Against the House

The savings we are forced to deposit into superannuation funds would be better used paying off our mortgages, says Nick Cater.

For a precise explanation of the problem with superannuation, it would be hard to beat the writings of Friedrich von Hayek, and his liberal conviction that individuals use their money more wisely than the state. "The more the state ‘plans’ the more difficult planning becomes for the individual," he wrote.

Australia's Superannuation Guarantee means that the state makes the big decisions for us as we provision for retirement. Since 1992 the law has insisted that not only must we save a portion of our wages for retirement but we must save it in a certain way.

Liberals have grumbled from time to time about this socialist-inspired intrusion into our personal lives, but most have gone along with it. The greater good of steering Australians away from state dependency in retirement, with all the dignity that bestows, was justification enough.

A quarter of a century later, we find ourselves saddled with a superannuation system riddled with flaws and false incentives. Paul Keating's promise that working Australians would enjoy comfortable retirements if hey were forced to save has not been fulfilled.

Instead, Labor's grand plan has given us a huge financial services industry and the kind of anti-consumer practices now being exposed in the Financial Services Royal Commission.

One of the most prudent decisions to make in preparation for retirement is to pay off the household mortgage. If they were allowed to make their own decisions, many mortgage holders would do just that. Yet the law demands that we put 9.5 per cent of wages into savings.

By any measure, it is a terrible deal. In the 25 years since introducing compulsory super, fund returns have averaged 7.6 per cent. Over the same period the standard variable home loan rate quoted by the Reserve Bank has averaged 7.2 per cent. Even allowing for the tax advantages in superannuation, the superannuation fee machine makes super a less lucrative return than if the money had instead been used to pay off the mortgage.

The institutions get to clip the ticket at both ends. They might give the super funds as little as 2 per cent for money on deposit and meanwhile charge the punter 5.5 per cent, a 3.2 per cent clip. However the clip is bigger as the banks are also in a large proportion of cases getting fund management fees of say 1 per cent and their share of adviser fees of say .5 per cent.

The size of our collective superannuation pool - $2.2 trillion - might suggest our compulsory savings are working. The other side of the ledger - housing debt - paints a different picture. In 1992, when compulsory superannuation was introduced, Australia's housing debt was a mere $100 billion. Today it is more than $1.7 trillion, a 1700 per cent increase. To put that figure in perspective, business lending has grown from $200 billion to $900 billion today, a 450 per cent increase.

The growth in Australia’s housing debt has mirrored the growth in super assets. It would be nice to think that Hayek and other free-market theorists can show us the way out of this mess. Sadly, however, like the energy market, things are too far gone to simply let the market rip. Distortions built into the system are hard to eradicate, particularly when there are so many vested interests that want them to stay.

A good government will find ways to empower the individual, by giving them greater choice in retirement savings. John Howard's self-managed superannuation reforms were just such a move. A good government will examine the findings of Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry carefully, and do what needs to be done to restore power to the costumer.

A bad government will respond to the retirement income challenge by putting even more controls in place, and turn a blind eye to the anti-competitive practices of superannuation funds. Labor is tied to the union movement, which profits mightily from industry superannuation funds. It would abolish self-managed funds, given half a chance, and force workers to invest even more into superannuation when they would be better off paying down their house.