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Compulsory super - not so super duper

By Mirko Bagaric - posted Monday, 20 February 2006


It is time to scrap compulsory superannuation.

The proposal by Finance Minister Nick Minchin to use the government’s budget surplus to scrap the 15 per cent contributions tax on superannuation has received widespread support except from those who matter. Federal Treasurer Peter Costello has rejected the plan on the basis that superannuation is already concessionally taxed.

It’s a pity that the treasurer didn’t take the time to consider reform of the superannuation industry more generally. If he did so with an open mind, he would be very enthusiastic about scrapping the notion of compulsory superannuation which forces us to pay 9 per cent of our wages to a superannuation fund to manage for us until we hopefully reach retirement age.

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The superannuation juggernaut that was introduced in 1992 by the Federal Government, against alarmist predictions that we can’t afford to sustain an ageing population, needs to be halted. The main winners from this meddling, coercive policy are the superannuation industry which makes hundreds of millions of dollars annually charging us fees for money we are forced to hand over, and public companies in whom fund managers are effectively forced to purchase shares due to an absence of other investment vehicles (thereby artificially driving up the value of stocks).

The government should cease the policy of compulsory superannuation and allow us to access the approximately $600 billion dollars that we have been forced to hand over during the past 14 years. Provision should be made for our old age by abolishing the erroneous notion of retirement and by providing a non-means tested pension to all Australians.

The ageing rationale which underpinned the move towards compulsory superannuation was flawed at the time. It is even more clearly flawed now.

First, it assumes that productivity per worker would remain constant in the foreseeable future. This is wrong. Increases in workplace efficiencies more than compensate for the proportionally fewer people of working age.

Being old isn’t what it used to be in terms of productivity. Technological advances have brought about considerable increases in work efficiencies. A process that in times gone by required considerable human exertion can now be accomplished with a push of a button - even grey-heads can do that.

As a result of these new efficiencies, a government paper in 2003 projected that GDP growth per capita in the next few decades to be between 1.5-2 per cent. This will ensure that in the future despite a smaller percentage of the population being in the workforce, total income per capita will remain similar to what it is today.

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Moreover, while in the foreseeable future there will be proportionality more dependant old people, the community will make enormous savings by not being required to fund the education of the proportionally fewer young people.

Another problem with compulsory superannuation is that it compounds the problem it is meant to solve. One of the main reasons that couples do not have children is because they have insufficient means to support them. A 9 per cent reduction in income can logically only increase this problem. The best way to encourage more children would be to give more money to people during their child-rearing years. This is the reason for the success of the $3,000 “baby bonus”.

Third, the ageing rationale assumes static retirement patterns. The notion of going from 100 to zero work intensity the day one reaches 60 or 65 is a folly. Many people view their job as a defining aspect of their personhood. Surveys show that on average employed people are 17 per cent happier than those without jobs. It should come as no surprise that Citibank's latest retirement index shows that almost one million retirees have re-commenced work after retiring.

The studies also show that overwork is also detrimental to wellbeing. The way to maximise the economic and psychological benefits from work is to spread out our working years, thereby facilitating a work-life balance during our entire adult life.

To the extent that the notion of retirement remains part of our terminology, it should be understood in an incremental sense. People should reduce their weekly hours from say 40 to 30 hours at the age of 60, then to 10 to 20 hours at age 65 and 4 to 10 hours thereafter. The overriding principle is that people should be encouraged to perform the amount of hours that are commensurate with their physical and mental capacity and the satisfaction and stimulation they derive from work.

The final reason that compulsory superannuation should be scrapped is because it is highly coercive. Workers have the right to enjoy the fruits of their labour and should not be forced to defer their spending and wellbeing. A system of forced savings is counter to notions of personal responsibility and offensive to the intellect of citizens.

Coercive laws are only legitimate where the government can demonstrate that it will encourage compliance with fundamental moral norms that affect the wellbeing of others or where they will promote the welfare of each individual. This test has not been satisfied in relation to compulsory superannuation.

The superannuation experiment is flawed and should be halted before our market economy is distorted any further through the coercive funnelling of billions of dollars annually to an industry that does nothing to compete for our money.

All of the money currently in superannuation should be made available, now - or at least progressively over a period of five years - in order to prevent a huge injection of funds into the mainstream economy.

If we are allowed to access our superannuation, the cautious punter may still elect to leave the money exactly where it is and continue to make superannuation contributions at the same level. Others will withdraw their money and use it to repay their mortgages and car loans. Some will take the lead from George Best and “invest” it in fast cars, dinners and holiday, but so what, it is their money and presumably they will enjoy it - the notion of deferred happiness should not be taken to extremes.

If you decided to reduce your superannuation contributions, this does not necessarily mean that you will pay the price later in the form of having less to live on in your older years. Modelling which compares the efficacy of superannuation with other forms of investment is complex due to the large number of assumptions involved, such as the likely return of superannuation funds over a 30-year period and long-term inflation rates. However, a number of models suggest you will have more resources at retirement if you plough your extra hard earned cash into your mortgage (where most people effectively get a guaranteed 14 per cent return) than into the lap of a hungry fund manager.

Sounds too good to be true? Well, not this time - just look across the Tasman. New Zealand does not have an individual compulsory superannuation scheme. Rather, it has a non-means tested pension, available to all of its citizens regardless of their wealth. Is it any surprise that when in 1997 New Zealanders were asked to vote in a referendum on whether a superannuation scheme similar to Australia’s should be introduced, 92.8 per cent of the population voted against it?

It’s about time our government allowed us a say regarding what we want do with our money.

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A version of this article was first published in The Age on February 2, 2006.



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About the Author

Mirko Bagaric, BA LLB(Hons) LLM PhD (Monash), is a Croatian born Australian based author and lawyer who writes on law and moral and political philosophy. He is dean of law at Swinburne University and author of Australian Human Rights Law.

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