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The generation worse off because of super

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Isaac soloman View Drop Down
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    Posted: 04 Jun 2018 at 5:20pm

ould superannuation be the biggest con job ever perpetrated against generations X and Y?

In the wash-up from last week’s Productivity Commission report, it’s worth considering the question.

I fall between generations X and Y - it’s been 15 years since I graduated university and joined the workforce.

Interestingly, that happens to almost perfectly coincide with the lifespan of Australia’s 9 per cent “superannuation guarantee”. While this universal guarantee was first introduced in 1992, requiring employers to direct 3 per cent of a worker’s pay into a superannuation account, it only phased up to 9 per cent from 2002.

During that time, I’ve fallen into all the traps identified in the commission’s report.

I’ve accumulated multiple accounts (although they’re now consolidated), shelling out for premiums on multiple insurance policies I was too young to ever really need.I’ve usually opted to go with my employer's default fund – never shopping around the dizzying array of 40,000 products on the market for the best deal.

According to the commission, that’s a mistake that could cost $635,000 in retirement if you happen to end up in a fund in the bottom quartile of funds by performance, compared to the top quartile.

Despite it all, today I have managed to amass a reasonable nest egg – more than enough to be a 20 per cent deposit on the first home to which I aspire to buy.

And therein lies the rub. Perhaps I don’t need to remind you, loyal reader, but I still don’t own a home.

Some of that’s my fault – a penchant for holidays and eating out - but it’s important to remember the extra demands that have been placed on my generation of workers against those placed on our parents.ince I entered the workforce, I’ve had 9 cents in every dollar I earn automatically taken away from me and put – safely out of reach – in super. As my income rose out of uni, I also had up to 9 per cent of my salary seized to pay back my HECS debt.Talk about wage theft.Meanwhile, during that time, Australia has experienced two massive property booms, one during the early 2000s and the other occurring after the halving of real interest rates after the global financial crisis.

The timing could not have been worse for me, according to economist Saul Eslake.

“It would certainly be true that someone who was 25 [years old] 20 years ago would now be better off if he or she had put the savings that they might have put into super into buying a home, if they didn’t have one.“That’s another way of saying it would have been better if young Australians 20 years ago had gone on the real estate roller coaster than being forced on the superannuation rollercoaster.”But Eslake warns against concluding that the entire superannuation system is a sham, even if it’s been financially disadvantageous to date for my generation.

“Basically you’re right, although the principle that it’s a good thing for young people to start saving as soon as they start earning an income is right. I have always asked my son: ‘What’s the most powerful force in nature?’ And he knows the answer to that. It’s compound interest.”

But while Australians have now amassed some $2.6 trillion in our superannuation savings, enjoying the wonders of compound interest, we’ve also wracked up some of the highest levels of household debt in the developed world.To the extent enforced super has forced us to take on bigger debts than otherwise to fund a home purchase, we’ve also paid higher interest charges – money that’s as dead as any rent money.

So the magical compounded returns of super are offset, to some degree, by the additional interest charges on borrowing.This intersection between the growing super system and the property market is something that does not get enough attention.

The irony, according to Eslake, is that much of today’s accumulated super savings will be used by retiring baby boomers, and their children, to retire mortgage debt which is increasingly carried into later life.

And many young people – particularly those on lower incomes – will retire while still living in rental accommodation. Any income they can draw from their superannuation nest eggs will be eroded faster to meet their continuing housing costs. They will also face the vicissitudes of the private rental market into old age.

Grim.

But Eslake says future generations are unlikely to suffer the same super disadvantage as me. “I think it’s most unlikely that the return to investments in Australian housing in the next 20 years or so are going to outperform investments in a balanced portfolio of financial assets.”Still, it’s hard not to feel some resentment at a system that – while well intentioned – has failed so comprehensively to serve the interests of younger Australians.

The universal super system we have today was born of a different era. In the 1980s, unions needed a way to continue pushing for worker gains at a time when they’d agreed to low wage indexation to combat high inflation. The nation was also in the grips of a now defunct obsession with needing to boost national savings to reduce the current account deficit.

There was also genuine concern for fairness, as blue collar workers did not enjoy the same access to employer-backed defined benefit schemes of public sector employees and white collar managerial employees.

But in transforming super from employer-based defined benefits schemes – which paid out a set annual amount in retirement – to a universal defined contributions scheme, has put the burden of risk firmly on individual workers.

Eslake says this is one of the greatest injustices of the super system, often forgotten.

Rather than funds bearing all the risk of longevity and delivering adequate performance to ensure a consistent payout to retirees, my generation and those younger now bear the risk of out-living our savings or suffering poor returns.n the process, the government has created a multi-trillion dollar money pot, from which the finance sector continues to siphon off billions of dollars in fees and charges.

Meanwhile, richer Australians and older Australians have benefited the most from generous tax concessions on super which are now beginning to be closed.

In addition to a broken home ownership system, young Australians have also been gifted a superannuation system which has manifestly failed to serve their interests.

Eslake says we should be rioting in the streets. I’ll meet you outside.

y Jessica Irvine
Updatedfirst published 
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