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Save Up or Live It Up: Is Super Wasted on the Young?

Published: June 11, 2012 in Knowledge@Australian School of Business
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For a 20-year-old just starting a career, the prospect of retirement seems like eternity. The focus of anyone earning money for the first time is more likely to be on more immediate needs, such as paying bills, studying, travelling, starting a family, buying a house and – let's not forget – the general joys of life.

The federal government's compulsory retirement savings strategy mandates employers put 9% – rising to 12% by 2020 – of an employee's wage into a superannuation account. This is designed so that individuals have means other than a government pension as financial support later in life.

How much someone earns and the money they can stow away over 30 years of paid employment will, in part, determine their lifestyle when they eventually retire.

Incentives to save more superannuation include tax advantages for Australians earning more than A$37,000 a year, the point at which the income tax rate moves from 15% to 30%. Personal contributions to a super fund and the earnings generated within the fund are taxed at a concessional 15%. And after the age of 60, withdrawals from super funds are tax-free.

The amount individuals can contribute to superannuation at the concessional rate is capped at A$25,000 up until age 50, and A$50,000 thereafter. The cap makes it harder to play catch-up if someone is nearing retirement with a less-than-satisfactory super account balance.

There are also proposed rebates for those earning less. A low-income earner's tax offset of A$500 in the 2012/13 income year for those earning less than A$37,000 is aimed at helping people in the low tax bracket build savings quicker and earlier within the super system. There is also a co-contribution payment where the government will match after-tax super contributions made by low-income earners.

The overall strategy is focused on encouraging the young to save for retirement early. But for many people, this is the time when other financial priorities – spending to live – means they can least afford it.

The problem with a policy designed to ensure a greater degree of self-funded retirement and less reliance on government pensions is the issue it creates at the early stages of the lifecycle, says Bruce Bradbury, a senior research fellow at the Social Policy Research Centre at the University of New South Wales. "Superannuation is a policy which transfers resources from one age to another. But retirement isn't the only time when people are short of money," Bradbury argues. "By solving one problem, super is creating another."

The gradual increase of the compulsory levy placed on employers from a minimum 9% to 12%, which will happen in increments between 2012 and 2019, only exacerbates the problem. Even though employers will make the contribution, most economists agree the burden effectively will fall on workers via reduced wage increases.

Bradbury insists now is the time to amend the existing super policy to improve the match between retirement saving and costs across the course of life.

Pay Now, Save Later?

In a recent article, Saving the Young from Superannuation, Bradbury raises the possibility of allowing people to access their super for other expenditures, such as raising children, or to supplement paid parental leave. He advocates that getting the money shouldn't be too easy. It might be that individuals can withdraw a portion of funds annually, perhaps when they do their tax return. Another restriction could be that the person wanting the funds would be not working for reasons such as raising children. There might also be an age restriction on withdrawals, such as under-40. Alternative access to super funds might initially be very narrow and could be expanded over time, if appropriate, once the policy is tested, Bradbury suggests.

One issue that would need to be addressed is how to claw back the tax concessions associated with the initial super contributions – or whether it is appropriate to do so at all.

Given its vested interest in people sinking as much money as possible into the system early, delaying contributions or providing early access to benefits are not ideas the superannuation industry supports. After years of encouraging young people to take an interest in their superannuation, at least one peak superannuation organisation believes it is finally getting somewhere with its message about what superannuation means for an individual's future. And several superannuation funds also think they may finally be on the right track to bringing the message home.

Research undertaken for the Association of Superannuation Funds of Australia (ASFA) indicates Australians understand that without a compulsory system, their savings for retirement will not be enough, says Margaret Stewart, ASFA's general manager of policy and industry practice.

Under existing policy, superannuation benefits can already be accessed prior to normal retirement age in the case of permanent disability, or on certain hardship or compassionate grounds. Additional grounds for the release of benefits would increase complexity and may not be that useful, Stewart argues. If a person's superannuation could be used for other pressing financial purposes, such as to buy a house, the low levels many young people have in superannuation would hardly make a difference, she says: "Those people currently unable to enter the housing market generally would not be able to get there by having access to an additional A$10,000, which is often all that younger Australians and low-income earners will have in super."

Stewart believes that if utility bills or childcare expenses justify a public subsidy, then direct action to deal with such costs is a better policy than allowing superannuation savings to be tapped into prior to retirement by a broader pool of people.

According to the most recent Australian Bureau of Statistics publication on superannuation, almost three-quarters of 15 to 24-year-olds had a superannuation balance between A$1 and A$9,999 in 2007, although almost one in five people in this age group did not know their balance. One third of 25 to 34-year-olds had a balance up to A$9,999 and 28% had a balance between A$10,000 and A$24,999.

The Australian Institute of Superannuation Trustees (AIST), the peak industry body for the A$450 billion not-for-profit super sector, says one of the key issues in ensuring people have enough savings to retire on is saving early and taking full advantage of the power of compounding interest returns. This makes engaging with young people about their super vital, says the institute's chief executive, Fiona Reynolds.

Starting young and saving often is considered even more important for young women due to many taking time out of the paid workforce to care for children or other family members. "This 'career break' means many women will have to contribute extra to their super in order to have a comfortable retirement," says Reynolds. "The lift in the compulsory super rate from 9% to 12% won't change this. If you take a seven-year to 10-year career break, the harsh reality is that 12% still won't be enough for many ordinary wage earners to enjoy a comfortable standard of living in retirement."

Like Us for the Future?

Social media is shaping up to be the saviour for the superannuation industry as it works hard to engage the young, according to Reynolds.

For example, HESTA, the leading superannuation fund for the health and community services industry with 730,000 members, is hoping the Facebook contact and support it's showing to student nurses in particular, pays off in the future. It has been giving student nurses a so-called "joey" pouch, which many students would normally buy at the start of the academic year to carry their equipment, including scissors and tape. The pouch is clearly emblazoned with the fund's logo.

"By giving them something that is useful and that they may otherwise purchase themselves, we are demonstrating to these young people that we understand them. We hope they then walk around with the brand displayed," says Kate Andrews, HESTA's executive manager of marketing strategy.

HESTA knows from its own research that superannuation is a low involvement category for most people until retirement is looming or an individual's account balance reaches a substantial level that looks like "real money". "For people starting out in the workforce there can be no interest at all," notes Andrews. "What young people are interested in is managing their budgets and paying bills. Superannuation is something in the far distance and not relevant to them."

HESTA's use of Facebook to target 20,000 student nurses who use the social media site is proving to be a successful starting point to build a future relationship. When HESTA presented ads to students offering them a free pouch it thought it would be doing well to get a 2% response rate. However, the fund received responses from 40% of the students it targeted. In return, students gave permission to be contacted by HESTA. "We saw it as a way to start the dialogue. It is not about HESTA for these people yet – but if they know that we support their industry, when they are in the workforce we hope they will choose HESTA as their superannuation fund," says Andrews.

HESTA's typical member is a 42-year-old nurse with A$9000 in his or her account.

HOSTPLUS, the leading super fund for the hospitality, tourism, recreation and sport industries has 984,000 members. It is also using social media to target young people in the hospitality industry. To raise the profile of careers in cooking, the fund last year used Facebook to launch "Cook for your Career" (C4YC), a national cooking competition supported by seven of the country's leading chefs and restaurateurs.

As well as meeting the chefs, the competition's entrants posted a video of their cooking creation online where the public then voted. They also had the opportunity to go on a national HOSTPLUS employment database, and the winner was offered a full-time training apprenticeship in a top Australian restaurant.

HOSTPLUS chief executive David Elia says that C4YC was created to help passionate cooks get their foot in the door and to ensure the industry's long-term growth. "Apprentices are the lifeblood of the hospitality industry, so we created C4YC to support our members and foster the next generation of quality chefs," he says.

Elsewhere, Sunsuper is running a campaign through Facebook asking members to share their dreams for the future. CareSuper and Telstra Super are proactive users of Twitter, tweeting tips for members and engaging with the wider super community.

AIST's Fiona Reynolds says social media is revolutionising the way individuals communicate with each other and their professional organisations. "We know that super often doesn't register on the radar for many young people, but platforms like Facebook and Twitter have provided funds with a way to engage with their younger members – at least to create some awareness – because this is how Gen Y, especially, communicate," Reynolds says.

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