Our compulsory superannuation retirement scheme is creating a wealthy middle class, with many millionaires and at a faster pace than the rest of the world, according to Boston Consulting Group (BCG).
A recent report by BCG showed that Australia's wealth jumped by 16% to $3.52 trillion in 2014. That's above the world at 12% and in two years, our wealth has risen by $1.04 trillion or $1.4 billion each day, according to Fairfax newspapers. The number of millionaires has increased by 18% last calendar year to 215,000.
I'm not sure how they calculate people's wealth, but the median house price in Sydney is approaching $1 million and the population of Greater Sydney, which includes the Blue Mountains and Central Coast, reached 4.84 million in June 2014. That suggests there are many more 'asset rich' millionaires in Sydney that the statistics suggest.
BCG's head of financial services Andrew Dyer said that Australia's compulsory superannuation savings system was responsible for the bulk of the nation's wealth boom.
"What we are starting to see in Australia is the legacy of people being forced to save money through superannuation for nearly 25 years and the impact of compound interest over that time. Our super system is working well at safeguarding some of people's wealth for retirement, but there is definitely scope for the system to be further strengthened".
As Fairfax media reports today, homeowners and investors collectively made $13.8 billion in profits from selling property, an average of $230,633 during the first three months of this year, according to CoreLogic RP Data.
More than a third of sellers doubled their money and just 9% of those selling their property recorded a loss. No wonder property has been the go-to asset class for many Australians for many years – despite underperforming other asset classes, including stocks, over longer periods. Don't forget that someone selling their property for more than double the price they paid for it 10 years or more prior have made around 7% compound growth per year.
When dividends and franking credits are included, stocks listed on the ASX have been shown to roughly grow by 10% a year. Over the long term, that 3% difference can make a huge difference, so it makes sense to have at least some of your savings in shares.
Still, Australians have more than $2 trillion inside the superannuation system, rising by 14.3% in the 12 months to March 2015, according to the Association of Superannuation Funds of Australia (ASFA). $595 billion of that is held within self-managed super funds.
But despite the apparent wealth, it seems the assets are accruing to our wealthiest households at a faster rate than the rest of the country. Private wealth in households in the range of $1 million to $5 million rose by 26% versus the national average of 16%.
And still many of our retirees won't have enough in super to live on when they retire. When calculations suggest we now need more than $1 million in income generating assets when we retire to live a comfortable life, it's not surprising that the number of millionaires is growing fast.
As I wrote earlier this month, superannuation is still a highly-effective way of accumulating savings for your retirement, despite government's plans to reign in some of the excesses.
BCG's Dyer supports the government's plan to tighten eligibility criteria for the aged pension, which is designed to force retirees to use more of their super rather than rely on the pension for income. It seems many of our retirees want to pass on something to their children when they die – not a bad aspiration at all. But at the same time, Australia as a nation can't afford to provide all retirees with a part or full pension and for us to use the superannuation system as a vehicle to pass on our savings instead.
Foolish takeaway
It still makes sense for us to use superannuation savings to support us in retirement but also have investments outside of super as a nest egg the government can't touch easily.
