We would all benefit from higher retirement incomes, though in raising the rate of compulsory superannuation there is a danger of robbing Peter (current income, already inadequate for some people) to pay Paul (retirement income). Is there a middle ground?
Paul Keating has been legacy defending again, recently calling for his original plans to increase compulsory superannuation contributions from 9 to 12%, and eventually to 15%. The Government have headed off the proposal, most likely on the back of recent Treasury advice (as input to the Henry Review) that indicated that the current 9 per cent would adequately provide for retirement incomes, and that voluntary payments are available to those that wish to boost their super.
The Unions are supporting an increase to 15%, again demonstrating that their core constituency is the full-time employed, more likely to be card-carrying members, rather than those with tenuous links to employment. The risk for the latter is that their income is currently inadequate in meeting the cost-of-living at any reasonable standard, and taking an extra 3 or 6% from their income would be a disastrous social policy decision.
But, as in all policy areas, there are other options.
In 2007 the New Zealand Government introduced the KiwiSaver program to promote retirement savings. One key difference from the Australian superannuation system is that although workers are automatically enrolled when starting a new job, there is the option to opt out. So, whilst not a compulsory scheme, it takes advantage of our natural bias to pick default options.
Other incentives to remain in the scheme are offered, such as a $1000 ‘kick-start’, and payment holidays are allowed. The payment holiday would be a particularly useful way to assist households in crisis, for example sudden illness in the family, or loss of employment for other household members or other unforeseen costly events.
Politically, I suppose this is what you do when you don’t think the public will swallow a compulsory scheme, but that there are benefits both nationally and for individuals for increasing retirement savings.
The Kiwisaver program could teach us how to increase retirement savings in Australia from the current compulsory 9%, which is combined with saving incentives that benefit high income earners to the detriment of the overall tax take, to higher compulsory super rates.
Upon entering into new employment, a default option of 12% super could be offered, with an option to opt-out, down to 9%, available between day 14 and 56 of employment (borrowed directly from Kiwisaver). Public education, and Union campaigns, could be used to ‘normalise’ the decision to remain on 12% where it could be afforded.
Overtime the 12% would become standard and could become compulsory, and perhaps an opt-in for 15% could be introduced.
Options for drawing on portion of accrued super for expenditure that would likely be in the long-term benefit of the individual, for example expensive medical procedures to ease chronic pain or illness, first home-owner deposits, education after losing employment or assistance in times of crisis, could also be available after the ‘opt-in’ option has been maintained for a certain period of time.
Another benefit of this scheme is that often, though not always, the start of a new job means a higher income, and therefore the extra percentage super payment would be less noticeable as a change in income.
If Australia’s policy makers are willing to consider innovative ideas in the way seen across the Tasman, the application of behavioral psychology to public policy could provide an increase in retirement savings without the negative social implications likely under a straight-up rise in the rate of superannuation.