Once again, compulsory superannuation is back on the agenda. Recently I debated an economist about this topic, and we had radically different views. He took the line that a lower paid worker was much better off having the 9.5 per cent employer superannuation in their pocket to spend now, or possibly put towards buying a house. He made the point that one of the best ways to have security when you retire is to have a paid-off house. I have no argument with that - it's stating the obvious.
Let's run the numbers using a person aged 40, earning $45,000 a year, with $75,000 in superannuation all paid for by the employer. They would currently be receiving employer superannuation of $4275, less 15 per cent contributions tax, for a net amount of $3263 paid to super each year. If that money was paid to them, instead of into super, they would receive an extra $2961 a year, or $57 a week after tax.
So, the argument boils down to whether they are better off to have $57 a week in hand or annual contributions to super of $3263. First, we need to take into account human nature - the reality is that the majority of Australians spend whatever they get paid, and invest nothing, unless they have compulsory commitments such as loan repayments. To make it worse, 50 per cent of Australians live payday to payday, which was demonstrated by their behaviour when they were allowed to access up to $20,000 from superannuation due to the coronavirus crisis.
Our lowest paid workers have just received a pay rise of $13 a week, which you can bet will be spent in full, and there is little doubt that an additional increase in take-home pay of $57 a week would go the same way. If there was no employer superannuation they would end up at retirement with nothing.
Now let's run the numbers on superannuation using the Super Contributions Calculator on my website, www.noelwhittaker.com.au. We'll use the same assumptions: age 40, superannuation balance $75,000, salary $45,000 a year indexed at 2 per cent and estimated rate of return on the superannuation fund of 7.5 per cent. Thanks to the magic of compound interest they would have $770,000 in their superannuation fund at age 65. So a low income couple could retire with $1.5 million. That's winning the jackpot!
If we think about the possibility, in the same scenario, of buying a house, the picture is grim. The purchase price will probably need to be at least $350,000 and they would need a deposit of at least 10 per cent, or $35,000. On a salary of around $45,000 a year you receive $39,000 after tax - if this was increased by $57 a week it would still be just $42,000 a year after tax. Unless it was a two-income family, and they were both extremely thrifty, saving the deposit would be almost impossible. And even if they did, to pay the loan off in 25 years, when they are due to retire, would take repayments of $383 a week, assuming an interest rate of 4 per cent. An extra $57 a week may help a little, but for a single income family home ownership is impossible without substantial government assistance. That $57 a week is a drop in the bucket.
When teaching children about money, we often use the metaphor of the ice-cream and the bicycle. Would you rather spend your money on an ice-cream today, or save up for a bicycle in the future. It's the same with compulsory superannuation. Would you rather have $57 a week now, or $770,000 when you retire? I think the figures speak for themselves.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. firstname.lastname@example.org