Superannuation in Australia: a trillion-dollar heist?

I’m an Australian who has been living outside Australia for 15 years. Now that I’ve returned to Australia during the coronavirus pandemic, I’m getting to know some of the idiosyncrasies about the Australian way of life.

One of these is the compulsory worker contribution to superannuation funds. In fact, it’s more than an idiosyncrasy. I’m fast learning that superannuation in Australia is a rort.

Quick note: For people reading this from outside Australia, a superannuation fund is similar to a pension or a national 401(k). Except it’s compulsory and you can’t access it until retirement.

This may seem like a dry topic, but try to stick with me. Because it goes to the heart of what’s wrong with modern-day capitalism. It highlights how Australians lack the basic freedom to spend their own money as they see fit.

I’ll also introduce to you an unlikely character in the fight to fix Australia’s superannuation system.

But first, let’s talk about what superannuation actually is.

What is superannuation?

Superannuation in Australia is money that’s put aside until retirement. It’s compulsory savings and is made available upon retirement.

Superannuation funds have grown to over two trillion dollars under management. The funds own about 20% of Australia’s stock market, and there is enough money in them to buy the Australian stock market outright.

The key point about Australia’s system is it is compulsory for workers to contribute 9.5% of their salary to their superannuation fund.

On the face of it, superannuation funds could be revolutionary. Technically, the workers of Australia own 20% of the means of production. Karl Marx would be dancing a little jingle in his grave.

But the reality is far different. Workers have no idea where their money goes. The money is managed by bureaucrats with little accountability to the Australian people. And workers can’t access their own money until retirement.

My political perspective was shaped by my Labor-voting parents. I’d always unquestioningly believed that Australia’s superannuation scheme was a groundbreaking initiative by Prime Minister Paul Keating in the 1990s. And perhaps the intention was sound enough.

But what has Australia’s trillion-dollar superannuation scheme become?

I was confronted with the reality of Australia’s superannuation system after picking up a copy of Bad Egg by Andrew Bragg. Bragg is a Senator for New South Wales and has written an expose of this system.

Bad Egg is one of those little gems that gets you immediately thinking differently about an important topic. At 122 pages, it’s an accessible read and contains a roadmap for correcting Australia’s trillion-dollar heist.

Personal freedom and Australia’s trillion-dollar heist

The general idea of capitalism is that personal freedom results in better outcomes for all.

According to Bruce R. Scott from Harvard Business School:

“Capitalism is often defined as an economic system where private actors are
allowed to own and control the use of property in accord with their own interests, and
where the invisible hand of the pricing mechanism coordinates supply and demand in
markets in a way that is automatically in the best interests of society.”

For capitalism to work as intended, we need to make purchasing decisions in our best interests.

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Superannuation in Australia has the potential to be a revolutionary force – at an individual or societal level.

At an individual level, superannuation funds could help someone purchase their first home (in a market that is becoming increasingly inaccessible). It could be used to pay for medical costs. Or invested in education.

At a societal level, workers who believe strongly about a social issue could actually do something about it. For example, those concerned about climate change could divest their investments from fossil-fuel companies.

With personal freedom, capitalism works as intended and helps individuals live better lives while evolving society in a way congruent with people’s values.

But none of this is possible under the current system. The Australian Tax Office has the following to say if you want early access to your own money locked up in superannuation:

“You can only have early access to your super in very limited circumstances. Be aware that some promoters claim to offer early access to your super by transferring your super into a self-managed super fund. These schemes are illegal and heavy penalties apply if you get involved.

The superannuation system is broken

Writing in The Monthly, Richard Dennis says Australia’s superannuation system is broken:

“Australia’s superannuation system is so big that it has broken the categories of public and private ownership and, in turn, we are currently running an enormous experiment in a new form of capitalism without capitalists. And the public debate about how to regulate it is broken too.”

What’s more, the bureaucrats running Australia’s superannuation funds are voting against acting in the interests of the people. As Dennis says:

“Last year, the bureaucrats who run AustralianSuper, acting on behalf of their 2 million members, voted against 11 shareholder resolutions designed to improve the climate performance of the companies they hold shares in. This included voting against a proposal to mandate Rio Tinto’s disclosure of its transition plan from coal, and another proposal to stop BHP funding lobbying campaigns that were inconsistent with the goals of the Paris Agreement. UniSuper voted against all climate motions put forward in Australia. They don’t have to tell us why.”

The problems with Australia’s superannuation system boils down to this:

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Australians are forced to contribute money to an investment fund which (a) they cannot withdraw from for a very long time, and (b) they have no say over how this money is invested.

Effectively, we’re being told that other people know better than us how to spend our money. You couldn’t design a more elitist superannuation system if you tried.

Andrew Bragg’s plan to reform superannuation

In Bad EggSenator Andrew Bragg lays out a vision for what the Superannuation system could become.

Bragg’s goal is not to abolish superannuation. He believes superannuation is a great idea. At its best, superannuation is “a policy to reduce the cost of an aging population and boost the quality of life of Australians in retirement.”

However, superannuation as an idea has not been supported with a clear policy framework guiding its execution. It’s been built “based on the idea that government knows best.”

What I like most about Bragg’s policy vision is that he doesn’t aim to throw the baby out with the bathwater. He doesn’t hold back when critiquing the origins of Australia’s superannuation system. But he is a pragmatist, aiming to reform the superannuation system in some key areas.

Here are a few of the key ideas shared by Bragg in Bad Egg.

Mandatory participation for each Australian should be abolished

I understand the purpose of superannuation is to get more people saving for their retirement. This makes sense on the face of it.

But it’s not fair that everyone should be required to save the same amount. If you’re struggling to make ends meet, the 9.5% compulsory contribution could be better put to use here and now.

Critically, Bragg believes that mandatory participation for each Australian should be abolished.

Instead, he believes that the Superannuation system should be voluntary (especially for those making under $50,000 a year).

If a worker opts out, then in effect they get a 9.5% pay raise each year (potentially paid as a tax refund).

The tradeoff of course is that this money is not invested for retirement.

Making the funds available for first home buyers

The Superannuation scheme has a relatively new program that allows users to access their voluntary contributions to pay for a new home. Andrew Bragg wants to expand this. He believes that you should be able to use your mandatory funds (the employer-based portion) to pay for your first house.

There certainly is a logic to this; homeownership historically is a powerful means of creating lasting wealth. Accessing one form of investment to create another doesn’t seem counter to the spirit of the superannuation vehicle itself.

According to Bragg, there are already caveats to the Superannuation scheme: the First Home Super Saver, the newfound ability to access $20,000 due to COVID-19, and other hardship withdrawals.

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Since these caveats and exemptions already exist, why not take a holistic view of the system, and reconfigure it to better suit the needs of Australians?

On the other hand…

One of the main criticisms lobbied at the idea of making Superannuation voluntary is that Superannuation works best when everyone participates. Proponents liken it to vaccination, where everyone needs to be inoculated in order to keep the population safe.

The chief executive of the Association of Superannuation Funds of Australia, Martin Fahy, says the following:

Bragg isn’t deterred by this argument. He points to the recent decision to allow early access to $20,000 per saver due to COVID-19, noting that this new change will cost $27 billion from a Superannuation system worth over $2 trillion.

That’s less than one percent. Voluntary decisions to withdraw from the Superannuation system will not fundamentally destroy the system itself.

Who owns your money?

Superannuation may seem an unlikely topic to explore on Ideapod. But there are a number of important themes in this story.

The first is around the concept of money. We have a free masterclass playing with Rudá Iandê on prosperity. In the masterclass, Rudá encourages us to make conscious decisions about where we spend our money. Money is energy, after all, and how we spend money has a big impact on what’s happening in the world.

I was in the masterclass as the host, and it was a very profound moment for me. I realized that my relationship with money is important. I have been reformulating my relationship with money by being mindful of where I spend it. My decisions as a consumer are constantly recreating the world. My money goes towards a vision of the world that is aligned with my values.

But if I had been living in Australia for the last 15 years, almost 10% of my income would be going into superannuation funds that I have no control of. I wouldn’t be able to exercise any autonomy in trying to make the world better. I would be completely disempowered by the system.

What’s more, my money would be in the hands of bureaucrats with very little accountability to me (or any other superannuation contributor).

Superannuation in Australia is a perverse example of modern-day capitalism. It seems like a good idea on the face of it. It probably was once. But superannuation in Australia desperately needs a new plan.