Why Australians Don't Put Enough In Their Superannuation

Australians are increasingly relying on superannuation for their retirement income, but despite more than 20 years of compulsory super, many people are not retiring with enough.

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The assets under management of the superannuation sector now exceed $1.8 trillion (greater than annual GDP), but analysis by superannuation research firm Rice Warner suggests the retirement savings gap -- the national shortfall in savings for an adequate retirement -- is still as high as $836 billion.

As well as a mandatory saving mechanism through employer contributions, the Australian super system was designed to allow people to make additional savings for retirement through voluntary contributions.

The most recent ABS data show the participation rate (in voluntary contributions) has fallen steadily since 1993, from half to less than a quarter of employees in 2007. This trend is observed for all age groups, and a recent survey on women's superannuation by Rice Warner shows that the lack of take up is still prevalent.

So what's stopping people making more voluntary contributions?

What we know about super decisions

Building on PhD work by Dr Jun Feng, a recent study by researchers from Monash University, UNSW and the University of Western Australia, focused on the two main types of voluntary contributions -- salary sacrifice and post-tax contributions -- to provide a better understanding of the voluntary saving decisions people make.

Using several population survey data sets, the study shows that participation rates increase with age and income, and voluntary contributions (particularly by salary sacrifice) are more likely to be made near retirement and by high income earners.

Job type is also important: people in more stable jobs (such as those in permanent positions and/or working in a large firm) have a higher propensity to make extra contributions to top up their retirement savings. But the research did not find differences in participation by education level and gender, suggesting income is the real driver of the gap in super contributions for women and the less educated.

The study also explored how superannuation tax design influences voluntary contribution decisions. One key incentive for salary sacrifice contributions is the relative tax benefit compared to taking remuneration as income. Employer and salary sacrificed super contributions are generally taxed at 15 per cent.

But despite the generous tax benefits (as high as 31.5 percentage points for those facing the highest personal tax rate), a forthcoming research paper in the journal Economic Record fails to find a significant difference in contribution patterns as individuals pass through the personal income tax thresholds.

Another important finding was a negative relationship between home-ownership and voluntary contributions. Households with mortgages -- as well as renters -- were less likely to make voluntary contributions.

What's behind these decisions?

The low participation in voluntary contributions can be explained by a combination of socio-economic, behavioural and psychological reasons.

Unaffordability is a major barrier and household budget constraints are often quoted as the main reason for not making voluntary superannuation contributions. ABS survey data indicates that individuals who do not feel they earn enough, cannot raise emergency funds or are paying off debt/mortgage are much less likely to make any additional contributions. This is supported by the Rice Warner survey on women's superannuation where six in ten women nominate affordability as a barrier.

Poor basic superannuation knowledge and financial literacy, and lack of retirement planning could also explain the lack of participation in voluntary contributions. Only around 40 per cent of superannuation fund members can correctly answer three questions which test their understanding of interest rates, inflation and diversification; and the overall knowledge and understanding of the superannuation system is poor. Results also suggest a strong relationship between financial competence and retirement planning, and by implication the likelihood of making voluntary contributions.

Finally, stickiness to default settings may be at work. People may consider the mandatory employer contribution rate (currently 9.25 per cent) as an appropriate benchmark because it's endorsed by the government. They may pay little interest to superannuation because the contributions are paid by employers, or they may simply be susceptible to status quo bias or procrastination. Although the recent increase in the Superannuation Guarantee rate and the public debate on retirement savings may have raised the public profile of superannuation, recent research shows that interest in superannuation is not readily transferred to actual behavioural change.

Getting people to contribute more to their super will require a combination of policy intervention, and industry and employer efforts to increase awareness, engagement, superannuation knowledge and financial competence of super fund members, especially younger members.The Conversation

Jun Feng is Research Fellow at Monash University. Hazel Bateman is Associate Head of School, Australian School of Business at UNSW Australia. Paul Gerrans is Professor of Finance at University of Western Australia. Jun Feng receives funding from CSIRO-Monash Superannuation Research Cluster. Hazel Bateman's research mentioned in this article is funded by ARC DP1093842 and LP110100489. Paul Gerrans receives funding from CSIRO-Monash Superannuation Research Cluster.

This article was originally published on The Conversation. Read the original article.


    I am probably just young and dumb right now, but super annuation feels like im just throwing money to the wind, my parents lost a high percentage as any others did with the global financial crisis in 2008, and they keep raising the age to access i hopeing you die beforehand.

    I believe you can access it all if you permanantly move overseas and renouce citizenship, so theres always that.

    Without knowing your parent's exact situation idlike to make two points in relation to your statement. Unless your parents had investments in companies like Storm Financial, the money didn't actually go anywhere, the GFC was a market correction, the asset (shares etc) didn't disappear, the value just dropped. From memory, the superannuation industry in Australia has now increased more than the value lost during the GFC. the people most directly affected by the GFC with super were those who were actively drawing down on their super at the time as they had less actual funds available. Superannuation investments go up and down, all investments have a risk profile where they expect to lose money some years (high risk may expect to lose money 1 year out of 5). Over the long term, super growth is pretty reliable.

    I can see your point about it seeming like 'throwing money to the wind' when you are young and that the government keeps raising the preservation age. But think about this, the earlier you invest in super, the more you will have by retirement age, and you seriously don't want to be relying on the age pension. I'm in my late 40's and accept that there will probably not be a liveable age pension by the time I retire. That being said, a young person would be better investing any extra cash into paying off their mortgage (if they have one) before topping up their super. Even with interest rates at 'historic lows', it still makes sense to pay down a mortgage at 5-6% interest than investing extra in super with an annualised return of about the same (or slightly more) over the medium term. Note, I am not a financial advisor, just someone who does take an interest in how super works.

    Last edited 20/04/14 10:48 am

      But that's the point. Regular people don't understand that investments vary and when shares go down they just see that they are losing their money... THEIR money!

      They don't realise that the share value will (probably) go up again by the time they retire in 20, 30, 40 years time. All they know is that they've lost their money now, and so they lose faith in the whole process.

      People just don't have such long term concepts in their minds

    How about compulsory financial education in high school?
    Every kid, potentially entering the workforce, should know about tax, investments and retirement planning ...

    What I'm getting out of this article is "The compulsory super amount is not high enough for most people and most of them don't pay enough voluntarily". So the only way I can see to fix the problem is raising the percentage to say 11% gradually over the next few years. The only other option is raising the government pension but I'm sure Tony and the other current high income earners will love that.

    Steveo, they're raising it to 12% by 2022 eventually (at least at the moment). It would have been by 2020, but, well, Abbott wanted to give businesses a tax break at employees' expense, so he delayed the rise from 9.25% to 9.5%, which was supposed to happen in July 2014, until 2016.

    Glad to see this little article, years ago we were told super is compulsory because when us "baby boomers" retire there would be no money for pensions. Over the years successive governments changed the rules and played with the super to the point where most of us, at my age, (ancient) gave up because it was too much to think about.
    I would like to know, if everyone is supposed to have superannuation today why is the government claiming the pension costs are increasing and will be out of control in the future?

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