Superannuation – simply called ‘super’ – is a retirement saving plan for Australian employees. Contribution-wise, employers carry the primary responsibility, followed by voluntary individual contributions, and if applicable, additional governmental contributions. Interestingly, superannuation is a financial planning term that is mostly used in Australia, and not so much for the rest of the world.
Like many other retirement or pension plans, the basic idea is the same – accumulation of regular financial contribution during the course of an individual’s working life, invested in safe, interest-bearing super fund, will result in a comfortable post-retirement nest egg.
At its core, it is hard to find fault with superannuation. There are a lot of benefits, beyond being potential ticket towards financial freedom: tax advantages, potential bonus contribution from the government, and cheaper insurance makes it a practical, safe approach.
Or is it? The times are changing, the economy appears bearish, and policies can always change.
Josh Bornstein, a Melbourne-based lawyer, argues that ‘the current (superannuation) system is riddled with serious structural and policy flaws’. He’s not wrong; here are some downsides of superannuation that you should know.
Is your employer actually paying your super?
Turns out, many employees are not receiving their entitled super contribution from their employers. Some were even purposefully duped into believing their retirement savings are growing – that’s what was shown on their payslips.
In 2014, it was reported that hundreds of thousands of you missed out on a whopping $2.5 billion of your retirement money. However, can employees take action to recover this lost source of future retirement income? Disturbingly, no.This is a massive gap in the system. And severely under-reported, considering its implications.
Are you factoring in lower returns than long-term averages?
According to experts, growth in superannuation savings are “mathematically impossible” and it would be wise for savers, especially those who are retiring soon, to prepare for up to 2 per cent lower returns.
While lower returns will not destroy one’s retirement plan, it will definitely cause a significant difference between projected and actual retirement savings stashed over the years. This may force some to accept a lifestyle downgrade – something that may be difficult to digest among older workers nearing retirement.
In the bigger picture, this will cause some workers to delay retirement as well as they struggle to make up the difference. This will impact the job market as a whole, as new graduates will not be able to replace empty vacancies at the same rate.
Superannuation policy changes: who will bear the most impact?
As mentioned in the previous paragraph, Baby Boomers will need to prepare for lower retirement savings. However, the younger generation will bear much more financial impact due to superannuation policy changes (along with sky-high property prices out of the reach of many), a new research finds.
The policy changes include: abolishing the low income super contribution from 2017, tightening of age pension means testing, and delaying the rise in compulsory super payments. These policy changes are expected to hit the low and middle income earners the most – a double whammy for young Australians who are already struggling in the job market.
Unfortunately, solutions for your superannuations woes will be largely determined by policies introduced by the Turnbull government. At writing time, Bornstein said that the ‘Turnbull government has announced it will introduce new laws designed to shift more employees into bank-owned superannuation funds’ – further downside, as bank-owned super funds tend to impose higher fees, thus eating into one’s retirement savings.
Despite the shortcomings, a compulsory retirement plan is better than none. Having said that, it would be wise to not solely depend on super, and start making other retirement plans.