Superannuation funds can have a significant effect on the financial wellbeing of Australians, especially those who are heading towards retirement and wish to maintain a certain quality of life. However, just because this is something that affects people as they leave the workforce, it doesn’t mean younger generations can put off thinking about it until they retire.
There’s a growing trend among young Australians that is seeing many invest only the bare minimum in their super funds. Despite the fact that there are a number of drawbacks to this practice – namely, they won’t be able to afford a comfortable retirement – government actions are making it difficult for people to get a handle on the superannuation framework.
Currently, there’s an air of instability around superannuation rules, which is reinforcing these habits as they develop in young Australians. How can regulations evolve to support stronger engagement between people and their superannuation funds?
Recent proposed changes bring uncertainty to superannuation
The super landscape in Australia has recently been characterised by change and instability. While the supporting rules and regulations do need to evolve over time as economic conditions change, there also needs to be an element of stability to ensure people can adequately plan for their retirement.
The recent budget proposals saw a significant reduction to the concessional contributions cap, which will be reduced to $25,000 per year for all Australians. On top of this, the government also announced an amendment that will affect people who intended to make non-concessional superannuation contributions after budget night. Anyone who has made non-concessional contributions of more than $500,000 since 1 July 2007 will not be able to contribute more non-concessional contributions from budget night 3 May 2016 (non-concessional contributions of over $500,000 made before that date can remain in the fund).
These changes specifically affect people who had planned their superannuation contributions for this year, as they now need to wait to see how these proposals are received before making further decisions. We have a number of clients who were planning to contribute $540,000 to their funds – as allowed under the previous rules – who now can’t put anything in until there is a degree of certainty over what the regulations will look like.
Is there an ideal situation for Australian superannuation?
An ideal set of superannuation rules will mean different things to different people, but for most Australians, a sense of stability and certainty will go a long way to create confidence in their funds and ability to contribute.
If both government parties commit to a sustained period of stability, say for at least 20 years, it will allow Australians to prepare for their future and know year-on-year what they are able to contribute and what the results will be. Ideally, any changes that are made will be followed by the government drawing a line in the sand and saying this is what superannuation will look like for a significant period of time.
The concept of an ideal situation for super also extends to contributor behaviour as well. We conducted a brief survey around our office focusing mainly on 25- to 40-year-olds and found that no one was considering contributing beyond the mandatory super guarantee. It’s not that people don’t want to plan for the future, but they need certainty if they are to stay invested in the process.
Investing the bare minimum is unsustainable
The current trend defining superannuation investment in young Australians involves them committing the bare minimum, a practice that may be the best course of action in the short term, will become more unsustainable in the long run.
Put simply, if people aren’t contributing beyond the bare minimum to their superannuation fund, it’s unlikely they will have enough to retire on, which means they will need to lean more heavily on the old-age pension or other investment alternatives. If someone in their 20s only contributes the mandatory 9.5 per cent from now until their retirement, they’ll fall a significant portion short of what they will need to live a comfortable lifestyle in retirement.
What do young Australians need to do?
While there are issues with the way superannuation is being dealt with at the moment, it’s still a robust system that can deliver significant benefits for young Australians as they head towards retirement. It’s clear that many are concerned about the superannuation system’s current instability, but this doesn’t mean they should ignore it in favour of other investments.
Instead, once the regulations stabilise, people need to think about how further voluntary contributions will benefit them in the long term – something they won’t be able to do if legislation changes year-by-year. People also need to raise the issue and put pressure on those who have power over the regulations.
A sustained commitment to ongoing stability for superannuation funds is necessary to ensure Australians continue to engage with the process. Without this encouragement, many will be unable to afford their retirement, consequently putting further pressure on employers and other Australians.
Paul Rafton, superannuation partner, BDO