Why your superannuation could make or break you

David Taylor
·Contributing Editor
·5-min read
Your superannuation could make or break you. Here's why. Source: Getty
Your superannuation could make or break you. Here's why. Source: Getty

Why are former prime ministers and billion-dollar fund managers getting so hot-under-the-collar about superannuation?

It’s just a big pile of money, right?

Not so much.

It’s actually the single biggest investment many Australians are likely to own. And if, by retirement, your honey pot isn’t so large, and you’re still renting, welfare advocates say you’re at risk of poverty.

So it’s a big deal.

Policy makers are trying to help build the honey pot for many Australian workers by increasing the amount of money employers are required to contribute to their employees’ super funds.

The problem is that many struggling families need the money now.

Let’s break it right down for you, so you can make up your own mind where you stand on superannuation and compulsory contributions.

The plan as it stands

As it stands, it is compulsory for employers to make superannuation contributions for their employees on top of the employees' wages and salaries.

The employer contribution rate has been 9.5 per cent since 1 July 2014, and as of 2015, was planned to increase gradually from 2021 to 12 per cent in 2025.

If nothing changes, this will go ahead, with the first increase to 10 per cent, slated for July next year.

The problem

Everything else being normal, the planned increase in superannuation would be great news: the economy would grow, as would wages, and your retirement nest egg with it.

This, as we know though, is far from reality.

The economy is right now in the deepest recession since the Great Depression – an economic downturn that has led to disturbing levels of unemployment.

Wage growth is either non-existent or actually going down.

So, logically, if employers are forced to provide more superannuation to their employees, and profits are stagnating or falling, the fear is wages will be cut to make up the difference.

The PMs are passionate about lost income

If any changes to the legislation are to be made, now, or soon, is the time to make them.

Perhaps, then, it’s not surprising that the father of Australia’s modern superannuation system has come out swinging.

“They want to jib ordinary people by 2.5 per cent of their income for the rest of their lives,” Paul Keating said.

“I mean the gall of it.”

“I mean the heartlessness of it.”

Mr Keating has made it abundantly clear he’s worried about workers’ savings and their capacity to have a comfortable retirement if increases in compulsory super are removed.

This is despite the obvious pressure on the economy and wages at present – which means less money for workers now.

Kevin Rudd, who became prime minister roughly a decade later, is singing from the same hymn sheet.

“This is a cruel assault by Morrison on the retirement income of working Australians and using the cover of COVID to try and get away with it,” Mr Rudd said.

What about on the conservative side of politics?

Future Fund chairman Peter Costello, unsurprisingly, thinks that a re-examination of increases to the guarantee is warranted.

“You can’t just say what looked good a few years ago is going to look good in the current climate,” Costello said.

What about outside of politics?

Outspoken US fund manager, Bill Ackman, has weighed into the debate.

He supports Paul Keating and Kevin Rudd in terms of their protection of super – which mind you, the Coalition also supports, but it also has the burden of protecting families from financial ruin right now.

Speaking more broadly about the US, Ackman believes giving Americans a greater share of the benefits of capitalism by making “every American an owner of the compounding growth in value of corporate America”, is the way to go.

But just how much are these funds “compounding” in value anyway?

High unemployment, and the stalling in wages growth, has given workers the option to draw down superannuation.

In March 2020, the Federal Government announced a relaxation of the rules around early access to super.

As part of its overall stimulus package to protect Australians against the economic impacts of the coronavirus, the scheme allows individuals to withdraw as much as $20,000 in super.

You can see how if you only had $25,000 to begin with, you basically go back to square one.

This doesn’t have to, but in some cases it will mean, your superannuation balance could be cut significantly before it has a chance to ‘explode’ in terms of growth.

There are no right answers

The problem facing many workers and the unemployed right now is that they’re worried about their finances.

An ‘easy’ solution to that is to draw down superannuation.

This will crimp your earnings.

In addition to this, once you do find employment or feel more secure in your job, and as your boss hands out more superannuation, there’s every chance your wages will be cut further – or that’s the fear at least.

Here is some other logic though: the expectation is that this economic downturn will eventually come to an end. If and when that happens, and wages rise with it, having more going into your super account would be a very welcome development.

But, and that’s a big “but”, there’s no guarantee that when the economy does pick up again that wages will also rise.

It’s hard to support a super “guarantee”, isn’t it, when there are no “guarantees” in life.

Later this month I’ll interview Australian Super’s chief investment officer, Mark Delaney, at the Yahoo All Markets Summit. I’ll push him on this topic – tune in to find out what he thinks about it!

@DaveTaylorNews

Yahoo Finance's All Markets Summit is back! Don't miss out. Book your ticket for 17 Septemeber. Source: Supplied
Yahoo Finance's All Markets Summit is back! Don't miss out. Book your ticket for 17 Septemeber. Source: Supplied

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