Friday, September 5th, 2014

Compulsory Superannuation

There has been some discussion lately regarding the delays in increasing the compulsory super percentage. The discussion appears to ignore the fact that the Government already delayed this proposed increase by many years.

When compulsory super was first introduced it was supposed to be made up of 9% employer, 3% employee and 3% Government contributions – that is 15% of your wages. They started by gradually introducing the 9% employer portion over a number of years. When it got to the point where they were then to introduce the employee/Government portion that part got scrapped and replaced by an income tax exemption on the first $1000 of interest income (to be phased in over two years but scrapped after the first year).

Now most people are on a salary package that includes both their wages and their superannuation so any increase in the compulsory super without their getting a pay rise results in their wages being reduced. In effect there is no difference between employee and employer super as the employee effectively pays it in both instances. Where this would have made a difference in the original plan is that the part labelled as employee contribution was to be matched by a Government contribution of the same amount.

The new plan, now deferred a few years) makes no mention of employee or Government contribution and simply increased the employer contribution to 12% – effectively the same percentage that the employee was going to be contributing from their package under the original plan but without the extra 3% contributed by the Government.

Now of course there is nothing to prevent the employees contributing more than the compulsory amount (provided they don’t go over their contribution caps) so the effect of increasing the compulsory super is to force those who would rather spend the money on something else (such as paying off their home loan quicker of buying food) to instead put the money into superannuation.

Now there are some people who spend all the money they can and save nothing – for these people the compulsory super is forcing them to save something for their old age. For those who would save anyway the compulsory super is dictating to them how they have to save instead of giving them the choice. In many cases paying that extra money off of a home loan would achieve a greater saving benefit than the return they are likely to get through super. For the people in the first of these groups delaying the increase is a bad thing. For those in the second of these groups the delay is a good thing. At least the current superannuation system keeps people’s super money out of Government hands unlike a scheme from early last century where people made payments toward their retirement and the Government subsequentoy scrapped the sceme and spent those people’s retirement money on something else entirely.

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