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Equality & Superannuation

In today’s AFR, I have a piece on inequality and superannuation.

Superannuation Inequity Needs Redressing, Australian Financial Review, 10 October 2012

Wealth in Australia is more unequally distributed than incomes. That’s largely because those of us on higher incomes are able to save more than disadvantaged Australians. This becomes a wedge over the course of a lifetime. By the time rich and poor people reach retirement, those at the top of the distribution have contributed more, and earned more returns on their contributions.

Since the Commonwealth began paying pensions in 1909, a central purpose of retirement incomes policy has been to prevent poverty among the elderly. When the Keating Government introduced universal superannuation in 1992, the boost was primarily for low and middle-income earners, since many high-wage workers already had more than 9 per cent of their wage directed into superannuation. Similarly, the Gillard Government’s decision to boost contributions to 12 per cent will have its greatest benefit for low-wage workers.

In an article for this paper yesterday, Senator Mathias Cormann made the unfortunate decision to continue the Opposition’s scare campaign on superannuation. This is a pity, since the issues aren’t inherently ideological. It was President George W. Bush who sought to establish ‘private accounts’ for the US Social Security system, a system similar to Australian superannuation. In other countries, conservatives have supported retirement savings schemes that focus on looking after the poorest.

Underpinning superannuation policy is strong economic evidence that myopia causes most of us to save less than we need in retirement. But as Brian Toohey has noted in a series of columns for this newspaper, superannuation policy needs to become more equitable. One of the policies to achieve this – championed by Minister Bill Shorten – is the Low-Income Superannuation Contribution, which cuts contributions tax to zero for workers earning up to $37,000 and puts the money into their super instead.

Another reform is the creation of MySuper default products. In shaping superannuation in the 1990s, policymakers focused on giving workers as much choice as possible. Yet two decades of experience – and advances in behavioural economics – has taught us that the typical worker ends up in the default fund and the default investment plan. MySuper ensures that default plans are good plans, and that a smaller share of workers’ earnings ends up in management fees. The Government is currently looking at the process by which superannuation funds are named in modern awards.

Boosting superannuation for low-income workers isn’t just a good way of reducing wealth inequality; it’s also one of the most important reforms for reducing gender inequity. Although women’s wages are four-fifths of those of men, women’s superannuation payouts average one-third of men’s (a gap that particularly hurts single women). Two-thirds of those who benefit from the Low-Income Superannuation Contribution are women.

Like me, Senator Cormann enjoys the benefit of a parliamentary scheme that contributes 15 per cent of our incomes into superannuation.  Yet the Coalition opposed the increase in superannuation contributions from 9 to 12 per cent. What’s good for the pollie should be good for the voters.

Andrew Leigh is the federal member for Fraser, and his website is www.andrewleigh.com.

3 Comments

  1. [...] Leigh had a piece in the AFR talking about super. Once you strip away the bumpf and obligatory ALP speak he is making a good [...]

  2. Scott says:

    “those of us on higher incomes are able to save more than disadvantaged Australians. This becomes a wedge over the course of a lifetime.”

    No it doesn’t. The richer people are individually, the better off those around them are.

    Everyone knows you don’t go to the pub with friends who don’t have any money ;) Even the so called “disadvantaged” know this. They are disadvantaged not “stupid”.

    In general, superannuation in Australia disadvantages the disadvantaged as you prefer to call them because they lose access to capital which could have put against their debts (they are disadvantaged after all). Indeed, mandated super (or SGC) is such a loser of an idea that the government has to force contributions on their behalf. That “disadvantaged” people are less likely to contribute to super doesn’t mean they don’t know any better (as many of those in favor of mandated contributions imply), they simply have other priorities.

  3. Roger says:

    Tax-payer funded employers have the opportunity to offer their employees above rate super contributions. Even big and benevolent private companies like Fairfax might do it. However don’t castigate Tony Abbott for showing concern that small employers might struggle to match that largesse.