superannuation minister in the Turnbull government, moved to make insurance optional for members under 25 and cap the annual fees funds can extract at from low-value accounts at 3 per cent. Labor, incredibly, hasn’t made its mind up on whether to support the legislation.

Insurance premiums, of course, are just part of the bigger fee gouge, which was the centrepiece of the commission’s draft report. And fees, in turn, are just one factor in evaluating if compulsory super is a fiscally prudent policy.