The uncomfortable truth about super: there's no ‘one-size-fits-all’ contribution
- Written by Gaurav Khemka, Senior Lecturer in Actuarial Studies, Australian National University
Among the topics being investigated by the government’s retirement incomes review[1] is whether compulsory super contributions should be lifted from 9.5% to 12%.
Our research has identified two uncomfortable truths. One is that there is no “one-size fits all” correct contribution. The other is that 9.5% will be enough for most people, unless the aim is to replace the age pension.
It queries the need to lift lifting the contribution rate to 12%, and also the idea of having uniform compulsory contributions.
What our study did
We used what is known as a stochastic life-cycle model[2] to calculate the optimal level of super contributions for Australians at nine different income levels (ranging from A$30,000 to $150,000), applying existing tax, super and pension rules.
While necessarily limited, it is an advance on previous modelling that does not balance the loss of pre-retirement spending power against the income subsequently gained post-retirement. Household status, gender, assets outside of super and home ownership status also matter a lot, but are not directly modelled.
For each income group, we considered different income objectives for retirement including the Ausralian Association of Superannuation Funds of Australia’s “comfortable[3]” and “modest[4]” standards. We examined different retirement ages, life expectancies, super returns and effective employer contributions.
How much you need
The model produced a wide range of estimates[5].
Depending on income and other assumptions, the right amount of super contributions can be anywhere between about 3% up to 20%, although the higher levels typically assume away the age pension.
This table presents selected findings.
Some optimal super contributions by income level and objectives
References
- ^ retirement incomes review (treasury.gov.au)
- ^ stochastic life-cycle model (www.dictionary.com)
- ^ comfortable (www.superannuation.asn.au)
- ^ modest (www.superannuation.asn.au)
- ^ wide range of estimates (papers.ssrn.com)
- ^ Source: The 'Right’ Level for the Superannuation Guarantee: A Straightforward Issue by No Means, Khemka and Warren, 2020 (papers.ssrn.com)
- ^ Productivity Commission finds super a bad deal. And yes, it comes out of wages (theconversation.com)
- ^ Source: Australian Tax Office (www.ato.gov.au)
- ^ 5 questions about superannuation the government's new inquiry will need to ask (theconversation.com)
Authors: Gaurav Khemka, Senior Lecturer in Actuarial Studies, Australian National University