Lessons we can learn from Aussie Super's mistakes
17 March, 2015
You attended a post-retirement conference in Sydney last week and came away with some interesting insights. First, there is much debate in Australia over their superannuation scheme isn't there? So what came out of this conference?
Yes there were a number of things. First of all, their superannuation — we all look enviously at Australia's superannuation because it's been going for 23 years, it has created this enormous industry in Australia, and Australian's feel wealthier because they have been forced to save for their retirement over 23 years.
There are some really good things about their super regime, in that retirement and superannuation are just part of the day-to-day language in Australia — people talk about it, the media write about it and there's a real awareness of the need for retirement income. Whereas in a lot of other developed countries that awareness isn't there yet — even in New Zealand KiwiSaver is only 8 years old, so we're starting to talk about it but it's not as established as in Australia.
But, there are some negative things about the Australian super scheme, which hopefully we can learn from and not have to repeat. One of them is that it has just become so complex. Sitting at this conference I couldn't believe that this entire industry has been built really just to try and explain how superannuation works to members of the public — because it's so complex — you have tax, annuities, insurance attached to it, and you have lots of super funds all over the show.
You can actually access it from about 55 from memory, can't you?
Yes you can. So this fund that is meant to pay for your retirement lifestyle, which might last 20 or 30 years, if you can start taking it out at 55 — and people are taking it out as a lump sum and then their buying housing and spending it — it's not really achieving what it's supposed to be.
They're able to do it though, what do they call it? A self-managed DIY something and you can buy property?
Absolutely, and self-managed super funds have become I suppose the biggest threat actually to the industry, because people are saying "we'll just do it ourselves and instead of having a balanced portfolio we'll just buy a house, stick it in our super fund and rely on that to retire on". But of course, not everyone wants to sell their house when it comes to retirement.
There are issues, but there are some good things about it. As I say, people are thinking about it and are aware of retirement. I think also because the balances are so high, it forces people to really think about super.
What did you think about the debate around, I think Joe Hockey was suggesting this, withdrawing from your super fund for a property purchase — I guess we're talking about young people here, like you can do with KiwiSaver.
This was the hottest or the most debated topic I guess. The treasurer dropped this clanger in saying that retirement savings could possibly be used to help young people get onto the property ladder. The media and the superannuation industry both came out and said he was just ridiculous because how dare he fiddle with a retirement scheme that's working perfectly well and it's supposed to be designed to help the retirement needs of an ageing population.
The criticism was two-fold. The first was that allowing these withdrawals would hinder the ability of young people to save enough for their retirement. The second was that in making it easier for young people to get deposits for their first home, all that was going to happen was that an already "red hot" property market would become even hotter because all these young people would be chasing new homes.
Now the treasurer pointed to our KiwiSaver and also Canada's retirement regime because they both allow for first home withdrawals, although there is a slight difference between ours and Canada's. If you withdraw funds in Canada to buy your first home, you are required to pay that deposit back within 15 years to your retirement fund. As for New Zealand, the critics in Australia said KiwiSaver's too young to draw any conclusions from.
The debate is continuing and I have to say that I can see where the critics are coming from. Because when all the statistics are pointing to us needing to save more for our retirement (because we're living longer), you have to wonder whether it's right to encourage young people to use those savings to get a foothold in the property market?
I think it's a fair point — I think it's a backward move, but anyway.
The idea is though, even though a young person takes their money out of their retirement fund, hopefully their house will grow in value that will more than compensate for what they missed out on. However, that's a hard argument though when you're arguably buying at peak property prices and also we're potentially looking at a long period of low inflation — it's a big call really.
It's inevitable that things are going to change here over time, once this government goes the next government will come in, you know, there are going to be changes here I believe that. But in Australia of course they have means testing, income testing, don't they? Now they're debating whether or not the family home should be included in that as well.
That's right — it's actually quite tough. The means testing in Australia does make it tough, but also their age pension, our national super here, is set at less than half the average wage. So even though Australia thinks of it as sort of a "safety net" for retirees, it provides a very very low income. If you're going to exclude residential houses and if you don't have an established super fund, then it's quite tough living on their means tested national super.
Look, I think we've fixed or avoided a lot of mistakes that Australia has made, but the debate continues and obviously Australia after 23 years still hasn't gotten it quite right — hopefully we can learn from those lessons and not be destined to repeat them.