Millennials are beating boomers when it comes to super

It's easy for millennials to feel hard done by. Unlike their parents, they're unlikely to have a job for life or be able to buy their first home easily.

But there is one area where they will be better off. Come retirement, they will have accumulated far more super than their parents.

Why is that? For starters, when super was introduced three decades ago, the compulsory employer super contribution, or super guarantee (SG), was just 3% and default super, where most of the money goes, didn't have the close regulatory oversight it has today.

Much has changed since then.

Millennials now enjoy a SG of 10.5% and strong MySuper investment performance. Super funds that fail to deliver are encouraged to merge with better funds by a watchful regulator.

Millennials, born between 1981 and 1996, are about to overtake boomers as Australia's largest demographic. They are the beneficiaries of the improvements that have been introduced since super's inception.

"One of the great benefits of our maturing superannuation system is that on average a millennial will retire with a great deal more super than their boomer parents," says Martin Fahy, CEO of the Association of Superannuation Funds of Australia (ASFA).

"Currently a boomer aged 60-64 has an average balance of $180,000 if male and $140,000 if female, whereas a millennial, aged 27 with a $30,000 super balance and earning $60,000 a year, is projected to have $555,000 at age 67."

He says there are a number of factors driving this.

"Unlike many of their parents, millennials will benefit from having access to compulsory super for their whole working lives. The contribution rate has also been much higher with the SG currently set at 10.5% of wages and legislated to increase to 12% by 2025.

"With decades of data now at hand, we know that investing at scale for the long term, and benefiting from the expertise of large, professional, highly regulated investment teams, is absolutely key to delivering the best retirement outcomes."

Ignore the fads

Fahy encourages millennials to engage actively with their super. This means to be well informed and avoid being sucked in by new technology and investment fads.

"We encourage people to focus on wider ESG [environmental, social and governance] issues, their risk appetite and key life events such as career breaks, carer responsibilities and so on, rather than succumbing to the allure of app-based real-time investing or other individual decisions, however tempting that might be.

"The benefits of professional investment of pooled funds into diverse asset classes cannot be underestimated."

He says ASFA's current super balance trajectory shows that by 2050, 50% of retirees will be living comfortably, double the current proportion of retirees.

Alex Dunnin, director of research at Rainmaker Information, which publishes Money magazine, says having super your entire working life for over four decades makes a dramatic difference.

"That alone means millennials have had compulsory super working for them year in, year out. Most young people joined the system when it was 9%, which makes a massive difference. They are going to be sitting pretty in retirement with large super balances. It might be that younger people finally get a financial break in this country!"

The average age of super members is currently 43. The economic momentum is still with older people, who have bigger portfolios, but this will inevitably change, says Dunnin.

The SG is set to rise, in annual increments of 0.5%, to 12% by July 1, 2025. Although an SG of 15% was initially suggested at the start of super, Dunnin says that's highly unlikely now.

"As time has gone on, super has grown much bigger and faster than anyone dared dream. Who would've thought that we'd now be sitting on $3.5 trillion? It's on its way to between $6 trillion and $10 trillion, depending on a few assumptions.

"15% going into super is pretty extreme and means people might have heaps in super but they can't afford a house along the way. Not owning a home when you retire is one of the biggest leading indicators of having a tough retirement."

SG at 12% is about right, he says.

Rise of the mega funds

Dunnin believes super will be the bedrock of the millennial retirement plan and their whole financial economic life, whereas boomers had to create it out of nothing.

"To retire you need money in your account. You need people who can run the money and get decent returns year in and year out."

The industry is focused on lower fees, improved governance and stronger performance, with poorly performing funds required to inform their members and merge with stronger funds. He reckons the industry will come down to 10 to 20 mega funds.

He points out that superannuation is a long-term investment.

"When there's a market crash it's awful, but markets recover, super funds recover. If they are well led, they will always get through the crisis. It doesn't mean you won't have one, but they will get through it. Super does its job."

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