Is Superannuation a Scam or a Shield?

Superannuation Guarantee, the Australian answer to the fact that we are living longer and in better health whilst having less offspring. ie the Government will no longer be able to afford to pay the pension in the foreseeable future without overtaxing the younger employed population 

So when did it start? 

Back in 1992 Paul Keating, of the Labour party, introduced a compulsory employer payment of 3% or 4% of employee earnings, dependent on employer size, to be paid into a fund in accessible to the employee until they reach retirement age.

How has it progressed?

By 2002 the rate had increased to 9% and then upped to 9.5% in 2014. From 2021 this increased to 10% and progressively and extra 0.5% pa stopping at 12% in 2025.

What a great idea, free money for retirement!

Well hang on. Efficient labour markets suggest that an employer pays an employee what they are worth, inclusive of all oncosts including Superannuation. What do I mean by this? The assumption is that if SGC (Superannuation Guarantee Contributions) didn't exists your current take home pay would be an extra 12%, for you to choose to invest for retirement or meet more pressing current needs.

So why was this idea made mandatory?

To oversimplify, the general public is presumed by policy makers to be lacking in either financial literacy and/or the ability to plan long term. Most individuals when receiving their pay will spend it on their needs (and wants) and, intentionally or not, rely on the government to provide for their needs once they finish their careers.

Are they correct and do we the public lack the ability to Save for retirement?

The Australian Bureau of Statistics (ABS) evidences that in the 2023/24 Financial Year (FY) on average households managed to save just 2.5% of income.

Broader analysis suggests that the average rate of savings is closer to 8%, although the median value is more like 5% with a 'normal' range between 3.5% and 9.5% per quarter.

So not exactly accurate, however this is an average of an average, ie on average 8% of household income is saved as opposed to all households save 8%. This still leaves two key questions:

1. Do most households save 8% or do the to 10% save 90% and the bottom half save nothing!
2. Is 8% enough to achieve a comfortable Retirment?

Let's propose that the Policy Makers are wrong!

Then what a joke the superannuation system is! Removing the public's choice of when and how to spend and invest their hard-earned cash. But let's not fight the system today.

So is 8% unforced savings enough to support retirement?

Effectively we have 3 rates, 8% raw,12% mandated or 8+12 = 20% full potential.

So lets over simplify, $80k income over 30 years at these rates@ and average 7% (after inflation) stock  market interest rate.

 The outcome:

• 8% = $600k or $42k pa passive income
• 12% = $900k or $63k pa passive income
• 20% - $1.5m or $105k passive income

So NO, 8% unmandated savings is NOT enough for a comfortable retirement without pension supplementation.

Let's run with, Policy Maker know what they are talking about!

Most people will spend every cent they earn by retirement age and will therefore require a handout from the government once retired. However, because of superannuation, low-income earners may only require a little topping up from a partial pension, and moderate and high earners will be self-sufficient from their superannuation savings. And guess what, that income you would have had access to for investing for your future (12% of earning from 2025) but is held on your behalf, inaccessible until retirement age, is only taxed at 15% not 19%/32.5%/37%/45% ("Marginal Rate" dependent on your income), and you can contribute more, say that 8% average household savings the ABS refers to. And any earnings on these investments are only taxed at 15% not your higher Marginal Rate.

Brilliant, lets save on tax and boost our retirement savings!

So we have federally directed systematic and stable way for funding future retirees without adding a burden to future taxpayers. And I can redirect more long-term savings boosting my pay packet with an up to 30% instant tax saving (within a concessional cap). The only downside being I can't access this portion of my pay until I am of preservation age and retire.

Now hang on one moment!

Can I expect decisions I make today to boost my Retirement Income through additional Superannuation Contributions?

Is it really a stable system? 

Evidence the system may not be 'Stable'!

Preservation Age

Preservation age (the age you can start accessing your super) has changed over the years. It started at 55 for all persons however in 1995 the laws changed and it became a sliding scale, dependent on your birth year it could now be up to 60 years of age. Will it change again?

Investment Rules

Rules around what Superannuation can be invested in, particularly around Self Managed Super Funds (SMSF's), have changed over the years. Regulations were introduced in 1993 and furthered in 1999. In 2007 SMSF's were allowed to 'Borrow' under limited conditions, but had to be tightened in 2016. In 2021 some funds began to restrict investments in cryptocurrencies with the government stepping in with tighter controls on high-risk investments in 2023. APRA is currently reviewing investment choice rules and will likely outline new rules.

Tax on balances > $3m

Following election success in 2025 Anthony Albanese, Labour Party with support from the Greens, has decided that high balance superannuation funds should should have a tax equity adjustment of +15% on earnings related to value held above $3 million, ie pay 30% tax on earnings on capital over $3m. This includes unrealised gains, which completely refutes the basic principles of investing and will also distort market behaviour by forcing investors to make decisions based on tax obligations rather than sound investment strategy.

Unimplemented changes

1. Increase the preservation to 65 or 70 years of age have been discussed intermittently since 2010
2. Superannuation Death Tax, talked about in the 00's and 2017 
3. Access to Superannuation for First Home Buyers, discussed in 2017/2018
4. Mandatory Super Contributions for Gig Economy Workers was topical in 2017/2018 without success
5. Taxing Unrealised Gains has been floated on numerous occasions from about 2010
6. Reducing SGC rate was even on the table in the 2010's

Impact of non-stable system (real or implied)?

Trust is an underlying requirement for a strong economy and fiscal system. Laws should be made with clear objectives and rules that support the intention. This allows the public to follow the guidelines, supporting the system towards the greater good. Changing the rules spits in the face of good citizens who are trying to follow the rules and put their best foot forward. Lack of trust breaks the ability for policy makers to encourage citizens to follow desired path. Anarchy results.

SCG, Scam or Shield?

In my opinion the answer falls closer, but not completely, to the side of 'Shield'. There are other avenues to resolving the underlying issue of meeting the financial needs of the retired population, such as teaching Financial Literacy in Schools or a Federally Managed Pension Investment Program, but the current SGC policy provides a blunt but effective instrument to ensure all Australians 'plan' for their own future. 

How could things be improved. Well, clearly less political interference and certainly more confidence for the population that long term law changes aren't going to invalidate decisions made today!

This blog provides general information only and does not constitute financial advice. Seek independent financial guidance before making decisions. The author is not responsible for any losses from reliance on this content.

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