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How raising compulsory super from 9.5% would affect you

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Raising the compulsory super rate - is it likely?

Yes, politicians have been fiddling with the compulsory super rate since Paul Keating introduced the superannuation guarantee at 3% in 1992, with talk it would eventually rise to 15%.

One of the federal government's first decisions after winning the May election was to undertake a detailed review of the retirement system. Yes, another one.

The Productivity Commission had recommended the review in December when it released a report on super efficiency and competitiveness, claiming members could benefit by around $3.8 billion a year by addressing the problems of multiple accounts and underperforming funds.

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The problem is that this has also led to calls for the promised increase in compulsory super to be further delayed until after this review.

Given that it is also likely to look at contributions rates, some fear the rise may be scrapped altogether.

If you're thinking it is taking a long time to get to that promised 12%, you'd be right. The Gillard government had legislated a phased increase to 12% by this year.

But in 2014 the Abbott government froze contributions at the current level of 9.5% until 2021. Under the current timetable they will then increase by 0.5% a year to 12% in 2025.

Impact on savings

Some reports, such as a recent one by the Grattan Institute, a public policy think tank, argue we don't need to lift super to 12%, stating the rise would take $20 billion a year from workers' salaries without giving them a better income in retirement.

Under the current 9.5% rate, it says most people would retire with 70% of the income they had while working.

But others have argued that we need 12%, citing the fact that not everyone works full time until 67 or benefits from super over a full working life. Research has consistently shown that it is time in super that counts.

Those who didn't start receiving contributions until they were older, people with periods out of the workforce and workers forced to retire earlier than expected (due to redundancy, ill health, or other causes), lose the benefit of years of regular contributions.

Women, in particular, risk a poorer retirement with the average female super account balance at retirement around $115,000 less than that for the average male. Women also live around five years longer, requiring more money for their retirement.

David Knox, senior superannuation partner at Mercer, told a recent Actuaries Summit that Australia's net replacement rate of pre-retirement income is 40.7%, compared with an OECD average of 65%.

The Association of Superannuation Funds of Australia (ASFA) has called for the move to 12% to be accelerated if the budget permits. It recently undertook research that showed around 80% of respondents support the increase.

What does that mean in outcomes?

While it will vary according to your income and circumstances, ASFA's modelling found a 30-year-old worker on $70,000 today with $50,000 in super would have $71,000 less at age 67 if compulsory super stays at 9.5%.

Bringing forward the additional contributions would add another $7000 to their retirement kitty.

Thanks to compound interest, the younger you are the more benefit you'll get from higher super contributions.

While older people will still benefit, ASFA figures show a 55-year-old part-time worker on $40,000 with $100,000 in super will be around $7000 better off at retirement if the rate moves to 12% - or around $700 a year in extra income.

ASFA has also calculated that the proportion of people over 65 receiving a part or full age pension would fall from around 70% now to 60% by 2055 if compulsory contributions were lifted.

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Annette Sampson has written extensively on personal finance. She was personal editor of The Sydney Morning Herald, a former editor of the Herald's Money section, and a columnist for The Age. She has written several books.
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