An increase in the superannuation guarantee is only justified if it aims to help replace the age pension as more retirees become self funded or it helps members to self-insure against the risk that they live longer than expected, retire earlier than hoped or suffer lower-than-expected investment returns.
These were the findings revealed in a report by Geoff Warren, associate professor at the Australian National University in Canberra, and comes as the debate continues to rage over whether the government should raise the SG from 9.5 per cent to 12 per cent.
“We caution over using the SG as a hedging mechanism as it could lead to over saving if the risks are not realised,” he warned. “That would mean that members would have sacrificed pre-retirement living standards without commensurate benefit if they then die with unused balances. We query whether these risks might be better dealt with through social security or pooling solutions that spread the risks across members.”
There are two ways this can occur – by buying annuities or joining a member collective.
Warren urges policy makers to be clear about what the SG is trying to achieve. Specifying the policy objectives is critical, in his view.
Warren said finding the right level was “highly sensitive” to assumptions. He added that taking a “one-size-fits-all” approach to SG was not necessarily appropriate.
His analysis indicates that the impact of the SG on members may vary substantially depending on member objectives and income levels. “How the interests of various members are to be traded-off is also pivotal, given that the impact of the SG is not evenly felt,” he said. Other considerations such as the broader effects on employers, the economy and the government budget might be also addressed. But arguably these are not as important as establishing clear policy objectives and deciding how to deal with disparate welfare effects.
A key aim of the research was to work out what matters when setting the right level for SG and Warren’s research has established that the assumed role for age pension is a critical issue.
“We implore policy makers to provide more clarity on whether the age pension is considered an income stream that is made widely available for use by to all, or if it should be viewed only as a safety net for those who really need it.
Warren and the report’s co-authors Gaurav Khemka, Yifu Tangwill also be making a submission to the Retirement Incomes Review off the back of this study.