Australian superannuation – a local perspective

Around the world there are a vast number of ways that countries seek to provide financial support to its retirees. I certainly won’t profess to being an expert in any, including my home of Australia, but I thought it might be interesting to give some insight into how our superannuation scheme works, along with some of my thoughts.

Back in 1974, around 32% of Australians had access to retirement funds via a range of pension schemes. This obviously left a lot of Australians without any formal structure to save and invest for their retirement. This meant they had to rely on a mix of their own savings and the government aged pension.

In 1983, the first steps towards our current superannuation scheme began. In an era when trade unions were a much more powerful influence on government policy than today, the unions agreed to forego a 3% wage increase, which would instead be made as a contribution to a new superannuation system that would apply to all Australian workers.

In 1992, the employee contributions were matched with 3% paid by the employer. This signaled the start of the superannuation scheme as we know it today. Over time, with some hiccups along the way, there has been bipartisan support to steadily raise the level of contributions being paid. This currently stands at 11.5% of normal time wages (excluding overtime, bonuses etc.) but will increase shortly to 12%.

Like most large, government regulated schemes, there is lots of complexity in our superannuation system. But I like to keep things simple, so here are the bare bones:

• The employer pays 12% of the employee’s ordinary time earnings (excluding overtime, bonuses etc.) into an approved fund. This applies to all employees regardless of how much they are earning or their age.
• For people earning less than $250,000 each year, this is taxed at 15%. For those over $250,000 per annum, this raises to 30%.
• Employees can contribute extra to their superannuation fund. These are also taxed at 15% / 30%, which offers a considerable tax saving compared to normal income tax.
• For those born after 30 June 1964, retirement funds become available from age 60. For those born before on or before that date the age to access superannuation is lower.
• Once in retirement phase, there are range of options as to how the funds can be withdrawn, including as a lump sum or as an income stream.

The basis of the Australian “super” scheme is simple, but it has some interesting effects and outcomes.

Tax effectiveness

The advice from any accountant or financial planner when it comes to reducing tax is “put more into super”. The gap between the superannuation tax rate and our income tax rates makes it highly attractive to contribute more into your fund, especially for higher earners with some disposable income to spare.

As a business owner, this can be a frustrating piece of advice. I would love to put more into super, if only it wasn’t tied up in stock, debtors etc.!

A large bucket of money

As of mid 2024, Australian superannuation funds constituted around $4 trillion. For a small nation like Australia, this represents a large pool of capital that needs to be allocated.  And for the 12 months prior, net inflows were around $65 billion.

To put this in perspective, the total market capital of our ASX200 (our version of the S&P 500) was around $2.45 trillion. So super funds represented 160% of our total stock market, and the net inflows for the year represented around $2.6% of our total stock market.

This has obviously meant that funds have had to be allocated in a range of investment vehicles, including global share market funds and unlisted funds such as infrastructure. I think that this is a positive for Australians as we are forced to avoid too much “home bias” with our super funds.

A cultural fit

I am blessed to have an intelligent sister who happens to lecture in political science at Australian National University. A large part of her role has been surveying Australians regarding a range of views about democracy and democratic systems. Similar surveys are conducted globally, giving a chance to compare various views across countries. My sister’s summary often boils down to Australians being a pretty compliant culture.

Despite whatever our tourism marketing and Crocodile Dundee might suggest, our nature seems to be to accept rules and regulations put to us, as long as there seems to be some good reason behind it. As an example, Australia have readily accepted gun laws that would be seen as quite extreme to other parts of the world.

So the idea of a compulsory savings scheme sits OK with Australians, but I imagine that in many parts of the world this would be seen as draconian and unacceptable.

Future benefits

When working as an employee or running a business, superannuation has a cost. The 12% put to super funds could be either additional wages for the employee or a reduced cost for the business (likely some combination of both).

But undoubtedly the pain felt today will provide significant benefits for Australians and the Australian economy in the long run.

I think that people probably feel more comfortable about their retirement knowing that their super fund is steadily increasing right throughout their working life.

For our government, the reliance on our aged pension scheme will reduce in the future, which takes some strain off our national budget.

As an employer, it feels good to see funds going into our employee’s super funds each month, thinking that this builds some future stability and comfort for them.