Labor’s changes to superannuation tax rules for the wealthy have put superannuation in the spotlight again. The changes are minimal but there are bigger, longstanding issues with Australia’s super system. Here we use lattes to show some of them – and look at what can be done to fix them.
The impact of having children, an increased burden of caring duties, and subsequent reduction in working hours is clear when looking at overall superannuation statistics.
The latest data shows that, as of 2019, men aged 60 to 64 had a median super balance of $178,800, while women in the same age group had a median balance of $137,050, a gap of 23.4%.
Warren McKeown, a teaching fellow in accounting at the University of Melbourne, says women are hit with a “double whammy” when it comes to super.
“More women work in lower-paid industries, and then within an industry often women earn less as well,” he said. “On top of that, they have time out to have kids and extra caring duties when there is no superannuation contribution going into their fund.”
There are ways to address some of these issues, such as paying super on maternity leave pay, and topping up the super funds of people who have children. The government has said they’re considering paying super on paid parental leave, with the finance minister, Katy Gallagher, saying the measure was still on the table for the May budget.
McKeown said the mantra of “it’s your own money you can do what you like with it” is very persuasive. “People say, ‘Oh, I could grab that money now and use it, and then I’ll put more into super later.’ But if they do that, of course, they’re going to miss out on the benefit of compounding over a period of time,” he said.
Surveys of people who withdrew super under the early access scheme make it clear that many people felt they had no choice but to withdraw their super, despite the disadvantage it causes when they retire.
The Australian Institute of Family Studies surveyed people who withdrew super funds. The results show many used the funds at least partly to alleviate financial stress, such as paying their rent or mortgage, or to pay for goods and services they might not have otherwise been able to afford. A small proportion did report spending money on entertainment.
So if you’ve read all of this and you’re worried that there’s not enough in your super account, what can you do about it? Well, one thing you can do is make voluntary contributions. And, if it’s done in a certain way, it will actually reduce the tax you pay as well.
Of course, not everyone can afford to make voluntary super contributions.
But for those who can, Marisa Broome, a financial planner, says the extra contributions really pay off later.
“If you can actually put a bit extra into super when you’re first starting work, that really helps if you’re going to take a career break somewhere down the track,” Broome said.
“Because you’ve got that compounding interest. The money you put in earns interest, and then the interest earns interest.”
Notes
The models used to create the superannuation scenarios are meant to be realistic, but have been simplified for illustrative purposes. This means that while they use a number of assumptions based on real-world data on inflation, super guarantee rates and wage growth, they are still a simplification of the complex, real-world financial situation that people find themselves in.
All of the models use the following assumptions:
Wage growth – 2.25%
Inflation- 2.5%
Starting super admin fee, which is then increase in line with inflation – $50
Super investment fee - 0.85%
Super growth rate- 7.5%
Effective tax rate for super earnings – 7%
The dollar values for super amounts are also reindexed to the starting year consistent with a 2.5% annual inflation rate, and so the final amounts are essentially “starting year dollars”.
References
Wage growth uses the average of the past 10 years from ABS data
Post-maternity leave case study has a penalty of 10.3% applied to wage growth for 10 years from maternity leave, based on this research
Post-maternity leave case study also informed by this treasury paper on the motherhood pay gap/penalty
Some other assumptions were taken from the government’s super calculator
