Superannuation as a social policy: Retirement adequacy

Much cited Alliance Research older (2008) paper on superannuation and retirement adequacy - a topic that hasn't gone away.

According to Nielsen (2008)[1] there is disagreement amongst superannuation experts about the ability of the current retirement income system (compulsory superannuation of 9%) to meet retirees’ income requirements. However it appears there is even disagreement about whether there is disagreement.  According to Barr (2008)[2] “there is now widespread agreement among superannuation researchers that the current Superannuation Guarantee will not provide an adequate retirement income on its own”.

Nevertheless it is generally considered in the best interests of Australians that superannuation savings be maximized and there are several schemes proposed to increase these savings.  Two such schemes are ‘soft compulsion’ and super co-contributions.  These schemes are not in direct competition with each other, but both aim to address the adequacy issue in quite different ways. Co-contribution specifically targets lower income earners.

Super co-contributions were introduced in 2003 and further amendments to this scheme are now being proposed by the Australian Institute of Superannuation Trustees (AIST) which is an independent professional body. Its members are not- for- profit superannuation funds.

Soft compulsion is not yet policy, but has been promoted by the Association of Superannuation Funds of Australia Limited (ASFA).  ASFA  is a national, not for profit, non party political organisation that represents the interests of Australia's superannuation funds including industry, corporate, public sector and retail funds.  Member funds represent 80% of people holding superannuation accounts and about 80% of total Australian superannuation assets.

Both the ASFA and the AIST have produced research papers on their positions and each of these is discussed in turn below.

Co-Contributions – AIST

The Superannuation Co-contributions Scheme assists low to middle income earners making additional superannuation contributions. The government contributes up to $1.50 for every dollar of personal contributions, up to a maximum of $1,500 per income year if annual income is below $60,342[3].

AIST undertook two studies exploring differences in participation in co-contribution by demographics and income, awareness of the scheme, and its effectiveness in improving savings behaviour. 

The first study took information from three fund’s data bases to determine key characteristics of participants and non participants. The data bases contained approximately 700,000 people who were within the eligible income range.  Some steps were taken to counter biases in the funds’ membership.  One fund had more male members, but another had more female members.  The privacy law discourages collection and storage of persona data, so the interrogation of the data bases was limited to age, estimated income (based on SG contributions), gender, account balance, years of membership and marital status (if a spouse was nominated as a beneficiary).

The second study was a telephone survey of approximately 400 fund members (drawn from the same three funds used above), and the sample was structured to ensure one third of respondents had participated in co-contributions and two thirds had not. 

The investigation of the member data base provided information about the proportion who make co-contributions, and the growing rate of people making co-contributions (6.1% in 2005/4 to 9.9% in 2006/7).  This analysis showed very low income households were less likely to participate because they did not have the resources to do so.  Older people, women and married people were also much more likely to participate in the scheme. 

The researchers concluded that proximity to retirement encouraged older participants, and that married people were more likely to have greater disposable income potentially having two incomes.

The telephone survey showed awareness of co-contributions was high (76%) among non participants, particularly amongst women (85%). This survey demonstrated that if there were dependents in the household that participation in co-contributions was lower, further supporting the notion that not being able to afford the contributions was a key deterrent.  It also showed super funds were instrumental in providing information to member about co-contributions.

Both research approaches appear to be robust. The analysis of the data base is limited by the level of personal records collected and two key statistics of income and marital status have in fact been estimated.  There is no discussion about people with multiple superannuation accounts and that they may make co-contributions through a different fund.  However these limitations are quite minor in comparison to the opportunity to look at information reflecting what people are actually doing in their super.  This type of analysis is essential for informed policy debate.

The telephone survey data explored slightly different areas and added understanding to the information gained in the data base analysis.

The study concludes that to improve the superannuation savings of low income employees, the very low paid should have a $500 contribution made for them by government and recommends this as a policy change.  Above a certain threshold ($40,000) the co-contribution amount would be reduced to $1 rather than the $1.50 it is now.  The cost of doing this would be $4bn (although it is not clear if this is the whole system or the cost of the $500 direct contribution).

The results from these studies were presented at the AIST conference in April 2008. A that time there were a number of press releases issued which were picked up reasonably widely.

Soft Compulsion

Soft compulsion is a way for individuals to voluntarily make regular extra contributions to super, by committing an extra 1% of wages per year (in addition to the 9% Super Guarantee). This would be up to a maximum of 3%[4]. This system assumes there will be inertia and procrastination in ‘opting out’ and therefore peoples’ superannuation savings will increase.

ASFA has undertaken two main pieces of research on the topic of soft compulsion.  The first is a review of schemes in other countries using secondary data[5] and the second is research with people aged between 25 and 69 who work – a total of 750 interviews were conducted.

The desk research reviewing other countries schemes provides quite a compelling argument about the effectiveness of this approach in increasing people’s retirement savings.  This work has been widely cited in a research paper by Leslie Nielson, Economic Section of the Parliamentary Library, and in fact Nielson draws strongly from ASFA information in the discussion of soft compulsion.  These citations lend the ASFA research considerable gravitas.

The survey information has been less widely provided, and has not been widely reported.  Only excerpts were made available for this paper, despite a specific request to the Director of Research.  The limited findings made available suggest that 86% of Australian workers support soft compulsion.

It is quite difficult to establish the robustness of the consumer research. It appears to have been a poll to measure support of an idea rather than detailed investigation of the issues and impacts sitting behind the idea of soft compulsion.  Of course one of the issues with soft compulsion is that it will be taken up by those who can afford to contribute more, and those who have the lowest incomes will not benefit – and there is no evidence of this having been explored in either pieces of the research. 

The ASFA appears to be extremely effective in getting its message out.  Information on soft compulsion was presented at their annual conference in November 2007 and accompanied by numerous press releases.  Information about soft compulsion was also included in their Pre-Budget Submission for the 2008–09 Budget, January 2008.

 The key benefits of this approach are promoted as being that:

·         It actually works

·         Does not cost the government much

·         It is not hard or costly for employers to implement

·         And employees and the community more generally think it is a good idea

Impact on Policy

Whilst both the AIST and ASFA have been attempting to place policy changes to superannuation on the table, neither appears to have managed to get on the agenda of the Minister for Superannuation and Corporate Law, The Hon. Nick Sherry[6].  In his speech to the Institute of Actuaries Financial Services Forum in May 2008 setting out the Government’s Priorities in Superannuation and Financial Services neither of the issues discussed above were mentioned.  Indeed even the broader issue of ‘adequacy’ was not raised, let alone any potential solutions. 

REFERENCES

[1] Nielson, l. Superannuation contributions – the soft option, Research Paper, Parliamentary Library, 13 March 2008, No. 22, 2007-2008

[2] Barr, A., Co-Contribution Report 2008, AIST, www.aist.asn.au/Pages/PolResAdv/ResearchProjects.aspx

[3] 2007 Threshold http://www.ato.gov.au/super/content.asp?doc=/content/42616.htm&page=4

[4] ASFA Conference 2007, Consumers give thumbs up to soft compulsion in super, research finds.

[5] OECD, Pensions at a Glance

[6] 19 May 2008 http://ministers.treasury.gov.au/listdocs.aspx?doctype=0&PageID=003&min=njs