The super guarantee was never about our retirement

The superannuation system’s creaking girders have done little to dislodge the pride of its architect, Paul Keating. The scheme may have more design faults than an average Melbourne tower block, but the cracked panels and falling masonry begin to blur when you step back to look at the big picture.

Compulsory superannuation is the “biggest industry reform and capital markets program in the history of Federation”, Keating told the Australian Financial Review last year. It has “materially bid down the Australian equity risk premium”.

So much for those who thought the purpose of superannuation was to materially benefit working people by bidding down the risk of penury in their twilight days. There may be $2.8 trillion in the bank but the chances of ending up on state pension have barely improved.

To be fair, Keating never said they would. The Superannuation Guarantee was a scheme born not from a noble social purpose but from a desire to fight inflation, cooked up with the unions at a time when rising wages were to be feared. Any benefit to workers in retirement was an afterthought.

The result is a scheme charged with more tonal tension and conflicting allegiances than the Gustav Mahler symphonies of which Keating was once fond.

Australia’s superannuation pool is one of the richest in the world built upon one of the poorest designed. It offers little incentive to save and every incentive to withdraw a lump sum. There are dozens of funds from which to choose but little effective competition. Unions operate as both poacher and gamekeeper, striking deals to force workers to join schemes in which they have a vested interest and on which their leaders serve as salaried directors.

To save for one’s own retirement is a virtuous activity singled out for special praise by Robert Menzies in his seminal Forgotten People talk in 1942.

The question of whether people should be compelled to be virtuous by law, however, raises a different set of principles.

John Hewson promised to abolish the stick and replace it with the carrot of tax incentives to encourage voluntary contributions. The loss of that argument at the 1993 Fightback election meant the Liberals were stuck with Keating’s edifice, resolving their philosophical conundrum through the expectation that it would reduce the burden on the common purse.

This uneasy philosophical equilibrium has survived, despite the evidence that a scheme entering maturity is failing its most important test. The Liberals endorsed a phased increase in contributions through gritted teeth in the two years of the Abbott government from 9 per cent to 9.5 per cent. The decision to defer the start of a phased increase to 12 per cent until July 2021 has allowed room for a timely debate in the partyroom.

Those for and against the increase agree on one thing: compulsory superannuation has not fulfilled its promise of reducing reliance on the state pension, except on the margins.

The response, however, is divided. Should the government double down and force workers to put more of their wages aside? Or is it time to review the whole structure, deal with its flaws as best as they can and ask whether individuals might indeed make wiser decisions about allocating their income if left to themselves?

The leading voices in the chorus demanding the contribution be raised come from the industry itself, in close harmony with its self-interested friends in the Labor Party and the unions.

The Quiet Australians, whose salary sacrifices pay these people’s wages, are barely heard in this debate. We can safely assume, however, that they are not in favour of being forced to do anything by government where money is concerned.

Senator Jane Hume has brought a novel approach to the superannuation portfolio with which she was entrusted in May by taking their side, rather than that of the salaried drivers of the gravy train.

“I don’t think the government can morally ask workers to give up more of their current earnings and put them into an inefficient system,” Senator Hume said.

Sadly, the 1993 election was probably the last chance the Coalition had to fix the scheme’s biggest flaw, the taxing of funds on the way in, rather than on the way out.

There is much that can be done, however, to knock off its roughest edges, most of which require the fortitude to take on the vested interests of the unions and the funds themselves.

Ultimately, the review of retirement income must look beyond superannuation. Compulsory super is, after all, an egregious example of the government picking winners, favouring one form of investment over others.

The Liberal Party’s gift under Menzies was to recognise the importance of the family home to a comfortable retirement. It is concerning, then, that the level of property ownership has fallen in recent years from 70 per cent to about 66 per cent, a level last seen in the 1950s.

In the mid-1990s when compulsory superannuation was introduced, 7 per cent of Australians over retirement age were paying rent and 6 per cent were paying off a mortgage. Today 16 per cent of those aged 65-74 live in rental property and 13 per cent are burdened with home loan repayments. Raising the Superan­nuation Guarantee will only make it harder for Australians to enter the housing market. They will be more likely to approach retirement in the hapless circumstance that Polonius warned of in Shakespeare’s Hamlet. They will find themselves as both borrowers and lenders, paying off debt while hoping that the return from their super will be enough to pay off the mortgage.

These are the finance industry’s dream clients, since it gets to rake off the margin as both mortgage provider and fund manager.

It is a brutal reminder that the fortunes of the finance industry and its customers are only tangentially aligned. They are united in a desire for strong return on investment, but beyond that perennially at odds.

Nick Cater is executive director of the Menzies Research Centre.