Influences on superannuation policy settings

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

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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