Analysis of Australian Superannuation System

Australian superannuation system was reviewed in 1992 when a superannuation guarantee system was introduced by the government. In this system employers are required to contribute compulsorily to superannuation on behalf of their employees. Initially, the superannuation rate was set at 3% but has been increased since then to the current 9%. This does not include coverage on overtime payments but covers remunerable items such as bonuses and commissions. This system is important in that the system enables Australian employees to have access to funds upon their retirement. However, there are some flaws in the system which needs to be addressed. In this paper some of the aspects which need to be improved are analyzed. Recommendations are then given on how to effect those improvements.

One of the aspects that need to be improved is the aspect of compulsory contribution. The government requires employers to contribute to the superannuation fund compulsorily through the deduction of employees’ remunerations. In this case, employees are charged a given amount of contribution to the superannuation guarantee on their remunerations such as salary, wages, bonuses and commissions (Industry Super Network, 2010). The government derives such contributions from employers on behalf of their employees so as to ensure that all employees contribute compulsorily without default.

It is argued that fiscal policy is not being observed appropriately through a mandatory imposition of contributions. This is because compulsory contributions do not allow individuals to make their own decisions on the spending, saving and investment of their income. Different individuals have different spending and saving habits and impositions of compulsory contributions will limit their spending behaviours, hence may be demoralized and may lack the motivation to perform well at their workplace, hence leading their companies to perform poorly (Crowther, 2000). Furthermore, spending on contributions without one’s own will is an additional burden just like taxation. This limits individual’s spending, saving and investment income.

Some individuals prefer investing in long-term projects rather than saving in pension schemes. This is because saving in pension schemes does not reflect inflation rates, the changing interest rates and value of the Australian dollar. On the other hand, investing in long-term projects will take into account all the above aspects. For instance, an investor will set prices and valuation of his/her business with respect to the current economic conditions. An example that shows the inappropriateness of this policy is the case of losses to the superannuation funds occasioned by the 2008 global financial crisis (Industry Super Network, 2010). It was reported that there was a loss of $430 billion to the superannuation funds due to the global financial crisis experienced in 2008 (Main, 2011). Therefore, the superannuation contributions cannot adjust to the changing situations in the economy.

Since a constant rate is charged in superannuation scheme, economic recession such as that experienced in 2008 through the global financial crisis will limit the financial stability of the old people who depend on the superannuation funds. It is also observed that compulsory contribution to superannuation guarantee locks out the members of the private sector. Employees are protected by the fund but those who run small businesses and those who have been out of the workforce don’t benefit from the fund. Compulsory imposition of superannuation contribution is also a disincentive to investment since the funds are not available for the employees to invest until their retirement age. The employees also tend to put their trust in the superannuation funds and may not invest, believing that there is no need to do so because there are funds available for them after retirement in form of superannuation savings.

In order to make the superannuation contribution program work better, it is necessary to make it voluntary rather than compulsory. This will give an opportunity for those members who would wish to invest their funds on other investment projects do so without necessarily contributing to the fund (Fear & Pace, 2008). It also enables the individuals to make a choice of their retirement age without being influenced by the environmental factors but by their own economic conditions. If individuals use their funds to invest rather than saving in superannuation, they may attain financial stability even their retirement age and may prefer to retire early and still manage to survive throughout their old age lives.

However, since procrastination, inertia and disengagement may affect employees in voluntary contribution to superannuation, it is necessary for the government to conduct an awareness and education campaign to enable employees and employers understand the significance of contributing to the fund. Government’s investment in civic education on the need for superannuation may not be as costly as the opportunity cost which most employers incur through contribution to the superannuation funds instead of investing in other viable projects.

Another aspect of the scheme which needs improvement is superannuation co-contribution. In this plan, the government subsidizes low income and medium income earners by paying for them a co-contribution. This includes a maximum of $1,000 co-contribution since 2009-10 entitlement year. In this program, the government pays the co-contribution directly to an individual’s superannuation account. The legislation was amended to include a 100 per cent matching rate and the maximum co-contribution of $1,000. In 2009 there was a shift of the administration of the co-contribution to a new system (Main, 2011). This resulted in inefficiencies in that some entitlements which were determined in one year were paid in another. As a result, the 2009-10 data reflected an abnormal increase in superannuation entitlements compared to the 2008-09 entitlements (Taxation Statistics, 2010). Superannuation entitlements paid to women have been more than the entitlement payments paid to men. Co-contributions are also paid mostly to old people of ages ranging from 41 to 60 years.

This aspect of Australian Superannuation System does not sufficiently serve to boost the economic standards of employees. First, the program does not sufficiently cover the members of the society who deserve to be subsidized. For instance, low income earners who work in small businesses and do not contribute to the superannuation contributions are not subsidized in any way. Furthermore, subsidization of employees is also a disincentive to performance since employees whose contributions are covered by the government are reluctant to improve their positions in the social society so as to keep enjoying subsidization from the government. This also leads to overdependence on social benefits and subsidies, hence making the members of Australian workforces less motivated to work (Bailey, Joshua & Daniel, 2000). The subsidization system also keeps changing from year to year. The subsidization rate has been decreasing since the conception of the superannuation scheme. This makes the future trends of the system unpredictable for the employees. Some employees are motivated to stay in employment due to the government’s co-contribution mechanism. If such a co-contribution mechanism becomes unpredictable, the employees may not be able to adjust their preferences of work since they are not able to forecast their earnings.

To avoid this kind of uncertainty in government’s co-contribution amounts, it is necessary for the government to set a constant rate of deduction for every level of income in all sectors. Higher income earners should be covered proportionately less through co-contribution than lower income earners. This will enable employees to determine their contribution amounts in preparation for their expenditure, budgets and savings plans. If an individual’s income improves due to promotion or an improvement in his/her skills through training or education, the co-contribution from the government to his/her superannuation funds should be adjusted downwards. On the other hand, if an individual’s salary is lowered due to demotion or other economic conditions faced by the employer, the government’s co-contribution should be adjusted upwards (Fear & Pace, 2008).

Subsidization through co-contribution should also be maintained at low amounts so as to reduce the possibility of overdependence on social incentives such as superannuation funds. This also gives an individual the incentive to work hard so as to attain more income levels where their superannuation levels do not have more detrimental effects on their economic situations. According to micro-economic theory, individuals seek to meet their expenditures given their level of income, such that more expenditure requirements will lead an individual to work hard so as to attain the income level that can enable him or her meet such expenditure requirements (Griffin, 2011). However, if there are subsidies that may settle some of these expenditures such as the government’s co-contribution to superannuation funds, such an individual may not require working harder since part of his/her expenditure will have been met by the government.

As much as it may be asserted that Superannuation contributes to the financial strength and sustainability of retirees, it is also evident from this analysis that Australian Superannuation System is inherently plagued with a few flaws, especially in terms of its implementation policies. The compulsion of the superannuation system as well as the government’s co-contribution towards the fund brings about disincentives to work and overdependence on social benefits such as superannuation funds. It is also clear from this analysis that unpredictable mechanisms of the superannuation scheme make employees not to plan adequately for their retirement age. Furthermore, people who are self-employed, especially in small businesses may not be covered adequately by the superannuation system since it involves the collection of contribution through employers. Therefore, this paper recommends that Superannuation system should be made voluntary and/or the government’s subsidization through co-contribution be reduced substantially.


References List

Bailey, A., Joshua, G. & Daniel, K. (2000). Validation of a Multi-Dimensional Measure of Strategic Development Process. BJM, 2(22), 151-162.

Crowther, D. (2000). Social and Environmental Accounting. London: Financial Times Prentice 0  Hall.

Deloitte Actuaries & Consultants (2011). Dynamics of the Australian Superannuation System: The next 20 years, 2011–2030. Melbourne, Victoria: Deloitte Melbourne.

Fear, J. & Pace, G. (2008). Choosing not to choose: Making superannuation work by default. The Australia Institute Discussion Paper 103, ISSN 1322-5421.

Griffin, R. W. (2011). Management. Mason, OH: South-Western Cengage Learning.

Industry Super Network (ISN) (2010).  Industry Super’s blueprint for Australia’s superannuation system. Retrieved from October 2, 2012.

Main, A. (22 October 2011). Markets forcing retirees to work after $75bn paper loss in superannuation. The Australian, 34-35.

Taxation Statistics (2010). The Superannuation System. Taxation statistics 2008-09, 138-144.

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