The analysis clearly shows that both consistent and one-off saving in superannuation is very worthwhile over a wide range of income levels. It also confirms that saving using the superannuation system remains very much better than saving outside superannuation6. Further, contrary to some claims, it shows (particularly through Charts 3 and 4) that the system is broadly equitable and treats low to middle income earners well.
For a person on $40,000, around median earnings, 3% consistent (optimal) saving within superannuation over a 30 year working life, leads to 44% more private accumulation at retirement than achieved by the SG alone, with part of this coming from the co-contribution. By way of comparison, saving the same amount outside superannuation gives a 20% higher accumulation. Using superannuation, the person’s retirement spending, including a part age pension, rises by about 11%. His spending replacement rate in retirement rises significantly from 72% to 82%.
For the high earnings $150,000 case, the rise in accumulation at retirement is 35%, compared with 15% outside superannuation. Removal of the surcharge results in a 13% higher accumulation at retirement compared with the base 10% surcharge case. The 3% (pre tax) additional saving during working life flows through to a sizeable 18% increase in retirement income. After removal of the surcharge, the replacement rate for this case only rises from 38% to 46%. At this high income range more than 3% extra voluntary contribution may well be desirable.
Overall, the analysis demonstrates that the current system is effective and concessional, and is projected to deliver very good expected outcomes to those prepared to save even moderate amounts above SG. Moreover it does so across the range of income levels, delivering strong results for low and middle income earners as well as for high income earners.
These strong incentives to save more also have aggregate impacts. There is likely to be around $3.5 billion additional flow into superannuation resulting from the policies, representing an additional flow of around 10% of base contributions. Most of this additional flow will be a net addition to private saving.
6 While this paper only considers ungeared investments outside superannuation, previous papers by the authors eg Rothman, 2000, show that superannuation will often be the better investment even compared with geared investments.
REFERENCES
APRA Quarterly Superannuation Financial Performance Statistics, December 2004
Connolly, E. and Kohler, M., ‘The Impact of Superannuation on Household Saving and Wealth’, Paper to the Eleventh Annual Colloquium of Superannuation Researchers, University of New South Wales, July 2003
Investment and Financial Services Association, ‘Government Co-Contribution to Superannuation – Market Research’, May 2004
Rothman, G., ‘Assessing the Tax Advantages of Investing in Superannuation’, Paper to the Eighth Annual Colloquium of Superannuation Researchers, University of New South Wales, July 2000
Rothman, G., ‘Tax Advantages of Investment in Superannuation – In Bad Times as well as Good’, Paper to the Eleventh Annual Colloquium of Superannuation Researchers, University of New South Wales, July 2003
Rothman, G. and Bingham, C., ‘Retirement Income Adequacy Revisited’, Paper to the Twelfth Annual Colloquium of Superannuation Researchers, University of New South Wales, July 2004
The Treasury, Tax Expenditure Statement 2004, Canberra 2005
Tinnion, J. and Rothman, G., ‘Retirement Income Adequacy and the Emerging Superannuation System – New Estimates’, Paper presented to the Seventh Colloquium of Superannuation Researchers, July 1999