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Retirement

Should super rise during the COVID recession?

  • August 20 2020
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Retirement

Should super rise during the COVID recession?

By Cameron Micallef
August 20 2020

Liberal MPs have stepped up calls for the superannuation guarantee to remain frozen at 9.5 per cent despite it costing Australians thousands in retirement.

Should super rise during the COVID recession?

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  • August 20 2020
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Liberal MPs have stepped up calls for the superannuation guarantee to remain frozen at 9.5 per cent despite it costing Australians thousands in retirement.

Should super rise during the COVID recession

Over the next five years, contributions paid into workers’ superannuation funds is legislated to increase half a per cent a year before reaching a final value of 12 per cent.

But Reserve Bank governor Philip Lowe and think tank The Grattan Institute have raised concerns that increasing the rate of superannuation will stagnate wage growth and hurt the economic recovery.

In response to a line of questioning from Liberal MP Tim Wilson, who has been a proponent of freezing the legislated increase of the super guarantee to 12 per cent, governor Lowe warned that “increases of this form do get offset by lower wage growth over time”. 

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“It will certainly have a negative effect on wages growth,” governor Lowe said. “If this increase goes ahead, I would expect wage growth to be even lower than it otherwise would be. There will be an offset in terms of current income. Some people say that’s perfectly fine because people will have a higher future income.” 

Should super rise during the COVID recession

However, the Association of Superannuation Funds of Australia (ASFA) warned that many young Australians face long-term financial hardship due to the economic downturn, with a raising of the superannuation guarantee critical to long-term financial stability.

“If today’s young people are to avoid ending up on the age pension, every single dollar contributed to superannuation counts,” said ASFA deputy CEO Glen McCrea.

The ASFA pointed to the 2.5 million who have touched their superannuation through the early access to superannuation scheme, including one in five people living in Tasmania. 

ASFA modelling reveals the cost at retirement for a typical 25-year-old woman, who has accessed $20,000 in early release super now, could be as much as $85,000 if she is unable to secure employment and contribute superannuation for two years during the economic downturn.

Failure to lift rates

The ASFA modelling showed that raising the rate to 12 per cent would have a positive impact on retirement savings.

A male aged 25 to 29 currently has a median balance of $17,000, which under the current guarantee would be worth $464,000 during retirement. However, raising the super guarantee to 12 per cent will see the median male retire with $568,000 above the $545,000 (in today’s dollars) it estimates is needed for a comfortable retirement.

Similarly, females aged between 25-29 with a median balance of $16,000 could see their superannuation in retirement go from $377,000 based on the current guarantee to $458,000 if rates were lifted.

Separately, Canstar has found that delaying the SG increase by three years would mean a 35-year-old on the average income with an average superannuation balance of $51,740 may see themselves with $16,000 less in their super at retirement (age 67).

Canstar’s editor at large, Effie Zahos, said: “The erosion of retirement balances through early access for those financially impacted by the pandemic reinforces the need to ensure Australians have adequate retirement savings, which may be a strain for some businesses. 

“Delaying the increase to the super guarantee could impact everyone’s retirement future, particularly already depleted super balances.”

However, she highlighted to consumers worried about their future retirement that they can contribute to their own nest egg.

“You don’t have to wait for an official increase to your super; you can boost your retirement plans by contributing to your super each year with a maximum contribution cap of $25,000. If you’re eligible, you could also look to take advantage of government initiatives to help boost your super balance, such as co-contributions.

“Making pre-tax contributions to your super regularly and early on in your working life will have the biggest impact on your retirement savings.”

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About the author

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Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

author image
Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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