Australians are increasingly relying on superannuation for their retirement income, but despite more than 20 years of compulsory super, many people are not retiring with enough.
The assets under management of the superannuation sector now exceed A$1.8 trillion (greater than annual GDP), but analysis by superannuation research firm Rice Warner suggests the retirement savings gap - the national shortfall in savings for an adequate retirement - is still as high as $836 billion.
As well as a mandatory saving mechanism through employer contributions, the Australian super system was designed to allow people to make additional savings for retirement through voluntary contributions.
The most recent ABS data show the participation rate (in voluntary contributions) has fallen steadily since 1993, from half to less than a quarter of employees in 2007. This trend is observed for all age groups, and a recent survey on women’s superannuation by Rice Warner shows that the lack of take up is still prevalent.
So what’s stopping people making more voluntary contributions?
What we know about super decisions
Building on PhD work by Dr Jun Feng, a recent study by researchers from Monash University, UNSW and the University of Western Australia, focused on the two main types of voluntary contributions – salary sacrifice and post-tax contributions - to provide a better understanding of the voluntary saving decisions people make.
Using several population survey data sets, the study shows that participation rates increase with age and income, and voluntary contributions (particularly by salary sacrifice) are more likely to be made near retirement and by high income earners.
Job type is also important: people in more stable jobs (such as those in permanent positions and/or working in a large firm) have a higher propensity to make extra contributions to top up their retirement savings. But the research did not find differences in participation by education level and gender, suggesting income is the real driver of the gap in super contributions for women and the less educated.
The study also explored how superannuation tax design influences voluntary contribution decisions. One key incentive for salary sacrifice contributions is the relative tax benefit compared to taking remuneration as income. Employer and salary sacrificed super contributions are generally taxed at 15%.
But despite the generous tax benefits (as high as 31.5 percentage points for those facing the highest personal tax rate), a forthcoming research paper in the journal Economic Record fails to find a significant difference in contribution patterns as individuals pass through the personal income tax thresholds.
Another important finding was a negative relationship between home-ownership and voluntary contributions. Households with mortgages - as well as renters - were less likely to make voluntary contributions.
What’s behind these decisions?
The low participation in voluntary contributions can be explained by a combination of socio-economic, behavioural and psychological reasons.
Unaffordability is a major barrier and household budget constraints are often quoted as the main reason for not making voluntary superannuation contributions. ABS survey data indicates that individuals who do not feel they earn enough, cannot raise emergency funds or are paying off debt/mortgage are much less likely to make any additional contributions. This is supported by the Rice Warner survey on women’s superannuation where six in ten women nominate affordability as a barrier.
Poor basic superannuation knowledge and financial literacy, and lack of retirement planning could also explain the lack of participation in voluntary contributions. Only around 40% of superannuation fund members can correctly answer three questions which test their understanding of interest rates, inflation and diversification; and the overall knowledge and understanding of the superannuation system is poor. Results also suggest a strong relationship between financial competence and retirement planning, and by implication the likelihood of making voluntary contributions.
Finally, stickiness to default settings may be at work. People may consider the mandatory employer contribution rate (currently 9.25%) as an appropriate benchmark because it’s endorsed by the government. They may pay little interest to superannuation because the contributions are paid by employers, or they may simply be susceptible to status quo bias or procrastination. Although the recent increase in the Superannuation Guarantee rate and the public debate on retirement savings may have raised the public profile of superannuation, recent research shows that interest in superannuation is not readily transferred to actual behavioural change.
Getting people to contribute more to their super will require a combination of policy intervention, and industry and employer efforts to increase awareness, engagement, superannuation knowledge and financial competence of super fund members, especially younger members.