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12% super might not be so super

Superannuation. Trusty old, never changing, reliable superannuation.

I don't think those words have ever been spoken in a non-facetious way and I don't think that they ever will be.

Even as a financial adviser it can be hard to keep up with the seemingly annual changes and tweaks to our retirement system. From the changing of the super guarantee from an initial level 3% of salary, to changing contribution limits to the recent introduction of the transfer balance cap for retirees barely a budget goes by with out our retirement system having at least one little amendment by the current government.

At the moment the topic of debate regarding our retirement system involves our super guarantee rate. For employees, your employer has to pay at least 9.5% of your wage into your superannuation fund to help you save for retirement.

Each year, someone making $100,000 will contribute at a minimum $9,500 to their retirement savings to be invested and grow over time. Debate is raging as to whether or not the superannuation guarantee or SG rate should be increased to 12% per annum.


To keep it simple we are living longer than any generation before us, I read recently that the life expectancy for a baby girl born in the year 2000 is 100 years old. That's a far cry from 25 years ago when the average life expectancy was closer to 75.

Even if the Aged Pension qualifying was not to increase over the next 30 years, the humbling fact remains is that if we are going to be retired for longer, we are going to need more money to fund our retirement lifestyles.

The positives of the plan

As every adviser, mathematician or financial savvy person will tell you compounding is an incredible thing. It's basically needless to state that higher contributions, high returns and the power of time will under almost certainly result in higher superannuation account balances by retirement.

In retirement, you no longer pick up your work boots, put on your suit and tie to earn a dollar. In fact what happens is that you rely on your accumulated savings to put on their work boots and earn you an income.

For retiree's often their financial goals change from accumulating as much growth as possible to moving to a more conservative asset allocation, with a higher focus on income producing assets. However, as anyone who has a term deposit can tell you, interest rates locally and globally are stubbornly low.

This is a trend that is likely to continue for the foreseeable future at minimum. What we have seen is that as soon as a central bank tries to normalise (increase) interest rates financial markets act as if they have just found Ted Bundy trying to sneak into their house and panic.

If you are earning less on your savings, you are going to either need more savings or take increased risk to maintain the same level of income. The easiest way to do this is via contributing more from an earlier age.

The negatives of the plan

The most immediate impact that will be felt by the general public is that if your employer is contributing more to your retirement savings, that is less money that is available to be paid into your back pocket. This means that as individuals are receiving what is effectively a pay rise into their retirement savings vs into their back pocket they are not able to spend that money today and help to lubricate the wheels of our economy.

One of the key drivers of household wealth in Australia is via our high home ownership rate. Unfortunately, when wages do not rise it becomes intrinsically harder for home values to rise over time.

Additionally, for lower income workers, they are going to see less benefit from this in comparison to their higher earning peers due to the main benefit of superannuation coming via the lower tax environment.

The last negative of this proposal is that some critics have claimed that the many retiree's will be no better off due to loss or partial loss of government benefits.

The choice

The nuts and bolts of the situation is that many workers including most governmental employees and those involved in higher education are already receiving superannuation contributions of above the proposed 12% level. At the end of the day we have to make a choice between a pay rise today or lower dependence on governmental support for our aging population in retirement.

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