Research Paper no. 22 2007–08
Superannuation contributions the soft
13 March 2008
- Soft compulsion is a method to increase retirement savings by
automatically increasing the individual employee s superannuation
contributions, but allowing the individual to opt out of this
- It is based on the assumption that individuals, left to their
own devices, will often fail to make sufficient superannuation
contributions to ensure that they receive an adequate retirement
income. It also assumes that most participants will not opt out of
such a scheme if introduced.
- New Zealand, the United States and the United Kingdom have, or
will have, a soft compulsion regime to boost retirement savings.
Tasmania already has such arrangements in respect of its public
sector workers, as do a number of private sector employers. The
Commonwealth also has default member contribution arrangements in
one of its superannuation schemes.
- There appear to be few practical obstacles to the introduction
of such a regime elsewhere in Australia, though the success of such
a regime would depend on its design.
- The introduction of a soft compulsion regime may significantly
increase government outlays, depending on its design, and
interaction with other parts of the retirement income and taxation
systems, particularly the government superannuation
- Further research may need to be undertaken on the adequacy of
current arrangements and the total resources available to retirees
to clarify whether there is a need for a soft compulsion regime in
What is Soft Compulsion?
Why do it?
Who has soft compulsion?
Australian experience Tasmania
Every employer or only some employers?
Everybody in or new employees only?
Inclusion of low income employees?
Before or after-tax?
A gradual lift or a set percentage?
What should the overall rate of superannuation contributions
Linkage with Co-contributions
It s not just an individual s superannuation alone
The biggest issue
The capacity of all parts of the retirement income system to
produce an adequate retirement income. What an adequate retirement
income may be is generally defined as either 60 per cent of pre
retirement income or a certain amount of income per year.
Contribution made to a superannuation fund from an employee s
salary, after income tax has been deducted from the gross salary.
In Australia, this is often called a personal contribution. Before
1 July 2007 such contributions were known as undeducted
contributions, as the amount was not deducted from a person s
Some US companies automatically enrol their employees in either
the company pension program or some form of tax advantaged
retirement savings account.
Association of Superannuation Funds of Australia.
A contribution to a superannuation fund that is made before
personal income tax is applied. Thus a before tax contribution
reduces the amount of taxable income a person receives. In
Australia, a before tax contribution can be an SG contribution
and/or a salary sacrifice contribution.
Fringe Benefits Tax
Fringe benefits tax (FBT) is payable on certain non-cash
benefits given by an employer to an employee, usually as part of a
salary sacrifice arrangement. Superannuation benefits payable by
the employer as a fringe benefit are generally exempt from FBT.
New Zealand s soft compulsion saving scheme.
The ability of a person to cease participation in any soft
compulsion regime i.e. they may choose to opt out of these
A superannuation account is portable when an employee can retain
funds in it, commence work with a different employer, and SG or
other contributions continue to be made to that account. Another
dimension of portability is being able to transfer an account
balance to another superannuation fund.
The proportion of pre retirement income that is desirable to
receive post retirement. Generally, a post retirement income of 60
per cent of immediate pre retirement income is considered a minimum
adequate retirement income.
In Australia the retirement income system consists of the
government Age Pension, the mandatory employer contributions under
the Superannuation Guarantee regime and additional savings.
An arrangement between the employer and employee where the
employee agrees to receive a lesser amount of salary in return for
certain non-cash benefits, such as a car, payment of school fees or
additional superannuation contributions. Additional superannuation
contributions by way of salary sacrifice are before tax
SG or Superannuation
Superannuation Guarantee. The SG regime requires that every
employee earning over $450 per month have superannuation
contributions made on their behalf equal to nine per cent of their
ordinary time earnings. SG contributions are before tax
A soft compulsion regime is one where employers increase
superannuation contributions made on behalf of the employees, and
the employee s wages are reduced accordingly. The soft part of
these arrangements is that the employee has the option of not
having these additional contributions made on their behalf. That
is, they may opt out of this arrangement.
An amount that reduces the tax payable. Not to be confused with
a tax deduction - which reduces the amount of taxable income. Tax
credits are sometimes known as a tax rebate or tax offset in
Retirement savings are said to be vested in a person when those
savings are beneficially owned by that person, and not some other
party, such as their employer. In Australia superannuation
contributions and associated earnings are generally automatically
vested in the fund member when the contribution is made or the
Superannuation is an important component of
the economic security for retirees. It not only increases national
savings, provides a pool of capital for investment and development,
but increasingly will be the major source of a person s retirement
income. On the other hand, superannuation contributions are funds
not in the hands of consumers and are not amounts available to a
person to meet their day to day needs. Thus, proposals to make
significant changes to arrangements for contributions to the
superannuation system are of great importance to the Australian
On 20 September 2007, Ms Pauline Vamos, the then newly appointed
Chief Executive Officer of the Association of Superannuation Funds
of Australia (ASFA), noted that one of the Association s priorities
would be to discuss the introduction of soft compulsion as a means
of raising the level of personal superannuation
a joint media statement on 5 November 2007 the Hon. Wayne Swan MP
and Senator the Hon. Nick Sherry, stated that an incoming Labor
government would not support raising the Superannuation Guarantee
(SG) amount paid by employers above the current nine per cent of an
employee s earnings. But they also noted that it would be desirable
to see additional incentives leading to a total superannuation
contribution rate of fifteen per cent of a person s
earnings. In a
recent speech the Prime Minister, the Hon. Kevin Rudd noted the
need to increase Australia s private savings in an effort to combat
Australian Workers Union has signalled that increased
superannuation contributions are part of its preferred policy
approach in countering any trends towards increased inflation even
at the expense of part of the foreshadowed reductions in personal
income tax to take effect from 1 July 2008. Further, there has been some press
speculation that the government is considering introducing a soft
compulsion regime to boost the level of superannuation
Soft compulsion as a means of raising the level of
superannuation contributions appears to be an idea that should now
be seriously considered. But what is it? Has it been tried
elsewhere in the world? What has been the outcome of other
countries adoption of this approach? What are the main issues in
adopting such a regime? This paper will attempt to address these
A soft compulsion regime is one where increased superannuation
contributions are made and the employee s wages are reduced
accordingly. The soft part of these arrangements is that employees
have the option of not having these additional contributions made
on their behalf. That is, they may opt out of this arrangement.
Within the superannuation industry the dominant view is that the
current level of SG contributions, of nine per cent of wages, is
insufficient to provide an adequate retirement benefit. The Howard Government s
Simplified Superannuation changes have improved the current
retirement income system s ability to deliver an adequate
retirement benefit. But recent comment suggests that despite these changes
the SG regime, by itself, will still not provide an adequate
retirement income for many retirees.
Of course, if individuals made additional voluntary
contributions to their superannuation accounts this would not be a
problem. However, the majority of fund members do not appear to do
so. One of the
reasons why individuals don t make regular additional
superannuation contributions may be inertia and procrastination.
That is, most individuals are inclined to accept current
arrangements and to delay changing behaviour (such as making
additional superannuation contributions) even when it is manifestly
in their interest to do so.
Soft compulsion overcomes this obstacle by harnessing the forces
of inertia and procrastination. The underlying assumption is that
individuals will also procrastinate in opting out of a soft
compulsion arrangement that automatically increases their
New Zealand and the United States of America have forms of soft
compulsion to make, or increase, retirement savings. The United
Kingdom is in the process of finalising its proposed scheme.
Tasmania has implemented a soft compulsion regime in respect of its
public servants. Further, the author understands that a number of
private sector employers across Australia also have such
arrangements. A short summary of these arrangements follows
From 1 July 2007, all employees starting a new job in New
Zealand are automatically enrolled in the KiwiSaver scheme (they
will already be members of the government run New Zealand
Superannuation Scheme). Features of the KiwiSaver scheme are:
- all employees, who are New Zealand citizens or permanent
residents of the country who are under 65 years of age, must be
automatically enrolled when starting a new job. Existing employees
can choose to join the KiwiSaver scheme
- the self-employed may apply directly to nominated financial
institutions to establish a KiwiSaver account
- each participant has a Kiwisaver account in their own name, if
they do not already have another private retirement savings
vehicle. Thus the savings are immediately vested in the member
- all employees can choose not to participate within four weeks
of being enrolled in the scheme. If employees do not opt out within
this time period, they cannot leave the scheme after that time.
Contributory membership ceases when the member leaves their
employer and automatically restarts again with a new employer
- contributions are either four or eight per cent of the member s
gross salary, as the member chooses. Employers may contribute
towards these amounts and these latter contributions can count
towards the total of the member s contributions (i.e. be part of
the four or eight per cent contributions)
- the government adds NZ$1000 to the member s account upon
joining. The member also qualifies for up to NZ$1042 in tax credits
(about NZ$20 per week), and a fee subsidy of $NZ40, per annum
- the member may choose to have KiwiSaver contributions paid to
an existing occupational pension account or simply paid into their
employer s default fund or choose an account from a list of
KiwiSaver accounts offered by government nominated providers
- New Zealand Inland Revenue collects all KiwiSaver contributions
and forwards these contributions to the appropriate fund or
- after twelve months participation a member may take a
contributions holiday of between three months and five years. There
is no limit on the number of contributions holidays a member may
Normally KiwiSaver amounts are not accessible until the member
qualifies for their New Zealand Superannuation Benefit at age sixty
five. However, most of the savings and associated investment
earnings may be accessed/withdrawn, as follows:
- after twelve months membership, up to half of the contributions
can be used to repay a mortgage on the member s own home
- after three years membership, the full amount can be used to
buy a member s first home
- if the member experiences significant financial hardship or a
- if the member emigrates permanently from New Zealand, or
- on the member s death, the accumulated benefits will be paid to
the member s estate.
The benefits will be paid as a lump sum only. Members have the
option of purchasing a private sector annuity with these
In addition, from April 2008, employers will be required to
contribute additional amounts to the employee s KiwiSaver accounts
or complying superannuation funds. This will be phased in over four
years, starting at one per cent of the employee s gross earnings
from 1 April 2008, reaching four per cent from 1 April 2011. An
employer tax credit will reimburse employers for these
contributions - up to a maximum of NZ$20 a week for each employee
participating in the scheme.
As at 31 December 2007, 381 000 New Zealanders were participants
in the KiwiSaver scheme. Over NZ$300 million had been transferred
to KiwiSaver or other retirement savings accounts since 1 July
2007, of which NZ$104 million were payments from the New Zealand
The employee s contributions, in effect, come from the after-tax
salary. Matching contributions up to four per cent by the employer
are tax free. Investment earnings of the KwiSaver accounts/funds
are taxed at a rate of either nineteen point five per cent or three
three per cent depending on the employee s taxable income in the
preceding two years.
In its May 2006 White Paper entitled Security in Retirement
towards a new pension system the UK government proposed the
automatic enrolment of all employees into personal, portable,
pension savings accounts. The UK Pensions Policy Institute has summarised this
proposal as follows:
- employees would automatically be enrolled into qualifying
work-based pension schemes or Personal Accounts if they are
- aged between 22 and State Pension age (currently 65 for males,
60 for females increasing to 65 from 2010, depending on date of
- earning above 5000 p.a.
- employees not meeting these initial qualifications may choose
to be enrolled in these schemes. The self employed would not be
eligible for enrolment
- a minimum combined contribution level of 8 per cent of band
earnings (initially 5000 - 35 000 p.a.)
- four per cent from the individual
- a minimum of three per cent from the employer, and
- at least one per cent from the state through tax relief
- contributions would be phased in over three years
- at one, three and then five per cent of earnings for
individuals (including tax relief), and
- and one, two and then three per cent of the employee s earnings
The government proposes to introduce low cost individually owned
personal retirement savings accounts.
There has been no firm proposal for the opt out
provisions of the UK arrangements. However, the UK government
intends that such provisions will be enacted.
The legislation enacting this system is currently before the UK
the details of the proposed changes are not yet finalised (such as
the opt out provisions) their impact is unclear. However, initial
estimates suggest that the proposed regime will result in between
four and nine million additional persons with retirement savings
In the United States both employers and employees contribute to
the United States Social Security Fund. Most US retirees are
entitled to receive payments from this fund. However, employers may
also offer their employees participation in a company sponsored
retirement savings scheme.
With the passing of the Pensions Act 2006, the American
Congress cleared the way for the automatic enrolment of all
employees in a company s retirement savings plan, where these plans
are offered by the company. Where offered, such a
regime must have the following features:
- the employee s contribution must be between three and ten per
cent of their overall compensation (i.e. total remuneration)
- the contributions must be three per cent in the first year and
rise to at least six per cent during the fourth year of an employee
s participation in the scheme
- the employer makes a contribution equal to a lower paid
employee s contribution, or in respect to certain highly paid
employees, a matching contribution of at least three and no more
that six per cent of that employee s compensation
- the employer s contributions vest in the employee after, at the
most, a two years service period. They may vest in the employee
after a shorter period of time
- the matching employer contributions have the same restrictions
on withdrawal as those of the employees contributions
- each employee participant must receive a notice explaining that
they may opt out of this arrangement and how the particular scheme
they are in operates, including investment options and the right of
the employee to give investment directions in respect of their
- the employee must be given a reasonable period of time before
the first contribution is made to opt out of this arrangement. The
author understands that a reasonable period of time is thirty days
after first becoming a member of the scheme.
An individual s contributions to a United States
retirement savings scheme qualify them to receive a maximum tax
credit of US$1000 per annum, depending on amount contributed and
the income of the person.
This regime commenced operation on 31 December
2007. the most common form of Unite States retirement savings
account is the 401(k) account. The term 401(k) refers to that
section of the United States tax legislation that provides
concessional taxation treatment for these accounts. The percentage
of employers that offer 401(k) retirement plans that offer
automatic enrolment had increased from nineteen per cent in 2005 to
thirty four per cent in 2007. This increase is possibly in response to the
above mentioned Pension Protection Act 2006. Further, a
number of employers surveyed in 2007 whose 401(k) plans do not have
automatic enrolment plan to offer this feature in the near
trends are reflected in recent press reports indicate that the
above auto-enrolment features of the Pensions Protection Act
2006 have found wide acceptance amongst both employers and
While the above comments are encouraging, this
increase in employers offering auto-enrolment in 401(k) retirement
savings plans has yet to significantly increase the overall
participation rate of employees in these plans. This may be due to the
non-compulsory nature of the United States retirement savings
system. Further, press reports indicate that the average rate of
contribution via the auto enrolment is about five per cent of
salary, which some American retirement income experts suggest is no
enough to secure an adequate retirement income. As noted above, employer and
employee contributions are to automatically increase over the next
few years and as the United States regime has just formally
commenced it may be prudent to wait before coming to any definitive
conclusions about the success or otherwise of these
Since May 1999 all newly employed Tasmanian public servants
automatically contribute five per cent of their after-tax salary to
the Tasmanian Accumulation Plan. Existing employees in May 1999
were automatically enrolled in this arrangement. All participants
- opt out of, or choose to participate in, this arrangement at
- vary the percentage of salary contributed at any time (as long
as it is a multiple of one per cent), or
- elect to contribute a fixed dollar amount from their after-tax
Initially, most existing employees in May 1999 opted out of this
arrangement. However, since its introduction thirty three per cent
of new full-time and twenty seven per cent of new part-time workers
opted to participate in this scheme. About ninety per cent of
participants contribute five per cent of their after-tax
The success of any soft compulsion regime will in part depend on
its features. The following section discusses some design aspects
of any potential soft compulsion regime and some associated
A common feature of overseas soft compulsion schemes in New
Zealand and the United Kingdom is that all employers, irrespective
of their size, have to offer participation in their country s
Smaller employers may argue that the administrative burdens of a
soft compulsion regime are excessive and that they should be exempt
from this requirement.
However, in Australia exempting small business from any such
regime may also deny about four million employees (about forty six
per cent of total employees) from the opportunity to
Further, all employers are required to make SG contributions on the
behalf of their employees earning more than $450 per month.
Employers already have to set the amount of superannuation
contributions when a new employee starts, and generally review wage
and superannuation amounts on an annual basis, at least. The
additional administration task should therefore not be too onerous
given these existing requirements.
New Zealand s scheme requires only that new employees be
automatically enrolled in KiwiSaver arrangements. Should the same
rules apply in Australia?
Requiring only new employees to be automatically enrolled in
such a scheme avoids suddenly disrupting existing arrangements.
Further, when a person changes employment they have the option to
participate in a soft compulsion regime, or reassess their needs in
the light of current circumstances. This could be particularly
relevant to higher income earners if their superannuation
contributions, either before or after-tax, approach the recently
implemented superannuation contribution limits.
Against that, restricting participation in any soft compulsion
regime to only new employees would deny the majority of the
workforce the option to participate in these arrangements. Of the
approximately ten million people aged fifteen years and over
working at in February 2006 about twelve per cent had changed their
employment in the previous twelve months. Further, some employees never or
infrequently change their job. Limiting the scheme to new employees
only may not be the best way to rapidly increase retirement
savings. If participation in this regime is not in an individual s
best interest they have the opportunity to opt out.
By its very nature, a soft compulsion regime that has a flat
percentage of earnings rate of contributions is arguably regressive
in its effect, at least in regard to its initial impact on
disposable income. That is, the contributions will have a higher
impact on a lower income person than on a higher income person. On
the other hand low income earners are more likely to attract the
co-contribution should the contributions made come from after-tax
income. Should low income persons be exempt from such a regime with
the option to participate? The proposed UK scheme has this
Generally, the lower a person s income the greater the ability
of the current retirement income regime to produce an adequate
retirement income, if adequacy is measured as a percentage of
immediate pre-retirement income received after retirement. If this
view is adopted there is a reduced need for very low income earners
to participate in such a regime. Generally, a replacement rate of
sixty per cent for a person on Average Weekly Earnings, and up to
one hundred per cent for a person who received social security
benefits before retirement, are considered an adequate retirement
However, the adequacy of a person s retirement income can also
be measured by the ability of the current retirement income system
to produce income in retirement that affords the retiree a modest
standard of living. The current budgetary standards for a modest
but adequate retirement income, for those owning their own homes
- $18 742 p.a. for a single person, and
- $26 339 p.a. for a couple.
ASFA have also calculated a comfortable budgetary
retirement standard, which currently is:
- $36 319 per annum for a single person, and
- $48 684 for a retired couple.
Should a person have to rent in retirement the
required amount of income to meet either the modest but adequate,
or comfortable retirement standards is considerably higher.
Box 1 A note on current
The adequacy of the retirement income system is very difficult
to determine. Following is an estimation of current retirement
income for a newly retired Age Pensioner home
Commonly, average superannuation balances at retirement,
together with assumed rates of investment returns and age pension
entitlements are used to undertake these calculations.
Average balances are potentially misleading, due to the upward
biases that may exist due to greater than average contributions by
wealthier individuals, and the tendency of superannuation balances
to increase rapidly later in a person s working life due to the
effect of compounding investment earnings. Median superannuation
balances at retirement would be more helpful, but these are not
Recently, the average superannuation balance at retirement as at
January 2008 was calculated by ASFA as $155 000 (male) and $73 000
(female). To compensate for possible upward biases the following
calculation assumes that most retiree couples will have total
superannuation assets of $150 000 at age 65. They are assumed to
have no other assets outside their superannuation benefits.
The average earnings rate on a balanced superannuation fund over
the 10 years to 30 June 2007 is about 8.4 per cent. The following
calculation assumes that the superannuation benefits at retirement
are kept in the superannuation fund and only the earnings are
withdrawn. The couple s income would be:
Amount $ p.a.
As can be seen this amount is above the current
modest but adequate budgetary standard noted in the text. However,
it is less than clear that most current retiree couples will have
even $150 000 in superannuation assets at their disposal at
retirement. Further, if the retiree couple had to pay rent then the
above amount would be inadequate, even allowing for the receipt of
rental assistance as part of their Age Pension payments.
Some industry commentators consider it unlikely
that low income earners will be able to generate such regular
amounts of income in retirement on the back of the current
Superannuation Guarantee contributions and age pension
alone. If this
is the case then it might be desirable for low income earners to be
included in any Australian soft compulsion regime.
In New Zealand, most KiwiSaver contributions are made on an
after-tax basis. The same appears to be true to the proposed British
scheme. In the United States a member of a government sanctioned
retirement scheme may have their contributions made on either a
before-tax, or after-tax basis depending on the type of scheme to
which the contributions are made.
In Australia, before-tax contributions would be undertaken
through a salary sacrifice arrangement. ASFA has recently called
for access to salary sacrifice arrangements for additional
superannuation contributions to be available to all
At first glance there are two main difficulties with a
before-tax approach. Firstly, it appears that it involves a loss of
revenue. These amounts would not be subject to either personal
income tax, or Fringe Benefits Tax (FBT), as additional employer
superannuation contributions are generally exempt from FBT. Secondly, such an
approach would disqualify these additional contributions from being
eligible for a government superannuation co-contributions payment
(see below). Without a government co-contributions payment, it is
doubtful whether the total contributions would reach the identified
desirable total contribution target of fifteen per cent of
The first of these objections does not appear to be a
significant problem. In respect of foregone revenue, it should be
remembered that all before-tax superannuation contributions are
subject to a flat fifteen per cent tax on their payment into a
superannuation fund. Thus the there would be a limited revenue
An additional contribution of six per cent of earnings would be
required to lift a person s total superannuation contributions to
fifteen per cent of wages. Taking six per cent from a person s gross income can be
a significant impost, especially to those on a low income. The
prospect of such a reduction in take home pay may cause a large
number of individuals to opt out of any proposed arrangements. This
particular problem may, in part, be addressed by the manner in
which such contributions are introduced (see the following
Taking account of the imposition of a fifteen per cent tax on
before-tax contributions, the person s actual total contribution to
a superannuation fund from both the SG and before-tax soft
compulsion contributions is about thirteen per cent of wages. Such
an outcome may be acceptable if it allows most retirees to generate
at least a modest but adequate income in retirement from all
A feature of both the British and American schemes is a gradual
increase in the level of both employer and employee contributions.
What would be an appropriate approach for Australia should it adopt
such a scheme?
ASFA, in its advocacy of a soft compulsion regime in Australia
has suggested a gradual lift in contributions, from 1 per cent to a
maximum of three per cent of earnings. The House of Representatives Standing
Committee on Economics, Finance and Public Administration in its
report, Improving the superannuation savings of people under
40, recommended that a default rate of three per cent of
earnings through salary sacrifice arrangements be adopted.
Whether a gradual lift in the contributions rate or a set
contributions rate is preferred will depend on the desired overall
level of superannuation contributions (see next section) and the
source of these contributions. For example, say that the desired
overall level of contributions was twelve per cent of a person s
ordinary time earnings. Further, that the individual, and the
government, were to be the sources of the additional contributions.
Then, the additional three per cent coming partly via a soft
compulsion regime and partly from an enhanced government
co-contribution scheme, on top of the existing nine per cent coming
from compulsory SG contributions, may not seem like a large
requirement for most employees. In these circumstances it may be
appropriate to set the required percentage of earning to be
contributed at, say, one point five per cent of earnings (the other
one point five per cent coming from the co-contributions scheme)
upon such a scheme s commencement.
However, if the desired overall superannuation contribution rate
was higher, say six per cent of earnings, and the individual was to
be the only source of these contributions, then a gradual increase
in the annual rate of contributions may be desirable.
As previously mentioned, the Treasurer and Minister for
Superannuation and Corporate Law noted that it would be desirable
for the overall rate of superannuation contributions to move
towards fifteen per cent of earnings. This target would be met by
the current nine per cent of earnings SG contributions, additional
personal contributions and an enhanced government superannuation
The notion that a person s superannuation total contributions
should be a total of fifteen per cent of their earnings appears to
have its origins during the Keating government. It was proposed to
raise overall superannuation contributions to fifteen per cent of
the individual s wages. The source of the extra six per cent was to be
additional personal contributions of three per cent of wages and a
matching co-contribution from the government. It is interesting to
note that this proposal opted for a gradual rise in personal
contributions, from one to three per cent of wages over a number of
years and was to be compulsory for all employees. This gradual rise was to
accompany the gradual rise in SG contributions to nine per cent of
earnings over the same period.
The appropriate level of superannuation contributions over a
normal working life to provide an adequate retirement income is the
subject of sometimes intense disagreement. Some commentators
suggest that the current level of SG contributions, plus additional
personal contributions and government superannuation
co-contributions are all that are required to achieve this
commentators consider that this is not the case.
The SG contribution rate reached nine per cent only in 2002.
Cleary, the SG regime is far from mature and those about to retire
cannot be expected to have accumulated sufficient superannuation
benefits to allow the generation of an adequate retirement income,
without receiving the Age Pension, as defined above. Further, the
introduction of a soft compulsion regime would have little if any
effect on this generation of retirees. Rather it is the long-term
effect of any changes in the retirement income system that should
be the focus of any consideration of the introduction of a soft
There is significant disagreement amongst experts on the
adequacy of the current retirement income system. This appears to
be based on conflicting evidence on the effects of current
arrangements to produce an adequate retirement income. These
factors underline the need for additional study of the ability of
current retirement income arrangements to produce an adequate
retirement income for the majority of retirees, before undertaking
further major changes.
A significant issue is whether the employee
should have the choice to opt out at any time, or only during a set
period after first being automatically enrolled.
It could be argued that the acceptability of a
soft compulsion regime in large part rests on the ability to stop
these contributions at any time should a person s circumstances
require it. If this feature were not available initial
participation in a soft compulsion regime might be less than it
might otherwise be due to members fears of being trapped in this
arrangement. This notion of being trapped would also be lessened if
the current arrangements for limited access to superannuation funds
on financial hardship and compassionate grounds were
As noted above, the government appears to favour additional
contributions being made on an after-tax basis together with an
expanded government superannuation co-contribution regime. Briefly, a government
superannuation co-contribution is payable if a person is earning
less than $58 980 per annum in the 2007 08 year and they make
personal contributions to their superannuation fund account. For
the financial year ended 30 June 2007 the net amount of government
superannuation co-contributions paid out was about $1.9
included a special one-off additional payment in regard to
contributions made in the preceding year which led to a doubling of
expenditure. It is reasonable to expect that a soft compulsion
regime would significantly increase the amount of personal
contributions that would attract such a matching payment.
Obviously, this would increase the cost of the co-contributions
regime to the government in excess of the current $1 billion or so
Of course, this issue does not arise if the additional
contributions made via any soft compulsion regime are made via
salary sacrifice arrangements before-tax. As already noted, such
contributions do not give rise to a co-contribution matching
The above discussion assumes that an individual s superannuation
balance alone is the key to achieving a reasonable standard of
living in retirement. While for many that will be the case there
are many other factors that may contribute to a person s standard
of living in retirement. Some of these are:
- as noted above a significant proportion of employers make SG
contributions on behalf of their employees at a higher rate than
the nine per cent minimum, although these employees tend to be
those in the higher pay ranges. Some commentators expect that employer
superannuation contributions above the nine per cent minimum will
become more wide spread in future years
- in recent years there has been a steady rise in the labour
force participation rates of older workers. This trend can dramatically increase
the superannuation benefits of older workers
- the majority of Australians enter retirement as a couple. It is
a couple s combined resources that are important, not the average
individual superannuation balance alone
- many retirees have savings outside the superannuation system
such as investment property or privately held shares. These
resources contribute to the achievement of an adequate retirement
- some retirees will benefit from bequests left by their parents
- for many retirees the Age Pension is a sufficient retirement
income and provides a range of fringe benefits such as a health
card and discounts on some government charges it s not luxury, but
neither is it absolute poverty if the retiree also owns their own
- commonly, what constitutes an adequate retirement income
declines as retirees reach an advanced age.
The importance of these factors in a retiree s retirement income
should also be assessed before further change to the current
superannuation arrangements occurs.
The purpose of superannuation is to provide some, or all, of a
person s retirement income. Thus, the best way to assess the likely
impact of increasing a person s superannuation contributions to
fifteen per cent of their earnings is to consider what impact this
may have on their retirement income, against the available
standards income required for both an adequate and comfortable
standard of living in retirement.
Initial projections undertaken by the Parliamentary Library
suggest that, over a forty year working life, a person having total
contributions of fifteen per cent of earnings made to a
superannuation fund will indeed generate sufficient superannuation
assets to provide an adequate, and one case a comfortable,
retirement income, without receiving the Age Pension. After the Age
pension has been taken into account every person achieves an income
above the ASFA comfortable retirement income standard.
The following table shows:
- projected superannuation fund balances given a fifteen percent
of earnings superannuation contributions both before, and after,
tax (down the left hand side of the table)
- the relevant ASFA retirement income standard (across the top of
- the projected income arising from both the fund balance and Age
Pension entitlements (in each separate box of the table), and
- the difference between the relevant ASFA retirement income
standard and the projected total income (again, in each separate
box of the table).
These results have been discounted for inflation
(see Box 2) and are in 2007 year dollars. The calculated income is
in the first year after retirement when qualified to receive the
Age Pension (on or after Age 65).
Table 1: Difference between ASFA Retirement
Income Standards and Total Income in Retirement
Adequate Single ASFA Standard
$18 742 p.a.
Adequate Couple ASFA Standard
$26 339 p.a.
$36 319 p.a.
$48 684 p.a.
Before Tax contributions -
Total Balance at Retirement
$45 458 p.a.
$26 716 p.a.
$56 935 p.a.
$30 596 p.a.
$45 458 p.a.
$56 935 p.a.
After Tax Contributions -
Total Balance at Retirement
$52 945 p.a. Difference
$34 203 p.a.
$60 952 p.a. Difference
$34 613 p.a.
$52 945 p.a. Difference
$16 626 p.a.
$60 952 p.a.
$12 304 p.a.
Before Tax Contributions -
Total Balance at Retirement
$43 805 p.a. Difference
$25 063 p.a.
$55 909 p.a. Difference
$29 570 p.a.
$43 805 p.a. Difference
$55 909 p.a.
After Tax Contributions -
Total Balance at Retirement
$46 607 p.a. Difference
$27 865 p.a.
$57 558 p.a. Difference
$31 219 p.a.
$46 607 p.a. Difference
$10 288 p.a.
$57 558 p.a.
Sources: Parliamentary Library - Age Pension
Rates as at February 2008 and the Westpac/ASFA Retirement Standard
in ASFA, Retirement
living costs up in September Quarter , media release,
20 December 2007
Box 2 Projections of Retirement Income
These projections took into account all fees and taxes and
included both before and after-tax contributions. One set of
projections held the income steady at $40 000 p.a. and the next set
increased income by four per cent (before inflation) a year from an
initial $30 000 a year. Taking into account the expected inflation
rate of 2.5 per cent per annum gross income was increased by 1.01
per cent p.a. The average balanced superannuation fund returned 8.4
per cent p.a. over the 10 years to 30 June 2007. Allowing for
the expected inflation rate, a real earnings rate of 5.75 per cent
p.a. was applied to annual balances after all relevant fees and
taxes. Superannuation based retirement income was calculated by
applying a rate of 8.4 per cent p.a. to the resulting
superannuation balance in all cases. No drawdown of capital in
retirement was assumed. These projections assume that couples only
have one superannuation benefit available to them in retirement.
Increasingly this is not the case due to the higher female
workforce participation rates and for couples at least access to
two superannuation benefits on retirement.
In all cases retirees achieve an income above the
relevant comfortable retirement income standard. However, should
such an outcome be the explicit objective of government policy?
The most significant source of the projected gap between
government revenues and expenditure after 2036 37, as the
population ages, is the projected rise in health costs.
The second highest source of this fiscal gap is the rising cost
of the Age Pension Larger superannuation balances and consequent higher
retirement incomes would make a significant contribution to
reducing these fiscal pressures. On this basis it is in the
government s interest to increase the overall level of retirement
On the other hand, it could also be argued that it is an
individual s responsibility to provide for a higher standard of
living in retirement and that the government s role in providing a
retirement income simply rests with the current goal of providing a
higher income in retirement than available from the Age Pension
it is likely that any soft compulsion regime could end up providing
higher income earners with a disproportionate benefit, both through
the higher dollar contributions they would make and the lesser need
they may have to opt out of such arrangements for financial
reasons. On this basis a government may choose not to implement
arrangements to increase the overall level of retirement
It s better to be richer than poorer in retirement, and the
introduction of a soft compulsion regime in Australia may
significantly increase many a person s level of retirement savings.
And there seems to be no practical reasons why a soft compulsion
regime to increase superannuation savings could not be introduced
in Australia. Further, at the time of writing, it appears to be
desirable to increase superannuation savings as a way of
withdrawing fiscal stimulus from the broader economy; and thereby
assist in reducing inflationary pressures over the long term.
But these points are not sufficient reason to say that a soft
compulsion regime should be introduced. Rather, the ability of
current arrangements to produce an acceptable level of retirement
income should first be considered. If current arrangements will
produce such an income for the majority of retirees it may not be
wise to introduce such a regime. After all, its not as if
increasing superannuation contributions is the only option for the
government to achieve its boarder economic goals.
Due to the disagreement amongst experts and the conflicting
evidence on the effects of current arrangements the ability of the
current retirement income system to produce an adequate retirement
income for the majority of retirees should be clarified, before
undertaking further major changes to that system.