The superannuation regulator, APRA, released its latest figures this week. And they are, frankly, extraordinary.
Australians now have almost $4.8 trillion in super.
That's trillion, with a 't'.
The system received $236 billion in contributions over the past year, earned an investment return of 8.6% and paid out $148 billion in benefits.
In a little over three decades, we have built one of the largest pools of retirement savings in the world.
That money is helping, and will help, millions of Australians enjoy a better retirement. It reduces the burden that would otherwise fall on future taxpayers. And it provides long-term investment capital for businesses, property, infrastructure and other assets.
For all of its faults – and I'm about to list some of them – I think superannuation is one of the best economic policies of the last four decades.
We are very fortunate to have it.
But, of course, 'excellent' doesn't mean 'perfect'.
When I posted some of those numbers on social media earlier this week, I said "For all its problems (and I'd fix many), we are very fortunate to have it.".
Some followers, very reasonably, asked me what I'd fix. Here's my answer, in 5 points:
Image source: Getty Images
1. Keep super for retirement – and keep politics out of it
Super is our money.
But it is money we are compelled to save because, left entirely to our own devices, many of us wouldn't put enough aside for retirement.
That comes with obligations, though.
We shouldn't be able to raid our super whenever a politically popular idea comes along. That includes proposals to let people withdraw it to buy a home.
Yes, helping first-home buyers with their deposits sounds attractive. I understand why people like the idea. But giving buyers more money without increasing the number of homes mostly gives them more money to bid against each other.
Prices rise. Retirement balances fall. And the underlying housing shortage remains.
Governments should also resist the temptation to influence where super is invested.
There may be excellent opportunities in housing, infrastructure, energy or Australian businesses. If a fund independently decides an investment offers an attractive return for the risk involved, wonderful.
But the decision must be made in the best interest of members' retirements – not based on the whims of politicians. Super is compulsory retirement saving, not a political piggy bank.
2. Radically simplify it
Here's a phrase I've used repeatedly: Super is stupidly complex.
There are different contribution categories, caps, thresholds, tax treatments, account types, preservation rules and withdrawal rules.
And those are only the headlines.
Some complexity is unavoidable. People have different circumstances, and a system covering millions of Australians will always need rules. But this… isn't that.
Funds spend members' money administering the complexity. People pay accountants and advisers to understand it. And those with the most money can afford the most sophisticated help navigating it.
Meanwhile, millions of ordinary Australians put super in the too-hard basket.
We need fewer contribution categories, fewer thresholds and a much simpler retirement-account structure.
Thresholds should be automatically indexed. Rules should be written in plain English. And governments should stop tinkering with the system every few years.
You shouldn't need an accountant and a lawyer to understand how to best manage your super – especially contributions and withdrawals.
3. Break the fee gravy train
Australians don't get to choose whether to participate in super. We are compelled to put away 12% of our wages. I'm good with that.
But it creates a guaranteed and constantly growing pool of money for fund managers, administrators, advisers, insurers, consultants and everyone else taking a clip of the ticket.
Some provide valuable services. Others? Well, there are an awful lot of comfortable livelihoods being funded by compulsory contributions from Australian workers.
Even apparently small fees matter when they are charged every year, on a growing balance, over four or five decades (and longer, in retirement). Those costs add up, as anyone who's seen the 'compare the pair' ads knows.
The solution? I'd create an extraordinarily low-fee default fund, run independently by the Future Fund.
It would offer a small number of simple, diversified investment options, mostly ETFs, including a low-cost growth option suitable as the default for most working Australians.
That's all most people would need.
Those wanting a different fund, investment strategy, insurance arrangement or self-managed super fund would remain free to choose one.
But other funds would have to persuade Australians to leave a very good, very cheap default option. They would need to offer better service, genuinely superior performance or some other benefit – and justify the fees they charged.
That competitive pressure would help everyone. Fees would have to fall, or value would have to rise.
(And yes, there would need to be a very high wall between the government and the fund's investment decisions.)
4. Make sure super is used in retirement
Super is supposed to provide retirement income.
It shouldn't be functioning as a tax-minimisation or an estate-planning vehicle.
That doesn't mean retirees should be forced to spend their savings quickly, or sell their growth investments on the day they stop working.
Someone retiring at 65 might live for another 25, 30 or even 40 years. Their money needs to keep working.
Retirement day isn't the end of the investing journey. For many people, it's not even close.
But there should be a reasonable expectation that super is progressively used to support someone's retirement.
We already have minimum-withdrawal rules for pension accounts. I would apply that broad principle more consistently to money left inside super after retirement.
Withdrawals should be sensible and age-based, recognising that people need flexibility, don't know how long they will live and may face significant health or aged-care costs.
People could still save or invest the money outside super. They could still leave an inheritance.
But super itself should fund retirement, rather than providing an indefinite tax shelter for the next generation.
5. Make the tax concessions fairer
Super should remain concessionally taxed. That is part of the bargain.
We lock the money away for decades, use it for retirement and receive favourable tax treatment in return.
But favourable doesn't have to mean overly generous, or unlimited.
I would give retirees a substantially higher tax-free income threshold than working Australians. Probably a universal aged pension, too. Above that threshold, retirement income would be taxed at normal marginal rates.
Most retirees would still pay little or no tax. Those receiving very large retirement incomes would make a reasonable contribution.
There is also no convincing policy justification for holding tens or hundreds of millions of dollars in concessionally taxed super.
At some point, the system stops encouraging retirement saving and starts subsidising wealth accumulation.
Of course, any thresholds should be indexed, so inflation doesn't gradually capture people the policy was never intended to affect.
Lastly, tax should apply to actual income and realised gains – not increases in the paper value of assets that haven't been sold.
And for the record… any reform should replace complexity, not add another layer to it.
None of these changes would weaken or destroy Australia's superannuation system. That's the last thing I want.
In sum…
If Australians are compelled to save part of their income, governments should protect that money, keep politics out of its investment and make the rules understandable.
Everyone should have access to an extraordinarily low-cost default, while retaining the freedom to choose something else.
Super should be used to support retirement. And its tax concessions should remain generous without becoming unlimited.
Seems pretty reasonable to me. Oh sure, those who'd be negatively affected will complain, but that's just human nature. Policy improvements need to use a broader lens.
Almost $4.8 trillion is an extraordinary achievement. The system that governs it should be improved.
Fool on!
