Kai Swoboda, Economics
Key Issue
The 45th Parliament is likely to consider a range of changes to superannuation policy settings.
In considering these changes, there are a number of broad external influences that may affect the landscape for superannuation funds and the retirement needs and outcomes of fund members.
At March 2016, the total value of assets in
superannuation exceeded $2 trillion; more than the annual output of the
Australian economy (Figure 1).
Figure 1: Superannuation assets, 1998 to 2016
Source: Australian Prudential Regulation
Authority and Australian Bureau of Statistics.
The superannuation system will continue to grow
over the medium to long term. Recent projections included in the Financial
System Inquiry interim report suggest that superannuation assets will reach
between $9 and $13 trillion by 2040. There are a number of influences
on this growth, including policy settings.
Election policies and inquiries underway
The alternative superannuation policy measures
presented by the major parties for the 2016 election included 2016 Budget
measures which propose changed tax concessions. The
Government has committed to advance these proposals in the 45th Parliament
after further consultation on draft legislation. The Government will also
consider the fate of measures that were not fully considered by the previous
parliament. These include governance changes for superannuation funds, broadening
choice of fund arrangements and changes to penalties for employers who make
late superannuation contributions on behalf of their employees.
The Productivity Commission is conducting two
inquiries and can be expected to propose changes. In the first, it is
developing criteria to assess the efficiency and competitiveness of the
superannuation system. In the second, the Commission is developing a workable
model, or models, for allocating members to superannuation funds if the member
does not choose one.
Demographic ageing
Changes in Australia’s population structure and the
impact of ageing have been well-documented. Increased life expectancies, higher
labour participation and rising expenditure on aged care, health and pensions are
all outcomes of these demographic shifts.
Superannuation policy settings will play a role in
adjusting to an ageing population, such as mitigating the impact of ageing on
labour markets by promoting the participation of older
people. Policy settings may also have a role in addressing the ‘longevity
risks’ associated with higher life expectancies, by providing incentives to
draw superannuation savings over a longer period. The financing of retirement
lifestyles—in full or in part combination with the age pension—will also be a key
consideration.
A maturing superannuation system
With the superannuation guarantee in place since
July 1992, the first cohort of people to have benefited from superannuation
over their whole working lives will start retiring from around the early to
mid-2030s.
With the population ageing, the maturing superannuation system
is expected to result in an increase in the total level of benefits paid as
fund members retire. At some stage in the 2020s, these outflows will be larger
than the level of contributions. This transition, from the ‘accumulation’ to
the ‘retirement’ phase, has implications for funds in managing cash flows and adjusting
investment strategies.
An era of low returns?
All other things being equal, higher rates of
return provide greater levels of retirement income for fund members,
potentially allowing for an earlier retirement or a more ‘comfortable’
retirement. While returns can vary significantly from year to year, over the
past 25 years the average nominal return has been in the order of 7 per cent.
With the Australian superannuation system closely enmeshed
with global financial markets and the Australian economy exposed to the global
economy, superannuation returns are influenced by changes in domestic and
international economic conditions. Some economists consider that the prospects
for future global economic growth are fundamentally constrained, basing their
arguments on the secular stagnation hypothesis.
Secular stagnation
hypothesis
The so-called
‘secular stagnation’ hypothesis suggests that the barriers to
growth—demographic change, education, inequality and government debt—combined
with the potential for low rates of productivity growth compared to that
achieved in the past, will lead to slower and lower levels of economic growth
in the future. This view is contested, with some economists considering that
low rates of growth are largely due to a ‘debt overhang’ in developed economies
which will dissipate over time and that technology advances and economic
restructuring will lead to productivity gains.
Recent forecasts suggest that the medium-term global
outlook is lacklustre. This is mainly due to concerns about the impact of
‘Brexit’ on confidence, the potential for rising oil prices and a continued low
interest rate environment, globally.
Further reading
I Arsov and A Ravimohan, ‘Secular stagnation: a review of the key arguments’, JASSA, 1, 2016, pp. 6–16.
K Swoboda, ‘A comparison of key assumptions and outcomes over four intergenerational reports’, FlagPost, Parliamentary Library blog, 5 March 2015.
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